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Do compensation consultants drive up CEO pay for the benefit of managers, or do they design pay packages to benefit firm owners? Using a large sample of UK firms from the FTSE All‐Share Index over the 2003–2011 period, we show a positive correlation between the presence of compensation consultants and CEO pay. Importantly, isolating this effect is somewhat dependent on the endogenous selection of consultants and the statistical modelling strategy deployed. We find evidence that compensation consultants improve CEO compensation design when their expertise is of greater importance (e.g. during the post‐financial crisis period, or for firms that have particularly weak compensation policies). In addition, our findings show that compensation consultants increase CEO pay–performance sensitivity. The balance of evidence supports optimal contracting theory more than managerial power theory, but the authors caution the limits to this verification. We are careful to note that the more compelling evidence for the positive effect of pay consultants on CEOs is based on advanced methods (such as propensity score matching and difference‐in‐differences), and that more standard approaches (such as OLS and fixed effects) are unlikely to reveal the same level of causality of consultants on CEO pay.

We study the impact of creditor control rights increases on rank-and-file employees. Using a regression discontinuity design, we provide evidence that workplace safety deteriorates when creditors gain bargaining power in the event of a debt covenant violation. The frequency of workplace injuries and illnesses increase more for firms with severe financing constraints and a less active labor union. These results are robust to entropy balancing and a host of alternative specifications. In sum, our results provide compelling evidence on how increased interference and cost-cutting pressures by creditors can impair the working conditions of employees.

This paper investigates the relationship between a CEO's foreign experience and CEO compensation. Our analysis is based on the constituent firms of the UK FTSE 350 index from 1999 to 2015. We find that foreign CEOs and national CEOs with foreign working experience receive significantly higher levels of total compensation compared to similar UK CEOs without such characteristics. The results are robust to the endogenous CEO selection using propensity score matching methods, as well as other modelling approaches. Our results show that pay premiums are attributable to the specialized foreign expertise and foreign networks of CEOs, which stem from foreign experience rather than broader general managerial skills.

This paper explores the effect of borrower and lender state-ownership on the consequences of corporate fraud in the debt market. Fraud revelations can increase a firm’s information and credit risk, and are therefore expected to significantly affect future bank loan conditions. The Chinese economy provides a unique setting from which to study the influence of state-ownership on debt contracting because it is dominated by state-owned banks (SBs) and firms. Using a sample of bank loans and enforcement actions announced between 2001 and 2012, we find that, after fraud announcements, the cost of private debt increases significantly, but not for loans issued by SBs to state-owned enterprises (SOEs). Moreover, we find evidence that SBs grant, and SOEs receive, lower interest rates. Additional tests show that SOEs that received a more favorable interest rate after the announcement of fraud from a SB perform worse than other firms. These results indicate that despite the bank reforms SBs continue to favor SOEs and this could lead to sub-optimal lending.

One of the most critical decisions top management in corporate groups has to make is the allocation of resources among competing investment opportunities across the group. Information asymmetry between the parent and subsidiaries, however, creates agency conflicts that complicate such allocation. Exploiting the adoption of more rigorous, international accounting standards by UK subsidiaries, we examine whether accounting information can mitigate these agency costs. We find that adopting subsidiaries have greater cash holdings, receive more group borrowings and pay less dividends. These findings are consistent with accounting effecting agency costs of excess cash. Further, we find that adopting subsidiaries have greater (lower) capital expenditures when in growing (declining) industries and invest more in innovation.

We examine the impact of employee incentives on firms’ tax planning. Labor mobility refers to the flexibility of workers to find alternative employment. Higher labor mobility increases expected labor adjustment costs for firms and increases employees’ bargaining power. Therefore, firms have strong incentives to make decisions in line with employees’ preferences when labor mobility is high. Using a sample of U.S. firms from 1993-2015, we find evidence that higher labor mobility is positively associated with cash effective tax rates and negatively associated with the volatility of cash effective tax rates. Results imply that firms engage in less tax avoidance when labor mobility is higher. We find stronger results for less unionized industries and environments with lower employment security. We provide evidence of a causal effect of labor mobility on tax planning by exploiting changes in state real estate transfer taxes.

We document that analysts cater to short-term investors by issuing optimistic target prices.Catering dominates among analysts at brokers without an investment banking arm as they face lower reputational cost. The market does not see through the analyst catering activity and theirforecasts lead to temporary stock overpricing that short-term institutional investors exploit to offload their holdings to retail traders. We also report evidence consistent with catering brokers being rewarded with more future trades channelled through them. Our study identifies a new sourceof conflicts of interest in analyst research originating from the ownership composition of a stock.

