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This study examines whether non-financial performance measures (NFPMs) included in CEO bonus contracts are complementary to equity-based compensation, and whether they jointly explain future firm value. We predict that in a performance evaluation system, NFPMs integrated into CEO bonus contracts complement the use of equity-based compensation, and that they are jointly and positively associated with firms’ long-term value. Consistent with our predictions, we find that the inclusion of NFPMs in bonus contracts is positively associated with the relative importance of equity-based compensation (especially in the form of restricted stocks), indicating a complementary relationship between NFPMs and equity-based compensation. We also show that equity-based compensation is marginally associated with higher future firm value when the firm uses NFPMs in its CEOs’ bonus contracts. Overall, our findings suggest that equity-based compensation is more effective in aligning managerial efforts and actions with firms’ long-term value when firms include NFPMs in CEO bonus contracts.

SYNOPSIS We investigate the association between earnings quality and investor disagreement regarding the valuation consequences of earnings announcements. A primary purpose of financial reporting, including periodic earnings releases, is to convey useful information to investors. However, earnings may be of low quality due to an inherent failure in the accounting process to accurately represent the economic entity, unintentional errors, or intentional manipulation on the part of management. We argue that low-quality earnings will be associated with more divergent opinions regarding the implication of the earnings signal (i.e., differential interpretations) and, thus, be reflected in their trading activity. We use two abnormal accrual measures and an earnings persistence measure as proxies for earnings quality. We proxy for differential interpretations using abnormal trading volume unrelated to returns and analyst forecast jumbling. Our results show that low earnings quality is associated with more differential interpretations of earnings announcements measures.

We examine how firms' corporate social responsibility (CSR) performance affects CEO compensation structure. Traditional agency theory suggests that CEOs engage in CSR for their own interests at the expense of shareholders. A competing argument is that CEOs consider firms' social performance as a business strategy to increase firm value and align their interests with those of shareholders. Our results support the latter prediction. We find that a firm's social performance is negatively associated with the proportion of cash-based compensation, while it is positively associated with the proportion of equity-based compensation. These results are robust to the degree of corporate governance, and they are more pronounced for firms with high levels of inside director ownership and long director tenure. Overall, our findings highlight the positive impact of CSR performance on CEO compensation packages, implying that CEOs' fiduciary behavior of engaging in CSR leads to mitigating agency problems and maximizing firm value.

This study examines whether and how multiple managerial entrenchment devices within a firm, specifically the structure of the board of directors and family firm status, interact to influence tax management. Using a sample of 4,000 U.S. public firm-year observations covering the period 1999–2013, we find that the classified board structure and family firm status are both negatively related with tax avoidance. However, accounting for the interaction between board structure and family firm status, we also find that the negative associations between both entrenchment measures and tax management apply only where the other entrenchment mechanism is absent. In further analysis, we find that higher levels of monitoring by institutional investors neutralize the interaction between the presence of a classified board and family firm status. Our evidence highlights that governance/monitoring mechanisms can interact in complex ways, including an offsetting effect between potentially redundant dual-level entrenchment mechanisms, to influence tax management behavior.

Purpose – This study aims to examine the value relevance of ethics information. Design/methodology/approach – This study adopts event study methodology to test the market’s reaction around the announcements of World’s Most Ethical Companies (WME), a ranking based on firms’ overall corporate social responsibility performance. The authors calculate the abnormal returns of firms on the WME lists to investigate how stockholders respond to the disclosure of ethical information. Findings – The authors find significant and positive abnormal returns around the announcements of the lists of ethical firms. Specifically, positive market reaction on the first day after the WME announcement (Day 1) is observed. Originality/value – This study contributes to the existing literature of the relationship between business ethics and firm value. The authors provide evidence that ethics can be aligned with firms’ financial goals. Further, this study is the first to use the WME announcement as a proxy for ethical firms.

Our study addresses two research questions. First, are audit fees related to the presence of common members in audit and compensation committees (committee overlap)? Second, are audit fees related to whether board membership is protected by the use of a staggered voting system (board classification)? Using a treatment effects model to control for endogeneity, we find a negative relationship between audit fees and committee overlap, which is consistent with the argument that committee overlap is associated with weak corporate governance and that in an environment with weak governance, monitoring efforts by the audit committee are similarly weak. We find a positive relationship between audit fees and board classification, indicating that firms with classified boards seek greater monitoring, which is consistent with the prior literature which suggests that such firms seek the “quiet life” and wish to avoid reporting-related problems.

