Debt contracts in the presence of performance manipulation

Empirical evidence suggests that firms often manipulate reported numbers to avoid debt covenant violations. We study how a firm’s ability to manipulate reports affects the terms of its debt contracts and the resulting investment and manipulation decisions that the firm implements. Our model generates novel empirical predictions regarding the use and the level of debt covenant, the interest rate, the efficiency of investment decisions, and the likelihood of covenant violations. For example, the model predicts that the optimal debt contract for firms with relatively strong (weak) corporate governance (i.e., cost of manipulation) induces overinvestment (underinvestment). Moreover, for firms with strong (weak) corporate governance, an increase in corporate governance quality leads to tighter (looser) covenant, more (less) frequent covenant violations and lower (higher) interest rate. Our model highlights that the interest rate, which is a common proxy for the cost of debt, neither accounts for the distortion of investment efficiency nor the expected manipulation costs arising under debt financing. We propose a measure of cost of debt capital that accounts for these effects.     

CEO compensation, option incentives, and information disclosure

This paper examines the impact of information disclosure on the valuation of CEO options and the incentives created by those options. Prior executive compensation research in the US has made assumptions about key input variables that can affect the calculation of option values and financial incentives. Accordingly, biases may have ensued due to incomplete information disclosure about noncurrent option grants. Using new data on a sample of UK CEOs, we value executive option holdings and incentives for the first time and estimate the levels of distortion created by the less than complete US-style disclosure requirements. We also investigate the levels of distortion in the UK for the minority of companies that choose to reveal only partial information. Our results suggest that there have to date been few economic biases arising from less than complete information disclosure. Furthermore, we demonstrate that researchers using US data, who made reasonable assumptions about the inputs of noncurrent option grants, are unlikely to have made significant errors when calculating CEO financial incentives or option wealth. However, the recent downturn in the US stock market could result in the same assumptions, producing exaggerated incentive estimates in the future.     

Executive incentive compatibility and selection of governance mechanisms

Executive incentive compatibility plays a crucial role in firm's selection of corporate governance mechanisms. We provide a simple model to explain why firms with enough executive incentive compatibility still prefer having external governance mechanisms, and firms with poor executive incentive compatibility have to rely on a combination of large investors monitoring and external governance. This model facilitates a better understanding of the co-existence of the two governance mechanisms and also reconciles conflicting findings with respect to a substitutive and complementary relationship between the two governance mechanisms. Empirical evidence supports there is a substitutive relation between large investors monitoring and executive compensation.     

The timeliness of performance information in determining executive compensation

We study whether boards of directors concentrate on performance near compensation decision times rather than providing consistent incentives for chief executive officers (CEO) throughout the fiscal year. We show empirically that managers can profit by moving sales revenue among fiscal quarters. Though this may suggest that boards use short-term trends when determining rewards, we find evidence consistent with boards tying pay to recent sales growth so as to use the best information about future performance. We also find that the timing of profits throughout the year does not affect CEO pay, which may suggest that smoothing firm income is important to CEOs.     

The effect of supplier industry competition on pay-for-performance incentive intensity

We examine how supplier industry competition affects CEO incentive intensity in procuring firms. Using Bureau of Economic Analysis data to compute a weighted supplier industry competition measure, we predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to that of the firm's own industry competition previously documented and is robust to alternative measures of supplier competition and to exogenous shocks to competition. Importantly, we show that performance risk and product margin act as mediating variables in the relation between supplier competition and CEO incentive intensity providing support for the theory underpinning our finding. We document that CEO compensation contracts are used as a mechanism to exploit the market dynamics of upstream industries to a firm's benefit. Our findings are economically important as suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA, 2016).     