Financial intermediaries such as venture capitalists (VCs) not only provide financing, they also play an active role in firm governance and in financial practices before a firm goes public. Venture capitalists are actively engaged in monitoring and advising their portfolio firms. Thus, one also expects them to exert significant influence over the development of financial reporting practices. This chapter reviews recent literature and empirical evidence on VCs and financial reporting quality in newly public firms. It surveys the role of VCs in such activities as earnings management. In particular, it discusses how their monitoring activities and reputation can impact how their portfolio firms establish financial reporting practices. Subsequently, it also reviews the consequences of misreporting, and whether they affect VC behavior ex ante. Finally, the chapter uses recent data to provide empirical evidence on the effect of VCs on accrual and real earnings management.

Using a comprehensive sample of US banks for years 2001 to 2016, we split the pay gap between the CEO and rank-and-file employees into two: CEO pay gap and VP pay gap. We examine the effect on bank performance of the tournament incentives arising from these different pay gaps. We find that CEO pay gap is positively associated with bank performance and negatively associated with bank risk while VP pay gap is positively associated with bank risk. We show that only executive pay is sensitive to bank performance, which might explain the differing results for the association between pay gap and bank performance for the two groups. Further analysis suggests that the positive association between VP pay gap and bank risk is at least partly driven by the quantity and quality of loan origination. Finally, we show that the VP pay gap is associated with insufficient loan loss provisions consistent with increased unexpected rank-and-file employee risk taking.

This paper identifies a new incentive for managers to engage in corporate fraud stemming from the relative performance evaluation feature of CEO promotion tournaments. We document higher propensities to engage in fraud for firms with strong tournament incentives (as proxied for by the CEO pay gap). We posit that the relative performance evaluation feature of CEO promotion tournaments creates incentives to manipulate performance, while the option-like character can motivate managers to engage in risky activities. We thereby extend previous corporate fraud literature that focuses mainly on equity-based incentives and reports mixed findings. Our results are robust to using different fraud samples, and controlling for other known determinants of fraud as well as manager skills.

This paper explores how managers' and supervisors' equity incentives impact the likelihood of committing corporate fraud in Chinese-listed firms. Previous research has shown that corporate fraud in China is a widespread phenomenon and has severe consequences for affected firms and executives. However, our understanding of the reasons that fraud is committed in a Chinese setting has been very limited thus far. This is an increasingly important topic, because corporate governance is rapidly changing in China, and it is unclear whether adopting the executive compensation practices of the West is appropriate for Chinese firms. We show that managers' equity incentives increase their propensity to commit corporate fraud. We also find that this effect is more pronounced for state-owned firms. However, we find a negative but not significant relationship between the equity incentives of the supervisory board and the incidence of fraud.

This article explores the relationship between corporate governance and the information environment in Chinese stock markets. We construct a parsimonious governance measure for public firms using a 2003 through 2011 sample period. We use four indicators to proxy for the information environment: analyst following, analyst forecast accuracy, analyst forecast dispersion, and price timeliness. We find that better governed firms tend to be associated with larger analyst followings and more informative forecasts. We also find that better governed firms tend to improve on the timeliness of bad news relative to good news.

This paper examines the relationship between performance persistence and corporate governance (as proxied for by board characteristics and shareholder structure). We document systematic differences in performance persistence across listed companies in China during 2001–2011, and empirically demonstrate that firms with better corporate governance show higher performance persistence. The results are robust over both the short and long terms. We also find that performance persistence is an important factor in refinancing, and it can lower companies’ costs of borrowing. Overall, our findings offer important implications for business ethics, as we demonstrate how corporate governance can lower companies’ costs of debt.

Portfolio optimization using private equity is typically based on one of three indices: listed private equity, transaction-based private equity, or appraisal value-based private equity indices. However, we show that none of these indices is fully suitable for portfolio optimization. We introduce here a new benchmark index for venture capital and buyouts, which is updated monthly, adjusted for autocorrelation (de-smoothing), and available contemporaneously. We illustrate how our benchmark enables superior quantitative portfolio optimization.

We posit that when a subject firm has greater accounting comparability with industry peer firms it facilitates that firm’s learning from peer firm investments leading to better investments by the subject firm. Therefore, we expect firms with greater accounting comparability with industry peers to generate more and higher quality innovations, which are key determinants of corporate innovative efficiency. In the cross-section, we expect that the benefits from learning are likely greater (smaller) when peer-firms are successful (unsuccessful) innovators. Moreover, we expect the benefits of greater accounting comparability to be greater in highly competitive business environments. We find that accounting comparability with peer firms is positively associated with innovative efficiency of subject firms. Moreover, this association is stronger when peers have successful innovations and for firms in industries with high product similarity and strong product market competition.