Increasing regulatory pressures have created specialization within boards, with more requirements and responsibilities being refocused to the committee level. Using data from S&P 1,500 firms, we find that board committee overlap associated with linking pin directors (i.e., those serving simultaneously on the audit and compensation committees) is an important conduit for knowledge transfer between boards' monitoring and incentive alignment functions. These directors are associated with lower executive compensation and influence pay mix. In studying the dynamics behind this process, we find that newly created linking pins improve monitoring effectiveness whereas recently dissolved linking pins decrease it. We also find that linking pins are all the more important when managers make less conservative accounting choices

This study examines the effect of accounting comparability on the design of CEO compensation structure. After controlling for firm-specific attributes, we find that accounting comparability is positively associated with CEO equity-based compensation intensity and pay-performance sensitivity. This suggests that the improved comparability increases the usefulness of equity-based compensation and a firm is willing to offer more equity-based compensation contracts to CEOs and increase their pay-performance sensitivity. Further, we find that the impact of comparability on the CEO’s compensation contract increases with information asymmetry, which is consistent with the notion that accounting comparability is a quality of financial reporting that facilitates the use of equity-based compensation in a poor information environment. Our analysis also reveals that the effect of accounting comparability on CEO compensation structure is greater when a firm’s corporate governance is strong, consistent with the complementary relation between comparability and the exiting corporate governance in determining CEO compensation schemes. Overall, our evidence suggests that firms utilize more equity-based compensation as a proportion of total compensation under greater accounting comparability and enhance the alignment between equity-based compensation and firm performance.

It is generally assumed that family firms emphasize socioemotional wealth, which exacerbates wealth expropriation from noncontrolling shareholders. We examine this issue in the context of nonfamily shareholders, specifically institutional investors, and find that institutional investors avoid investments in family firms. Furthermore, integrating institutional theory with a socioemotional wealth approach, we find that financial regulation can mitigate external investors’ concerns. These two results are important theoretically because they provide insight into the effect of agency problems specific to family firms and are important for management practice because they can provide guidance for family firms interested in new sources of capital.

We investigate whether the role of discretionary accruals in predicting future operating cash flows changes after the passage of SOX. We also examine the information content of discretionary accruals in litigious industries. We find that discretionary accruals are positively associated with future operating cash flows and that discretionary accruals become even more important to predict future cash flows during the post-SOX period. Findings also indicate that litigious industry firms impart greater information content relative to those in nonlitigious industries prior to SOX being issued and that the SOX effect on discretionary accruals is weaker for such firms as a result.

Earnings management has attracted much attention in this globalized economic environment due to large accounting scandals such as Enron and WorldCom. National governments and other market-regulation institutions are taking measures to restrain earnings management in order to ensure the reliability and transparency of financial reporting. This study explores whether audit committees and boards of directors influence earnings management using the literary review method. The findings show that both discretionary accruals and abnormal accruals are mostly used as dependent variables to detect earnings manipulation estimated by the Jones and Modified Jones Models. For the most part, evidence from previous literatures indicates that the more independent the members of the audit committee and board, the higher the quality of earnings in financial reporting. However, some opposite findings exist.

In this paper, we investigate whether the role of discretionary accruals in predicting future operating cash flows changes after the passage of the Sarbanes-Oxley Act (hereafter SOX). We also examine the information content of discretionary accruals in industries where litigation is more common. We find that discretionary accruals are positively associated with future operating cash flows. More importantly, we find that discretionary accruals become even more important to predict future cash flows during the post-SOX period. In addition, our findings indicate that litigious firms impart greater information content relative to non-litigious firms prior to the issuance of SOX and that the SOX effect on discretionary accruals is weaker for such firms as a result. Our results suggest that managers improve earnings quality after SOX by reducing discretionary accruals and reporting more conservatively. Our study contributes to the understanding of the impact of SOX on the use of discretionary accruals to convey firm value.

Earnings management has attracted much attention in this globalised economic environment due to large accounting scandals such as Enron and WorldCom. National governments and other market-regulation institutions are taking measures to restrain earnings management in order to ensure the reliability and transparency of financial reporting. This study explores whether audit committees and boards of directors influence earnings management using the literary review method. The findings show that both discretionary accruals and abnormal accruals are mostly used as dependent variables to detect earnings manipulation estimated by the Jones and modified Jones models. For the most part, evidence from previous literature indicates that the more independent the members of the audit committee and board, the higher the quality of earnings in financial reporting. However, some opposite findings exist.

We investigate whether firms reporting internal control weaknesses (ICW) over financial reporting under Section 404 of Sarbanes-Oxley Act, on average, have accruals that exhibit lower future performance (earnings and cash flow) predictive properties compared to firms without ICWs. We also investigate whether firms that remediate ICWs have accruals with greater ability to predict future performance compared to firms with no ICW remediation. We find that firms with weak internal control result in accruals with lower performance predictability. We also find that firms that remedy ICW generate accruals with higher performance predictability compared to firms that do not remedy ICW. Our findings emphasise that the internal control environment is an important factor in providing higher quality accruals, which in turn has substantial implications on firm valuation. Our findings also emphasise the benefit of a highly contentious portion of SOX, namely Section 404.

Corporate governance research on board monitoring effectiveness has assessed the implications of structure and composition of the board and its committees for organizational outcomes. In this artic...