Abstract:
We provide new insights into earnings quality from a survey of 169 CFOs of public companies and 12 indepth interviews of Chief Financial Officers (CFOs) and two standard setters. Our key findings are: (i) high quality earnings are sustainable, avoid one-time items, and are backed by actual cash flows; they also reflect consistent reporting choices over time and avoid long term estimates; (ii) CFOs estimate that about 50% of earnings quality is driven by innate factors, about 20% of firms manage earnings to misrepresent economic performance, and for such firms 10% of EPS is typically thus managed; (iii) CFOs believe that earnings management is hard to unravel from the outside but suggest numerous red flags that academics can use to identify managed earnings; and (iv) CFOs disagree with the direction the FASB is headed on a number of issues including the sheer number of rules promulgated, the top-down as opposed to the bottom-up approach to rule making, curtailed reporting discretion, de-emphasis of the matching principle, and the over-emphasis of fair value accounting.

Abstract:
We examine firms' practice of providing forecasts using a comprehensive data set containing detailed attributes of management forecasts from 78 countries. We find that the incidence of management forecasts is (a) positively associated with country-level institutional characteristics related to the protection of private business, (b) negatively associated with country-level institutional characteristics related to investor protection, (c) negatively associated with the level of government involvement in the economy, and (d) positively associated with the quality of mandatory reporting. Various properties of management forecasts such as frequency, precision, horizon, attribution, and the type of news in the forecast are also systematically related to these country-level institutional characteristics. In examining whether management forecasts are informative to the stock market, we find that forecasts are informative in nearly all countries. Moreover, institutional characteristics related to protection of private business and investors, and the quality of the mandatory reporting systems appear to enhance the informativeness of management forecasts, and government involvement in the economy is negatively associated with the informativeness.

Abstract:
This study focuses on the impact of the California Non-Profit Integrity Act (2004) (hereafter, the Act or regulation) on executive compensation in affected non-profit organizations in California. The Act, closely modelled after the Sarbanes-Oxley Act (SOX) of 2002, requires charitable organizations in California reporting to the Attorney General’s office to compulsorily form an audit committee and get their financial statements audited by a practicing public accountant. The Act also requires boards of directors of non-profit organizations to approve the compensations of the chief executive officer and the chief financial officer and ensure that the compensation paid is just and reasonable. This study examines whether the Act has really been able to reign in excessive executive compensation in affected non-profits. The issue of the impact of regulation on non-profits is a very interesting one. This is because the absence of an alienable residual claimant makes agency conflict issues in the not-for-profit sector different to those of for-profit sector, making the mechanical extension of latter sector’s research findings to the former questionable. Also, the not-for-profit sector forms a significant part of the US economy, generating $ 1.9 trillion in revenue (about 13% of the US GDP) in 2008. Using Ohio firms as a control for California charities, we find that not only has executive compensation not reduced in the wake of the Act, non-profits seem to be paying more to their executives, on the contrary, after the enactment of the Act. Recognizing that increase in executive compensation is not necessarily bad if non-profits can achieve cost savings elsewhere, we then examine changes in administrative costs and program ratio after the Act. We do not find any evidence to suggest that these two cost items have changed significantly after the Act. We also rule out cost shifting as a potential explanation for the increased compensation costs. Thus, our results call into question the necessity for imposing SOX-like regulation on a sector which clearly has different dynamics than the for-profit sector, for which SOX was intended. Our results have serious policy implications since many states in the USA have already implemented or are planning to implement similar legislation.

Abstract:
We examine whether CEO equity incentives are related to firm risk. Our study differs from prior research in two important ways. First, we distinguish between upside and downside firm risk. This research focus is prompted by the simple observation that variance is a symmetric and unconditional risk measure that may not capture how CEOs judge risk. Second, we distinguish between CEO incentives that arise from holdings of stock versus options because these compel CEOs to act differently. For a sample of about 2,600 firms from 1992 to 2008, we find that CEO incentives created by stock and options are differentially related to risk. In particular, both stock and option-based incentives are positively associated with upside risk but only stock-based incentives are negatively associated with downside risk. Our findings are consistent with the notion that CEOs perceive potential losses to their stock holdings as riskier than potential gains. Two conclusions emerge from our findings: 1) CEO incentives reflect risk asymmetrically, and 2) the effect of firm risk has a markedly different impact on CEO’s stock versus option incentives. To the extent that they are not already doing so, compensation committees might tailor contracts to reflect the differential importance of downside and upside risk. From a research perspective, failing to separately consider upside versus downside risk or the differential incentives induced by stock versus options, could lead to false inferences about the efficacy and efficiency of CEO equity incentives.