国企高管薪酬影响企业社会绩效的实证研究

基于利益相关者理论,将社会绩效引入高管薪酬显性契约缔约过程,构建了高管薪酬与企业社会绩效关系模型,并以137家国有上市公司为实证样本,采用因子分析、回归分析方法检验了模型的假设关系。研究发现:年薪与企业强社会绩效和企业总体社会绩效显著正相关,与企业弱社会绩效负相关;高管持股与企业社会绩效没有显著相关性。     

Optimal job design in the presence of implicit contracts

We characterize the optimal job design in a multitasking environment when the firms use implicit contracts (i.e., bonus payments). Two natural forms of job design are compared: (i) individual assignment, where each agent is assigned to a particular job and (ii) team assignment, where a group of agents share responsibility for a job and are jointly accountable for its outcome. Team assignment mitigates the multitasking problem but may weaken the implicit contracts. The optimal job design follows a cutoff rule where only the firms with high reputation concerns opt for team assignment. However, the cutoff rule need not hold if the firm can combine implicit incentives with explicit pay‐per‐performance contracts.     

高管薪酬与公司业绩实证研究——以中小企业板上市公司为例

选取2009年前上市的235家中小企业板上市公司2013年的年报数据,实证检验高管薪酬与公司业绩之间的相关性。结果表明：中小企业板上市公司高管薪酬与公司业绩、公司规模存在显著正相关关系,高管薪酬与资本结构之间存在显著负相关关系。     

An equilibrium model of wealth distribution

I present an explicitly solved equilibrium model for the distribution of wealth and income in an incomplete-markets economy. I first propose a self-insurance model with an inter-temporally dependent preference [Uzawa, H. 1968. Time preference, the consumption function, and optimal asset holdings. In: Wolfe, J.N. (Ed.), Value, Capital, and Growth: Papers in Honour of Sir John Hicks. Edinburgh University Press, Edinburgh, pp. 485-504]. I then derive an analytical consumption rule which captures stochastic precautionary saving motive and generates stationary wealth accumulation. Finally, I provide a complete characterization for the equilibrium cross-sectional distribution of wealth and income in closed form by developing a recursive formulation for the moments of the distribution of wealth and income. Using this recursive formulation, I show that income persistence and the degree of wealth mean reversion are the main determinants of wealth-income correlation and relative dispersions of wealth to income, such as skewness and kurtosis ratios between wealth and income.     

Getting compensation right - The choice of performance measures in CEO bonus contracts and earnings management

This paper examines whether the choice of performance measures in CEO bonus compensation contracts is associated with earnings management. From a sample of FTSE350 Index firms over the period of 2005–2014, we investigate the relationship between earnings management, through discretionary accruals and real activities management, and (1) the use of and extent of reliance on financial and non-financial performance measures in CEO bonus contracts; and (2) the use of long-term and short-term measures in CEO bonus contracts. We find less income-increasing manipulation through discretionary accruals and expenses when non-financial performance measures (NFPMs) are used alongside financial performance measures (FPMs) and when the NFPMs are used to a larger extent than FPMs. Furthermore, we find less discretionary accruals when long-term performance measures are used. This implies that non-financial and long-term measures encourage executives to work towards the long-term success of the company rather than their own short-term reward.     

An Examination of Multiple Governance Forces within Bank Holding Companies

This study explores multiple means of governance and monitoring in bank holding companies and their impact on performance and executive compensation. We exploit variables unique to the banking industry to aid in our understanding of this simultaneous relationship. Our primary finding is that after controlling for both regulatory oversight and capital market discipline, a strong board is associated with higher firm performance, lower levels of executive pay and lower growth rates of executive pay. The findings support the fundamental role of corporate governance in overseeing management and ultimately firm performance.     

An empirical examination of the impact of the Sarbanes Oxley Act in the reduction of pension expense manipulation

Since the Sarbanes Oxley Act of 2002 (SOX) attempts to make managers more accountable for the fair presentation of reported earnings in their financial statements, we expect managers to manipulate pension expense less during the three years after the passage of SOX than during the three years preceding the passage of SOX. Our results reveal that for smoothing firms the magnitude of pension expense manipulation during the three years after the passage of SOX on average increases instead of decreases. On the other hand, for benchmark firms the magnitude of pension expense manipulation during the three years after the passage of SOX on average decreases as expected. This research provides mixed evidence concerning the effectiveness of SOX in making financial statement reporting more transparent and representative of actual financial position, in the area of pension expense.     

