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We investigate whether non-miserly cognitive styles mediate the effects of cognitive ability and thinking dispositions on rational thought. Specifically, we review relevant literature on two dimens...

We study the relationship between CEO pay‐performance sensitivity, pay‐risk sensitivity, and shareholder voting outcomes as part of the “say‐on‐pay” provision of the 2010 US Dodd‐Frank Act. Consistent with our hypothesis, we provide evidence that shareholders tend to approve of compensation packages that are more sensitive to changes in stock price (pay‐performance sensitivity). Our findings are consistent with theoretical predictions that outside owners approve of equity incentives as a means of aligning managers' interests with those of shareholders. We also document that future changes to equity‐based incentives are related to voting outcomes and that shareholders incorporate CFO incentives into their votes. Collectively, these results provide evidence of the importance of equity‐based incentives from the perspective of those most concerned with firm value and of the effectiveness of say‐on‐pay as a governance mechanism.

Standard setters have expressed concern over the impact of complex accounting standards on the information gap between firm insiders and financial statement users. We address this issue by examining the relationship between accounting reporting complexity (ARC) and the market response to earnings surprises at the financial report filing. We document a weaker earnings response coefficient for increasing ARC, consistent with less market reliance on complex financial reports. We then examine whether ARC is associated with executives’ ability to trade based on their residual information advantage. Consistent with this expectation, we document higher returns to executives on trades executed in the sixty days following the report filing. The higher returns are concentrated in the trades of the CEO and CFO, who likely have a more profound knowledge of U.S. GAAP. Finally, we identify decreasing earnings persistence for increasing ARC as an underlying mechanism for these effects.

Although practitioner literature asserts a link between an auditor’s quality control system and engagement-level audit outcomes, prior archival evidence has struggled to identify observable indicators in support of this claim. We identify an observable failure that is unambiguously attributable to the auditor – a mistake in the audit report identified by the SEC – as an office-level proxy for poor, office-level quality control systems. Audit report errors suggest a breakdown in the engagement’s quality review process, which we expect to signal broader quality control problems in the respective office. Consistent with this hypothesis, we find that clients of a Big Four office cited for an audit report error display lower financial reporting quality than do clients of offices not cited for errors. We document this pattern in abnormal accruals, report lag, and adverse opinions on internal controls. Further, the SEC comment appears to trigger increased auditor attention to the quality review; after the SEC exposes an audit report error, financial reporting quality improves in the clients of the culpable office. Our results suggest that audit firms’ internal quality mechanisms impact the quality of the financial reporting process. They also suggest that audit report errors may be used as a proxy for an office’s audit quality independent of its clients’ pre-audit inputs.

We examine the impact of blockholder board representation on a borrower’s bank loan contract terms. We find that blockholder board representation is associated with lower spreads and fewer covenants, consistent with debtholders viewing blockholder-directors favorably. When examining the potential channels behind the relationship, we find that blockholder-directors who take dedicated monitoring roles, as opposed to short-term or confrontational positions typically associated with activist shareholders, drive the overall relationship. The findings, which are robust to alternative model specifications and explanations, suggest that blockholder-directors can serve as substitute monitors to debtholders when their incentives are aligned. Our research highlights the heterogeneity of blockholders, even among those who actively influence the management process.

Manager incentives are viewed as being better aligned with those of shareholders when they have an ownership stake in the firms they manage. However, manager ownership can exacerbate agency problems by better enabling managers to pass shareholder resolutions. We outline a model of strategic shareholder voting that allows outside shareholders to mitigate the influence of insiders. Consistent with our model, we find empirical support for strategic voting by outside shareholders and that strategic voting is more apparent when management-sponsored proposals are controversial or complex, when votes are close, or when other agency risks are greater. Accepted by Journal of Corporate Finance in May 2018.