Researchers use a proprietary data set with detailed executive compensation information to examine the relationship between the incentives of the tax director and GAAP and cash effective tax rates, the book-tax gap, and measures of tax aggressiveness. Find that the incentive compensation of the tax director exhibits a strong negative relationship with the GAAP effective tax rate, but little relationship with the other tax attributes. Researchers interpret these results as indicating that tax directors are provided with incentives to reduce the level of tax expense reported in the financial statements.

Using conservative statistical tests, we find that the out-of-sample performance of the models that are based on CEO or CFO narratives is significantly better than random by 6%-16% and statistically dominates or is equivalent to models based on financial and accounting variables. We find that the answers of deceptive executives have more references to general knowledge, fewer non-extreme positive emotions, and fewer references to shareholder value. In addition, deceptive CEOs use significantly more extreme positive emotion and fewer anxiety words. 

Most corporate governance research focuses on the behavior of chief executive officers, board members, institutional shareholders, and other similar parties. Little research focuses on the impact of executives whose primary responsibility is to enforce and shape corporate governance inside the firm. This study examines the role of the general counsel in mitigating informed trading by corporate insiders. Thus, when given the authority, it appears the general counsel can effectively limit the extent to which corporate insiders use their private information to extract rents from shareholders.

Paper investigates the market reaction to recent legislative and regulatory actions pertaining to corporate governance. Researchers find that the abnormal returns to recent events relating to corporate governance regulations are, on average, value reducing to shareholders.

Researchers use a proprietary data set with detailed executive compensation information to examine the relationship between the incentives of the tax director and GAAP and cash effective tax rates, the book-tax gap, and measures of tax aggressiveness. Find that the incentive compensation of the tax director exhibits a strong negative relationship with the GAAP effective tax rate, but little relationship with the other tax attributes. Researchers interpret these results as indicating that tax directors are provided with incentives to reduce the level of tax expense reported in the financial statements.

Researchers study put option sales on company stock by large firms. An often-cited motivation for these transactions is market timing, and managers' decision to issue puts should be sensitive to whether the stock is undervalued. Study provides new evidence that large firms successfully time security sales.

Study models the interaction between a sell-side analyst and risk-averse investors. It derives an analyst's optimal earnings forecast and investors' optimal trading decisions in a setting where the analyst's payoff depends on the trading volume the forecast generates as well as on the forecast error. Finds that the analyst biases the forecast upward (downward) if his private signal reveals relatively good (bad) news.

This paper explores direct relations between corporate investment behavior and the timeliness of accounting recognition of economic losses (TLR) reflected in a country's accounting regime. Researchers explicitly investigate the extent to which TLR influences investment decisions of firm managers.

Conducting a shareholder-level analysis of cross-holdings, researchers find that cross-holdings are too small to matter in most acquisitions and that bidders do not bid more aggressively even in the few cases in which cross-holdings are large. They conclude that cross-holdings do not explain value-reducing acquisitions.

Researchers survey the Personnel Economics literature, focusing on how firms establish, maintain, and end employment relationships and on how firms provide incentives to employees. Some of the unanswered questions in this area -- for example, the empirical relevance of the risk/incentive tradeoff and the question of whether CEO pay arrangements reflect competitive markets and efficient contracting -- are likely to be very difficult to answer due to measurement problems.

—How Good Are Commercial Corporate Governance Ratings? Stanford GSB News

Study casts strong doubt upon the value and validity of the ratings of governance advisory firms that compile indexes to evaluate the effectiveness of a publicly held company’s governance practices.

This paper studies voting in corporate director elections. Researchers construct a comprehensive data set of 2,058,788 mutual fund votes over a two-year period. Heterogeneity and peer effects are as important in shaping voting outcomes as firm and director characteristics.

The article presents a study conducted by Stanford University's Rock Center for Corporate Governance and Heidrick & Struggles on the critical lapses in chief executive officer (CEO) succession planning in private and public companies in the U.S.

The article focuses on research conducted by executive search firm Heidrick & Struggles and Stanford University which found that majority of survey respondents from U.S. and Canadian companies could not immediately name a successor to their organization's chief executive officer. Stanford business professor David Larcker says they believed that the governance lapse originates primarily from a lack of focus. The study also revealed that only 54 percent of respondents are grooming an executive for chief executive officer (CEO) succession.

Scrutinizes the role financial reporting for fair values, asset securitizations, derivatives, and loan loss provisioning played in the Financial Crisis.

The two major paradigms in the theoretical agency literature are moral hazard (i.e., hidden action) and adverse selection (i.e., hidden information). Researchers formulate two complementary generalized principal-agent models that incorporate features observed in real-world contracting environments (e.g., agents with power utility and limited liability, lognormal stock price distributions, and stock options) as mathematical programs with equilibrium constraints (MPEC).