This paper investigates the relation between foreign experience and CEO compensation. Using a sample of large UK firms from the FTSE 350 index from 2003 to 2011, we find that foreign-born CEOs and national CEOs with foreign working experience receive significantly higher levels of total compensation compared to those without these characteristics. We document that this foreign-CEO pay premium is stronger in firms that are more globalized. The results are robust to controlling for firm-specific economic and corporate governance characteristics as well as the endogenous CEO selection using propensity score matching. Our results show that the foreign-CEO pay premium is attributed to specialized foreign expertise rather than broader general managerial skills.

In addition to the well-established forms of real estate investing (direct and listed), investors can also choose open-ended property funds (OPFs), which are considered a complementary real estate investment option. OPF fund managers generally provide daily liquidity, and these funds must maintain at least 5% liquidity. If liquidity falls below 5%, share redemptions will be temporarily suspended, for a period of up to two years. During this time, investors can only sell shares on the secondary market (exchange), and are thus subject to significant liquidity risk. The objective of this paper is to examine the impact of OPFs as an investment vehicle on the risk and return profile. OPFs in principle have the same underlying as direct and listed real estate investments, but they are subject to a different regulatory regime. Therefore, we analyze the diversification benefits of OPFs in mixed-asset portfolios for various risk measures, investor types, and holding periods. We find that OPFs are ideally suited to reduce portfolio risk. This result holds independent of the holding period and whether in- or out-of-sample Monte Carlo portfolio simulations are used. However, these positive effects come at the cost of increased risk from temporary share redemption suspensions. During these periods, investors may have to accept an average 6% discount in the secondary market compared to the net asset value calculated by OPFs themselves. These discounts can go as high as 20% if investors fear that OPF management will not be able to ensure liquidity within the two-year time limit, and will have to “fire-sell” properties.

Besides the more commonly used REITs, German investors can also invest in a lesser-known real estate vehicle, Open-ended Property Funds. OPFs are considered a compromise between listed and direct real estate investments. OPF fund managers generally provide daily (perfect) liquidity. However, if liquidity falls below 5%, share redemptions in these funds can be temporarily suspended for a period of up to two years. During this time, investors will only be able to sell shares on the secondary market (exchange), and are thus subject to significant liquidity risk. The objective of this paper is to analyze whether OPFs add value to investor portfolios above that provided by REITs. We show that OPFs have a diversification advantage over REITs in low-risk portfolios, despite their larger potential liquidity risk. REIT liquidity is comparable to that of ordinary common stock, but OPFs exhibit an average initial discount to funds’ NAV of about 6% when share redemptions are temporarily suspended. However, in the long-run, this potential redemption suspension does not negatively influence OPF performance (in case OPFs reopen again). This makes OPFs an attractive investment alternative to REITs for investors who have a high level of risk aversion and a long-term investment horizon, such as endowments, insurance companies, and pension funds.

Motivation: To gain a deeper understanding of biological processes and their relevance in disease, mathematical models are built upon experimental data. Uncertainty in the data leads to uncertainties of the model’s parameters and in turn to uncertainties of predictions. Mechanistic dynamic models of biochemical networks are frequently based on nonlinear differential equation systems and feature a large number of parameters, sparse observations of the model components and lack of information in the available data. Due to the curse of dimensionality, classical and sampling approaches propagating parameter uncertainties to predictions are hardly feasible and insufficient. However, for experimental design and to discriminate between competing models, prediction and confidence bands are essential. To circumvent the hurdles of the former methods, an approach to calculate a profile likelihood on arbitrary observations for a specific time point has been introduced, which provides accurate confidence and prediction intervals for nonlinear models and is computationally feasible for high-dimensional models. Results: In this article, reliable and smooth point-wise prediction and confidence bands to assess the model’s uncertainty on the whole time-course are achieved via explicit integration with elaborate correction mechanisms. The corresponding system of ordinary differential equations is derived and tested on three established models for cellular signalling. An efficiency analysis is performed to illustrate the computational benefit compared with repeated profile likelihood calculations at multiple time points. Availability and implementation: The integration framework and the examples used in this article are provided with the software package Data2Dynamics, which is based on MATLAB and freely available at http://www.data2dynamics.org. Contact: helge.hass@fdm.uni-freiburg.de Supplementary information: Supplementary data are available at Bioinformatics online.

