Earnings Warnings and CEO Welfare

Some CEOs decide voluntarily to issue a warning when they expect a negative earnings surprise. Prior research suggests that warnings contain incremental information beyond actual earnings; warning firms tend to experience permanent earnings decreases. This paper investigates whether compensation committees take warnings into account in setting CEO compensation. We find that warnings are significantly negatively (positively) associated with CEO bonus (option grants), suggesting that compensation committees adjust CEO compensation towards a more high‐powered structure after warnings. However, the sensitivity of bonus or option grants to earnings and stock returns is not affected except for bonus sensitivity to stock returns. We also find weak evidence of an increase in forced CEO turnover after warnings, accompanied by a significant increase in its sensitivity to stock returns. This benefits CEOs with higher ability but imposes more risk on other CEOs. These findings provide a partial explanation of why not every CEO facing a negative surprise decides to issue a warning. Our results are robust to various specifications. In particular, the impact of warnings on compensation appears invariant to the timing or the number of warnings. Overall, these findings suggest that the signal from warnings is used in determining CEO compensation and retention.     

The Relationship Between Bank Risk and Earnings Management: Evidence from Japan

Using stock price data drawn from the 1990s in Japan, this paper empirically shows that bank risk is negatively associated with discretionary accruals, indicating that investors misinterpreted high reported earnings as favorable information about bank financial health. We also show that the negative relationship was very powerful prior to the major bank failures in late 1997 and 1998, but it diminished subsequent to the failures. We conclude that investors started to anticipate potential manipulation of financial reports by bank managers more rationally after the major bank failures.     

Bank Earnings Management in Emerging Market Economies: The Case of Mexico

In the mid-late 1990s, developing countries in several parts of the world experienced severe currency devaluations that were accompanied by deep economic downturns. For some regions, international financial organizations have documented that deficient financial reporting standards and practices contributed to the onset and magnitude of the crises by understating banks’ problem loans and capital adequacy problems. However, little research has been conducted concerning the role of financial reporting in the post-devaluation reconstruction of financial systems. As such, this paper examines the role of financial reporting in the post-1994 devaluation restructuring of the Mexican banking system. Emphasis is placed on examining whether the country's three largest banks delayed the recognition of loan losses in the late 1990s. The results provide evidence that banks took advantage of weaknesses in financial reporting standards to delay the recognition of loan losses.     

中央银行独立性的国际比较与思考

从国际视角考察,随着货币政策在宏观调控中的作用日益重要,中央银行的独立性亦呈不断加强的趋势.在组织独立性、政策独立性、人事独立性和财务独立性几个方面,美联储、欧洲中央银行、日本银行各有特色,其中一些成功的做法值得借鉴.我国中央银行独立性近年来在稳步提高,同时还存在诸多需要加强和改善之处.对我国中央银行独立性状况,需要根据我同的实际情况,作辩证的分析和全面的理解.     

Bank Capital Standards for Market Risk: A Welfare Analysis

We propose a simple model that is suitable for evaluating alternativebank capital regulatory proposals for market risk. Our modelformalizes the conflict between bank objectives and regulatorygoals. Banks' decisions represent a tension between their desireto exploit the deposit-insurance put option and their desireto preserve franchise value. Regulators seek to balance thesocial value of deposits in mediating transactions against thedeadweight costs of failure resolution. Our social welfare criterionis standard: a weighted average agents' utilities. We demonstrate that banks do not incrementally alter their portfoliorisk as the economic environment changes. Rather, banks eitherchoose the minimal feasible risk or the maximal feasible risk.This pattern, in turn, drives regulatory decisions: The firstgoal of the regulator is to induce banks to choose the minimalrisk level. For all nontrivial cases, unregulated banks failto choose the first-best allocations. Traditional ex-ante capitalrequirements can induce banks to choose the socially-optimallevel of portfolio risk, but the required capital is often inefficientlyhigh. In contrast, variants of the Federal Reserve Board's precommitmentproposal imply far smaller efficiency losses, and achieve allocationsat or nearthe first-best for most reasonable model specifications.The ex-post penalties required for the optimal implementationof precommitment are not excessively large. The welfare gainsfrom precommitment are even higher when the precommitment penaltyfunction is precluded from sending banks into default. We concludethat state-contingent regulatory mechanisms, of which the precommitmentapproach is an example, offer the possibility of substantialgains in regulatory efficiency, relative to traditional statenon-contingent regulation.