This article investigates the micro-underpinnings of boardroom behavior in order to explain this departure from principal-agency theory's argument that executive compensation serves to align interests between the owners of the company and its senior managers.

Paper investigates firms’ operating performance subsequent to the repricing of executive and non-executive employee stock options. Findings suggest employee stock options provide sufficiently large incentive effects to favorably affect firms’ performance, but primarily so at the executive level.

It has become standard practice in the cross-sectional asset pricing literature to evaluate models based on how well they explain average returns on size-B/M portfolios, something many models seem to do remarkably well. Paper reviews and critiques the empirical methods used in the literature.

This study examines whether Chief Executive Officer (CEO) equity-based holdings and compensation provide incentives to manipulate accounting reports. Paper finds some evidence that accounting irregularities occur less frequently at firms where CEOs have relatively higher levels of equity incentives.

This study develops a model that endogenizes the timing decision of analysts and analyzes their equilibrium timing strategies. All else equal, analysts with a higher precision of initial private information tend to forecast earlier, and analysts with a higher learning ability tend to forecast later.

Researchers construct a comprehensive list of dual-class firms in the United States and use this list to analyze the relationship between insider ownership and firm value. In single-stage regressions, they find strong evidence that firm value is increasing in insiders’ cash-flow rights and decreasing in insider voting rights.

Estimating the Cost of Capital Implied by Market Prices and Accounting Data, Foundations and Trends in Accounting, by Peter Easton, is reviewed.

Dechow, Myers, and Shakespeare (DMS, 2009) find a negative relation between income from securitization activities and income from non-securitization activities. We clarify the role of fair value in accounting for asset securitizations, discuss alternative explanations for the evidence presented in DMS, and offer suggestions for future research.

This article briefly reviews the literature on the direct and indirect effects of organizations and their decisions about people on human health and mortality. It then considers some possible explanations for why social sustainability has received relatively short shrift in management writing.

Study examines European stock market reactions to 16 events associated with adoption of International Financial Reporting Standards (IFRS) in Europe. Finds an incrementally negative reaction for firms in code law countries, consistent with investors' concerns over enforcement of IFRS in those countries; and finds a positive reaction to IFRS adoption events for firms with high-quality pre-adoption information, consistent with investors expecting net convergence benefits from IFRS adoption.

The article reviews the book "Earnings Quality," by Jennifer Francis, Per Olsson, and Katherine Schipper.

The mechanics by which dealer banks can fail and the policies available to treat the systemic risk of their failures differ markedly from the case of conventional commercial bank runs. These failure mechanics are the focus of this article. This is not a review of the financial crisis of 2007-2009. Systemic risk is considered only in passing. Both the financial crisis and the systemic importance of large dealer banks are nevertheless obvious and important motivations.

Analyzes a manager's optimal earnings forecasting strategy and optimal earnings management policy in a setting where both the mean and the variance of the distribution generating the firm's cash flows are unknown. The analysis shows that the equilibrium price of the firm is a function of the manager's forecast, the firm's reported earnings, and the squared error in the manager's earnings forecast.

A number of recent marketing studies examine the stock market's response to the release of American Customer Satisfaction Index (ACSI) scores. The broad purpose of these studies is to investigate the stock market's valuation of customer satisfaction. However, a key focus is on whether customer satisfaction information predicts long-run returns. Study provides evidence on the market's pricing of ACSI information using a more comprehensive set of well-established tests from the accounting and finance literatures.

Uses mutual fund manager data from the technology bubble to examine the hypothesis that inexperienced investors play a role in the formation of asset price bubbles.

When did we start measuring the success of a company only according to the increase in its share price? Stanford professor Pfeffer argues that it's time for CEOs to once again to balance shareholders' interests with those of the other stakeholders: employees, suppliers, and customers.

Examines whether a large shareholder can alleviate conflicts of interest between managers and shareholders through the credible threat of exit on the basis of private information. Results are consistent with empirical findings on the interaction between managers and minority large shareholders and have further empirical implications.

The reported cost of a product frequently contains historical cost components that reflect past investments in productive capacity. We examine a setting wherein a firm makes a sequence of overlapping capacity investments. First, in a regulatory context, establish the extent to which the accounting profit margin is indicative of a firm's pricing power in the product market. Second, researchers model an internal control scenario in which a manager's performance is evaluated using residual income, and identify the distortions in investment levels that result from the use of alternative depreciation rules.

Provides research perspectives on the relation between executive compensation and firms' financial reporting and disclosure policies. Provides research perspectives on the relation between executive compensation and firms' financial reporting and disclosure policies.