Abstract:
Little is known about whether powerful investors are affected by, or subsequently influence, the management practices of their investees. To examine this question, we rely on the public statements of a well-known powerful investor, Warren Buffett, “the oracle of Omaha,” and test whether investees of Berkshire Hathaway exhibit more timely and transparent financial reporting, stronger governance and superior investing decisions relative to our control firms. Our findings indicate that, consistent with Buffett’s publicly stated preferences, Berkshire investees often make transparent conservative accounting and disclosure decisions, measured as timely disclosure of good and bad news, better mapping of accruals to cash flows, voluntary expensing of stock option expense and a lower assumed rate of return on pension assets. In the area of governance, some of Buffett’s preferred compensation practices are followed by BH investees (notably higher CEO pay for performance sensitivity and lower “excess” CEO compensation), but board composition is generally inconsistent with his publicly expressed views. BH investee boards tend to be larger and are no different from the average control firm in terms of proportion of outside directors and directors share holdings. Consistent with Buffett’s statements, his investees enjoy substantially higher rates of return on equity, longer periods when firms’ sales growth and ROE growth outperforms their industry, lower volatility in such rates of return, lower leverage and have stock prices that trade closer to their estimated intrinsic values. However, there is little evidence of change in investees’ practices subsequent to Berkshire’s initial investment, suggesting that Buffett does not appear to be especially active or influential in the decisions of BH investees. Berkshire’s stock returns outperform the Fama-French four-factor model over 1977-2006, but not over the most recent decade (1997-2006). Berkshire’s equity investments and a portfolio of equity holdings that statistically mimics the attributes that Buffett favors beats the market but not the fourfactor model over most of the sample period. However, the statistically mimicking portfolio is able to identify firms that report improvements in operating performance five years out.

Abstract:
The economic consequences of disclosure regulation have been the subject of much debate. This study contributes to the debate by examining the informational effect of disclosure regulation and the extent to which the disclosure effect is altered by institutional and firm-level factors in the context of international IPO markets. Our empirical analysis uses a unique sample of 6,025 IPOs from 34 countries over the period from 1995 to 2002. We show for the first time that the stringency of disclosure requirements for IPO prospectuses is negatively associated with the extent of IPO underpricing, after controlling for various country- and firm-level determinants of underpricing. Moreover, we find that the mandatory disclosure effect on IPO underpricing is more pronounced in countries whose capital markets are less integrated and for IPO issuers whose prospectuses are audited by lower-quality auditors. Taken together, our findings are consistent with the view that increased disclosure regulation reduces IPO underpricing in international IPO markets, consequently lowering the cost of equity financing, and that both institutional and firm-specific factors play an important role in understanding the economic consequences of mandatory disclosure in international IPO markets. Key Words: Disclosure Regulation, Mandatory Disclosure, International IPO Underpricing, Cost of Equity, Auditor Quality

Abstract:
I examine the sensitivity of CEO cash compensation to fair value gains and losses in derivatives for a sample of U.S. oil and gas producers from 2007 to 2009. I provide evidence that CEO cash compensation is less sensitive to derivative gains/losses than to other earnings components. Further, CEO cash compensation is nearly three times more sensitive to derivative gains than to derivative losses, suggesting that compensation committees reward CEOs for fair value gains but shield their compensation from fair value losses. I also find that the asymmetric treatment of derivative gains/losses in CEO cash compensation decreases in the presence of strong corporate governance, specifically the presence of an accounting financial expert on the compensation or audit committee; and higher proportion of independent directors on the board