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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 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.

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 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.

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.

We introduce a framework for strategic asset allocation with alternative investments. Our framework uses a quantifiable risk preference parameter, λ, instead of a utility function. We account for higher moments of the return distributions and approximate best-fit distributions. Thus, we replace the empirical return distributions with two normal distributions. We then use these in the strategic asset allocation. Our framework yields better results than Markowitz's framework. Furthermore, our framework better manages regime switches that occur during crises. To test the robustness of our results, we use a battery of robustness checks and find stable results.

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.