Leadership structure and the value of debt contracts: Evidence from the Canadian market

This paper investigates the impact of a firm's leadership structure on its ability to generate value from loans by examining the market reaction to the disclosure of Canadian bank credit agreements. Two leadership structures are considered in this paper. In the first scenario, the positions of Chief Executive Officer and Chair of the Board are held by two different persons (denoted as a Separate CEO-Chair structure); in the second scenario, both positions are held by the same person (denoted as a Combined CEO-Chair structure).We observe a stronger market reaction to the announcement of bank credit agreements when firms have a Separate CEO-Chair structure (relative to a Combined CEO-Chair structure). This stronger market reaction for firms with a Separate CEO-Chair structure suggests that the division of CEO and Chair of the Board responsibilities between two people enhances a firm's ability to generate value from its loans. This conclusion is further supported by the fact that the observed market reaction for firms with a Separate CEO-Chair structure is even greater when the size of the board of directors is small. Our results also indicate that bank monitoring activities are more valuable for firms with a Combined CEO-Chair structure and no institutional shareholder.     

The equilibrium price of futures contracts: A result drawn from capital asset pricing model

A recent study shows that separation theorems in the stock and forward market literatures may not hold in an integrated financial market; therefore, the securities market may influence futures trading. This article investigates the securities market influence on the futures price. The result shows that although the futures price incorporates the investor's expectation about the future spot price, it generally is not a best estimate of the spot price. In addition, it is shown that the speculative activity can destabilize the cash market for some commodities, if initially, the underlying cash price is highly volatile.     

The Effect of the Mandatory Adoption of Corporate Governance Mechanisms on Executive Compensation

This study investigates empirically the effect of corporate governance principles on executive compensation and firm performance prior to and after the adoption of the first Greek Law on corporate governance. Prior to the adoption of the law, managers were not compensated in line with their performance. Since its introduction, a significant link has been observed between executive compensation and company performance as measured by accounting measures of performance. Following the adoption of corporate governance principles by law, the main mechanism that controls executive compensation is the election of independent non-executive board members. The results are robust to alternative accounting measures of performance.     

上市公司治理对会计信息披露质量的影响因素分析

本文采用熵权法研究了我国上市公司治理对会计信息披露质量的影响因素,研究结果表明第一大股东的性质、机构投资者持股比例、管理层的持股比例、公司总资产的大小和第一大股东的持股比例对会计信息披露质量有较大影响;而独立董事比例、监事会人数、流通股比例以及资产负债率、净资产收益率和主营业务收入率等指标对会计信息披露质量影响很小。根据研究结果,提出了完善公司治理结构和提高会计信息披露质量的改进措施。     

Growth through rigidity: An explanation for the rise in CEO pay

The dramatic rise in CEO compensation during the 1990s and early 2000s is a longstanding puzzle. In this paper, we show that much of the rise can be explained by a tendency of firms to grant the same number of options each year. Number-rigidity implies that the grant-date value of option awards will grow with firm equity returns, which were very high on average during the tech boom. Further, other forms of CEO compensation did not adjust to offset the dramatic growth in the value of option pay. Number-rigidity in options can also explain the increased dispersion in pay, the difference in growth between the US and other countries, and the increased correlation between pay and firm-specific equity returns. We present evidence that number-rigidity arose from a lack of sophistication about option valuation that is akin to money illusion. We show that regulatory changes requiring transparent expensing of the grant-date value of options led to a decline in number-rigidity and helps explain why executive pay increased less with equity returns during the housing boom in the mid-2000s.     

上市民营企业内部控制信息披露影响因素研究

本文运用在沪市直接上市的民营企业2009-2011年的年报数据,运用内容分析法构建了内部控制信息披露指数,同时从公司治理角度选择了5个可能的影响因素,实证检验了其对内部控制信息披露的影响程度,旨在为我国上市民营企业内部控制信息披露机制的完善提供建议。     

State contract law and the use of accounting information in debt contracts

Review of Accounting Studies - This paper examines the relation between state contract law and the use of accounting information in debt contracts. Contract theory suggests that balance sheet based...