Statistical Properties of a Composite Index as Estimator of a Single Latent Variable

Journal of Quantitative Economics -     

The random expenditure function approach to welfare in RUM: The case of hazardous waste clean-up

This paper presents an application of the random expenditure function approach for welfare analysis in RUM with a non-linear income effect. The measures of expected compensating variation (CV) are first derived as special cases to apply to a two-option conjoint choice-based survey data aimed at deciphering homeowners’ willingness to pay for hazardous waste clean-up. A comparison of the expected CV with the CV based on the representative consumer approximation (CVr) reveals high degree of agreement between the estimates. Using the Diewert and Translog utility specifications the study finds that regardless of the methodology used, welfare estimates are quite sensitive to the functional forms.     

Executive compensation and internal capital market efficiency

We document that chief executive officer (CEO) incentive compensation plays an important role in determining internal capital market (ICM) allocation efficiency. Our results suggest that CEO equity-based compensation can be effective in ameliorating inefficiencies in internal capital allocation decisions. We find that while stock grants play an important role in motivating CEOs to make more efficient internal capital allocation decisions, there is surprisingly no discernible influence of stock options. Our analysis supports the view that private benefits derived by managers are increasing in internal capital misallocation. We also document a strong positive link between CEO incentive compensation and excess value of diversified firms suggesting that the diversification discount can be ameliorated with CEO incentive compensation. The study contributes to the ICM literature and the literature on conglomerate diversification discount.     

REORGANIZATION AND FINANCIAL DISTRESS: AN EMPIRICAL INVESTIGATION

Prior studies on financial distress focus on the restructuring of one aspect of the firm. By examining various forms of restructuring, we provide empirical evidence that asset restructuring and governance restructuring play significant roles before bankruptcy filing. Our analysis shows that financial restructuring before bankruptcy is influenced by the holdout problem among creditor groups. Evidence suggests that the fraudulent conveyance provision does not pose a serious impediment to divestitures during the two years before bankruptcy. The evidence also indicates that Chapter 11 reorganization is lenient toward management. Although Chapter 11 allows the firm to breach burdensome executory contracts with employees, our findings suggest that union busting is not an important part of the reorganization process. Finally, we identify various financial characteristics to predict the different types of restructuring a firm may undertake.     

On accounting’s twenty-first century challenge: evidence on the relation between intangible assets and audit fees

Review of Quantitative Finance and Accounting - We inform the policy debate arising from the dramatic shift in US firms’ balance sheets towards intangible assets that has created a challenge...     

Upper‐echelon executive human capital and compensation: Generalist vs specialist skills

This study extends current knowledge of upper echelon executive compensation beyond the CEO, specifically CFO compensation, based on whether they possess generalist or specialist skills. We find that “strategic” CFOs with an elite MBA (generalist) consistently command a compensation premium, while “accounting” CFOs (specialist) and CFOs with a non‐MBA master's degree, even from an elite institution, do not. Further, scarce “strategic” CFOs are awarded both higher salaries and higher equity‐based compensation. Our findings support the view that unique complementarities between scarce CFOs and firms increase these executives' bargaining power leading to pay premium. Our results are robust to post‐hiring years, firm sizes, board characteristics, and CFO's insider/outsider status. We contribute at the confluence of upper‐echelon compensation, executive human capital, resource‐based view, and assortative matching literatures. Copyright © 2014 John Wiley & Sons, Ltd.     

Managerial Self-Interest, Pension Financial Slack and Corporate Pension Funding

This paper examines the impact of managerial self-interest on corporate pension funding decisions. It is postulated that managers with no ownership stake in the firm will have incentives to maintain financial slack in the form of excess pension funding. Pension funding slack may be viewed as a managerial perquisite that decreases the probability of necessary future debt financing. Such a strategy may increase the value of undiversified human capital to the detriment of maximizing shareholder wealth. As managerial ownership increases, the incentives to consume such a perquisite will decrease since the interests of managers and shareholders become more aligned. The results presented in this study strongly support this proposition.     

Auditors' Use of Formal Advice from Internal Firm Subject Matter Experts: The Impact of Advice Quality and Advice Awareness on Auditors' Judgments

When subject matter experts are consulted during an audit, the quality of the expert's advice depends upon their ability to fully understand and incorporate client‐specific facts into their advice. Public Company Accounting Oversight Board (PCAOB) inspection reports suggest that auditors are neglecting to perform the required work to assess the quality of experts' recommendations. This study examines how characteristics of the audit, notably staffing decisions, can impede auditors' ability to discern advice quality. In an experiment, we examine how receiving advice of different levels of quality (lower or higher incorporation of relevant client facts) and awareness at the planning stage of the use of a subject matter expert (a priori aware or unaware) impacts auditors' effort, utilization of the advice, and judgment accuracy. We find that awareness of an expert being employed led to a social facilitation effect such that auditors who were a priori aware put forth more effort prior to receiving the expert advice and were initially in less agreement with management's aggressive revenue recognition position than auditors who were unaware. Upon receiving the expert advice, auditors who were a priori aware were more accurate than auditors who were unaware. These results should interest both audit regulators and practitioners by demonstrating how the timing and communication of consulting decisions affect auditors' assessments of advice received from subject matter experts.