The Sarbanes-Oxley Act requires management and board of directors to be involved in establishing and maintaining good quality internal control systems and the evaluation and disclosure of any deficiencies or weaknesses that could potentially result in a material error. We find that venture capital backing is negatively associated with disclosures of material weaknesses in internal control. We show that material weakness disclosure is much more likely to be informative for firms backed by VCs: material weakness disclosure is followed by subsequent financial restatements for VC-backed firms, but not other firms. Furthermore, we find that firms backed by more reputable VCs have more effective controls as evaluated by management and auditors.

This paper identifies a new incentive for managers to engage in corporate fraud stemming from the relative performance evaluation feature of CEO promotion tournaments. We document higher propensities to engage in fraud for firms with strong tournament incentives (as proxied for by the CEO pay gap). We posit that the relative performance evaluation feature of CEO promotion tournaments creates incentives to manipulate performance, while the option-like character can motivate managers to engage in risky activities. We thereby extend previous corporate fraud literature that focuses mainly on equity-based incentives and reports mixed findings. Our results are robust to using different fraud samples, and controlling for other known determinants of fraud as well as manager skills.

Prior research documents that analysts produce less biased forecasts for stocks with high institutional ownership. We show that this result holds only for long-term institutional investors. In the presence of short-term institutional investors, such as hedge funds, analysts strategically bias their forecasts, specifically, they issue optimistic target prices, but not earnings forecasts. Analysts bias target prices, but not earnings estimates, because this strategy reduces the likelihood the market will recognize their catering behavior. Correspondingly, we find that the market fails to see through analyst incentives and reacts favorably to target price revisions for stocks with high short-term ownership. Short-term institutional investors take advantage of temporary stock overpricing to offload their holdings to retail traders. They also reward brokers engaging in catering with higher future trades channeled through the broker. Together, our results identify a new source of conflicts of interest in analyst research that originates from the ownership composition of a stock.

The hedge fund industry often boasts that it delivers superior returns compared to alternative investments. We document that one reason behind this success is because sell-side analysts issue optimistic research forecasts that facilitate profitable trades by hedge funds. Investors do not see through analyst incentives to cater to hedge fund trades and react more strongly to analyst forecasts issued for stocks with large hedge fund holdings. Hedge funds take advantage of temporary stock overpricing and sell their holdings in stocks where analysts issued optimistic forecasts. Analysts cater to hedge funds in return for broker votes, which are an important determinant of analyst compensation and career outcomes. Our evidence on collusion between analysts and hedge funds partially explains the success of the hedge fund industry.

This article demonstrates that increased inflows of capital into private equity and venture capital funds can influence the investment behaviour of fund managers by increasing staging intensity, increasing amount per financing round, and accelerating speed of capital allocation. These changes do not appear to be related to expectations of improved investment performance. The study extends the work of Gompers and Lerner who interpret these inflows as demand pressure for venture capital securities to drive up prices during periods of high inflows. Using a unique dataset, the study examines the effects of this pressure on investment behaviour.

Portfolio optimization with private equity is based on one of three different indices: listed private equity indices, transaction-based private equity indices, and appraisal value based private equity indices. We show that none of these indices are appropriate for portfolio optimization. We introduce a new benchmark index for buyouts and venture capital. Our benchmark is updated monthly, adjusted for autocorrelation (de-smoothing) and available contemporaneously. We show our benchmark enables superior quantitative portfolio optimization.

This paper tests the idea that financial regulation can impact performance persistence in the context of the hedge fund industry in 48 countries over the years 1994–2008. The data show evidence of three types of regulation influencing performance persistence: (1) minimum capital restrictions, which restrict lower quality funds and hence increase the likelihood of performance persistence, (2) restrictions on location of key service providers, which restrict human capital choices and hence tend to mitigate performance persistence, and (3) distribution channels, which make fund performance more opaque, decrease the likelihood of performance persistence. We do not find evidence that distribution channels, that promote fund presence to institutional investors, enhance performance persistence. Finally, we show differences in the effect of regulation on persistence by fund quartile ranking.

This paper introduces a new framework for strategic asset allocation with alternative investments (buyouts, commodities, hedge funds, REITs, and venture capital). Our approach is not based on a utility function, but on an easily quantifiable risk preference parameter, λ. We account for higher moments of the return distributions within our optimization framework and approximate best-fit distributions. Thus, we replace the empirical return distributions, which are often skewed and/or exhibit excess kurtosis, with two normal distributions. We then use the estimated return distributions in the strategic asset allocation. Our results show in various out-of-sample analyses that our framework yields superior results compared to the Markowitz framework. Furthermore, our framework better manages regime switches, which tend to occur frequently during crises. To test our results for stability and robustness, we use, among other things time-varying correlation structures in the return distributions and weight restrictions for the asset classes.