This discussion comment focuses on several fundamental issues that confront researchers examining the backdating scandal and other related decisions. Researchers specifically discuss the decision models for executives engaged in backdating and the potential role of social networks among directors, selection considerations, institutional voting behavior, and how backdated options can be replicated with existing equity instruments.

The U.S. Securities and Exchange Commission enacted Rule 10b5-1 to deter insiders from trading with private information, yet also protect insiders' preplanned, non-information-based trades from litigation. Despite its requirement that insiders plan trades when not privately informed, the rule appears to enable strategic trade.

The True and Fair View concept requires companies to depart from GAAP or the law if necessary to present a true and fair view of the corporation's financial affairs. We analyze UK public companies invoking a true and fair override to assess whether overrides are associated with weakened performance, earnings quality and informativeness. Findings are relevant for the debate on principle- vs. rules-based accounting.

Managerial bonus payments are frequently determined by both objective and subjective indicators of managerial performance. Research analysis examines the structure of optimal bonus pool arrangements. Study results address the contractual value of additional information variables, the desirability of compressed incentive schemes, and the nature of relative performance evaluation in settings with multiple agents.

Paper examines whether firms manipulating their reported financial results make suboptimal investment decisions. Examines fixed asset investments for a large sample of public companies during the 1978-2002 period and document that firms that manipulate their earnings—firms investigated by the SEC for accounting irregularities, firms sued by their shareholders for improper accounting, and firms that restated financial statements—over-invest substantially during the misreporting period. Findings suggest that earnings management, which is largely viewed as targeting parties external to the firm, can also influence internal decisions.

Researchers hypothesize that the structure of executive stock-based compensation helps to align managers’ payout choices with shareholders’ tax-related payout preferences. Specifically, stock options, which are not dividend-protected, can deter self-interested executives from using dividends as a form of payout. In contrast, restricted stock, which is dividend-protected, is more likely to induce the use of dividends. Researchers investigate the role of shareholders’ tax-related payout preferences in the design of executive stock-based compensation and extends the prior literature that has largely focused on the role of incentive contracts in inducing managerial effort, risk taking, and retention.

Paper examines the economic impact of the Sarbanes-Oxley Act (SOX) by analyzing foreign listing behavior onto U.S. and U. K. stock exchanges before and after the enactment of SOX in 2002. After controlling for firm characteristics and other economic determinants of these firms' exchange choice, researchers find that the listing preferences of large foreign firms choosing between U.S. exchanges and the London Stock Exchange's (LSE) Main Market did not change following the enactment of SOX.

Related: Excessive Executive Pay Makes Headlines, But So What? Stanford GSB News, April 2008

Examines the press’ role in monitoring and influencing executive compensation practice using more than 11,000 press articles about CEO compensation from 1994 to 2002. Study finds little evidence that firms respond to negative press coverage by decreasing excess CEO compensation or increasing CEO turnover.

Examines the importance of agency considerations for the mix of salary and performance-based compensation in member-owned medical practices. Performance-based pay increases with the informativeness of clinical productivity measures, and declines with greater reimbursement from capitation contracts. Inexperienced physicians receive more compensation from salary, but compensation mix does not change as physicians near retirement.

Activist NGOs have increasingly foregone public politics and turned to private politics to change the practices of firms and industries. This paper focuses on private politics, activist strategies, and nonmarket strategies of targets.

Milton Friedman argued that the social responsibility of firms is to maximize profits. This paper examines this argument for the economic environment envisioned by Friedman in which citizens can personally give to social causes and can invest in profit-maximizing firms and firms that give a portion of their profits to social causes

Article presents the author's views on the legitimacy of corporate rating agencies such as Institutional Shareholder Services Inc. (ISS). He views that though ISS has some 65 rules and guidelines, there is almost no evidence that ISS's prescribed practices for corporate governance are actually related to outcomes such as higher rates of return for shareholders or improved company performance. He views that there is no way to know whether its ratings are affected by its own self-interest.

Research shows that tests of market efficiency are sensitive to the inclusion of delisting firm-years. When included, trading strategy returns based on anomaly variables can increase (for strategies based on earnings, cash flows and the book-to-market ratio) or decrease (for a strategy based on accruals).

Researchers provide empirical evidence that firms use broad-based option compensation when boundedly rational employees are likely to be excessively optimistic about company stock, and when employees are likely to strictly prefer options over stock.

The discussion reinforces and expands on some of the fundamental issues about endogeneity raised by Chenhall and Moers (European Accounting Review, this issue, pp. 173-195). Paper focuses on the econometric problems researchers encounter when investigating the performance effects of some endogenous firm choice. Paper suggests need for better theory to guide the empirical work.

Discusses conference paper that provides a theoretical decomposition of the book-to-market ratio and uses this framework to document a robust negative relation between future returns and leverage after holding the net operating asset dimension of the firm's pricing multiple constant. Unfortunately, the authors do not reconcile this result to either a risk-based or misvaluation based framework, resulting in the paper generating more questions than answers. The failure to explore potential reasons for the negative relation is, ultimately, the greatest weakness of the paper, and will likely serve as the impetus for future research projects.

This paper uses a unique dataset from Denmark to investigate the impact of family characteristics in corporate decision making and the consequences of these decisions on firm performance. Find that family successions have a large negative causal impact on firm performance: operating profitability on assets falls by at least four percentage points around CEO transitions.

Provides maximum likelihood estimators of term structures of conditional probabilities of corporate default, incorporating the dynamics of firm-specific and macroeconomic covariates. For US Industrial firms, based on over 390,000 firm-months of data spanning 1980 to 2004, the term structure of conditional future default probabilities depends on a firm's distance to default (a volatility-adjusted measure of leverage), on the firm's trailing stock return, on trailing S&P 500 returns, and on US interest rates. The out-of-sample predictive performance of the model is an improvement over that of other available models.

Underlying the contentious debate on chief executive officer (CEO) pay is a view of the board of directors based on an economic theory in which the shareholders and CEO are seen to have conflicting goals--with the CEO attempting to garner more compensation at the expense of the shareholders. Researchers offer a social psychological perspective on board functioning, in which the CEO and the Board are jointly responsible for firm performance- and subject to the inevitable effects of reciprocity and social influence. Implications for board functioning are discussed.

Researchers test the doubly stochastic assumption under which firms' default times are correlated only as implied by the correlation of factors determining their default intensities. Using data on U.S. corporations from 1979 to 2004, this assumption is violated in the presence of contagion or “frailty” (unobservable explanatory variables that are correlated across firms).

Focusing on the four key option pricing model inputs—expected option life, expected stock price volatility, expected dividend yield, and the risk-free interest rate for the expected life of the option—this study finds that firms understate option value estimates and, thus, stock-based compensation expense disclosed under SFAS 123.

Uses data from chief executive officer (CEO) successions to examine the impact of inherited control on firms' performance. Finds that firms where incoming CEOs are related to the departing CEO, to a founder, or to a large shareholder by either blood or marriage underperform in terms of operating profitability and market-to-book ratios, relative to firms that promote unrelated CEOs.

The article presents information on why more and more U.S. companies are abandoning the public markets. According to Kevin Callaghan, a partner with leading private equity firm Berkshire Partners, there are several factors behind this trend. One is the "hassle" factor which includes the higher risk of shareholder lawsuits and dealing with issues of board size and composition.

Researchers generate estimates of the costs of broad-based stock option programs under varying assumptions about why firms use these pay schemes.

This article discusses the issues of fairness with regards to CEO and subordinate salaries. In this study the authors propose that norms of fairness are salient to top decision makers and show that over- or underpayment of the CEO cascades down to lower organizational levels. Implications for the design of executive compensation packages are discussed.

The article presents the author's comments on the rise in CEO pay package. More than a decade ago, when SEC-mandated disclosure of pay in proxy statements expanded to include not just salaries and bonuses but also stock options grants, it sparked an arms rare among compensation consultants happy to exploit another bargaining chip for their clients. But the author has seen no evidence that disclosing the grants and their costs caused the size of those grants to go down. The author affirms that the only way to stop the CEO pay boom is to stop writing about it.

Key indicators of managerial performance are frequently subjective, that is, they are difficult to specify and/or verify for contracting purposes. When a principal must rely on subjective information to create incentives for a group of agents, discretionary bonus pools are shown to be optimal mechanisms. Despite their optimality, however, discretionary bonus pools entail an additional agency cost relative to the benchmark of optimal contracts based on objective and verifiable information.

The 1964 Securities Acts Amendments extended the mandatory disclosure requirements that had applied to listed firms since 1934 to large firms traded Over-the-Counter (OTC). Researchers find several pieces of evidence indicating that investors valued these disclosure requirements, two of which are particularly striking. Results suggest that mandatory disclosure causes managers to focus more narrowly on maximizing shareholder value.

Researchers analyze changes in the composition of top management teams when a key member of the team (the chief executive officer [CEO]) departs. We find that the probability of non-CEO top manager turnover increases markedly around times of CEO turnover. Further, the magnitude of this increase depends on the relations between the tenure of the manager and tenures of the departing and incoming CEOs.

This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines whether these distributions can predict the profitability of analysts’ recommendations.