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Abstract:
We create a broad measure of corporate governance, Gov-Score, based on a new dataset provided by Institutional Shareholder Services. Gov-Score is a composite measure of 51 factors encompassing eight corporate governance categories: audit, board of directors, charter/bylaws, director education, executive and director compensation, ownership, progressive practices, and state of incorporation. We relate Gov-Score to operating performance, valuation, and shareholder payout for 2,327 firms, and we find that better-governed firms are relatively more profitable, more valuable, and pay out more cash to their shareholders. We examine which of the eight categories underlying Gov-Score are most highly associated with firm performance. We show that good governance, as measured using executive and director compensation, is most highly associated with good performance. In contrast, we show that good governance as measured using charter/bylaws is most highly associated with bad performance. We examine which of the 51 factors underlying Gov-Score are most highly associated with firm performance. Some factors representing good governance that are associated with good performance have seldom been examined before (e.g., governance committee meets annually, independence of nominating committee). In contrast, some factors representing good governance that are associated with bad performance have often been examined before (e.g., consulting fees less than audit fees paid to auditors, absence of a staggered board, absence of a poison pill). Gompers, Ishii and Metrick (2003) created G-Index, an oft-used summary measure of corporate governance. G-Index is based on 24 governance factors provided by Investor Responsibility Research Center. These factors are concentrated mostly in one ISS category, charter/bylaws, which we show is less highly associated with good performance than are any of the other seven categories we examine. We document that Gov-Score is better linked to firm performance than is G-Index.

Corporate governance, firm performance, gov score, nominating committee, governance committee, option burn rate

Abstract:
Gompers et al. [Gompers, P., Ishii, J., Metrick, A., 2003. Corporate governance and equity prices. Quarterly Journal of Economics 118, 107-155] created G-Index, a summary measure of corporate governance based on 24 firm-specific provisions, and showed that more democratic firms are more valuable. Bebchuk et al. [Bebchuk, L., Cohen, A., Ferrell, A., 2005. What matters in corporate governance? Working Paper, Harvard Law School] created an entrenchment index based on six provisions underlying G-Index, and found it to fully drive the Gompers et al. (2003) valuation results. Both G-Index and the entrenchment index are based on IRRC data that is comprised of anti-takeover measures, focusing on external governance [Cremers, K.J.M., Nair, V.B., 2005. Governance mechanisms and equity prices. Journal of Finance 60, 2859-2894]. We create Gov-Score, a summary governance measure based on 51 firm-specific provisions representing both internal and external governance, and we show that a parsimonious index based on seven provisions underlying Gov-Score fully drives the relation between Gov-Score and firm value. Our results support the Bebchuk et al. (2005) findings that only a small subset of provisions marketed by corporate governance data providers are related to firm valuation, and the Cremers and Nair (2005) evidence that both internal and external governance are linked to firm value. The 51 governance provisions we consider include five that are relevant to accounting and public policy: stock option expensing, and four that are audit-related. We find none of these five measures to be related to firm valuation. We document that only one of the seven governance provisions important for firm valuation was mandated by either the Sarbanes-Oxley Act of 2002 or the three major US stock exchanges. We provide researchers with an alternative measure of governance to G-Index with three distinct advantages: (1) broader in scope of governance, (2) covers more firms, and (3) more dynamic, reflecting recent changes in the corporate governance environment.

Corporate governance, firm valuation, anti-takeover, internal and external governance

Abstract:
Using a unique dataset provided by Institutional Shareholder Services (ISS), we relate 51 governance provisions to firm operating performance as proxied by return on assets and return on equity. We identify six corporate governance provisions that are significantly and positively linked to return on assets, return on equity or both using at least two of our six regressions. We examine nine governance provisions that have been recently mandated by the three major U.S. stock exchanges, and we find none of them to be significantly and positively related to firm operating performance. Our results reveal that the governance provisions recently mandated by the U.S. stock exchanges are less closely linked to firm operating performance than are those not so mandated.

Corporate governance, Firm operating performance, U.S. stock exchanges

Abstract:
Using a unique dataset provided by Institutional Shareholder Services (ISS), we relate 51 governance provisions to firm operating performance as proxied by return on assets and return on equity. We show that seven (six) governance provisions are significantly and positively related to return on assets (equity) using at least two of three econometric approaches. We identify 10 corporate governance provisions that are positively linked to return on assets, return on equity or both using at least two of our three econometric approaches. Nine of the corporate governance provisions we examine have recently been mandated by the three major U.S. stock exchanges but only one of them, nominating committee is comprised solely of independent outside directors, is significantly and positively related to firm operating performance. Our results reveal that the corporate governance reforms recently mandated by the three major U.S. stock exchanges are not more closely linked to firm operating performance than are those not so mandated.

Corporate governance, Firm operating performance, U.S. stock exchanges, Nominating committee

Abstract:
Applying a Burgstahler and Dichev (1997)/Degeorge et al. (1999) type methodology to quarterly data for the 1985-2002 time period, we show that, since the mid-1990s, but not before then, managers seek to avoid negative quarterly earnings surprises more than to avoid either quarterly losses or quarterly earnings decreases. Our findings suggest that the quarterly earnings threshold hierarchy proposed by Degeorge et al. (1999) does not apply to recent years, and that managers' claim that avoiding quarterly earnings decreases is the threshold they most seek to achieve (Graham et al. 2004) is inconsistent with their actions. We provide an intuitively appealing economic rationale for why the shift in threshold hierarchy occurred; since the mid-1990s, but not before then, investors unambiguously rewarded (penalized) firms for reporting quarterly earnings meeting (missing) analysts' estimates more than they did for meeting (missing) the other two thresholds. We provide several explanations for why investors unambiguously reward firms for reporting quarterly earnings that meet or beat analysts' estimates more than for meeting the other two thresholds late (but not early) in our sample period: increased media coverage given to analyst forecasts, more analyst following, more firms covered by analysts, and temporal increases in both the accuracy and precision of analyst forecasts.

Thresholds, propensities, valuation consequences, temporal changes, analyst estimates

Abstract:
I examine whether managers use discretion in revenue recognition to avoid three earnings benchmarks. I find that managers use discretion in both accrued revenue (i.e., accounts receivable) and deferred revenue (i.e., advances from customers) to avoid negative earnings surprises, but find little evidence that discretion is used to avoid losses or earnings decreases. For a common sample of firms with both deferred revenue and accounts receivable, I find evidence that managers do not prefer to exercise discretion in either account. However, further tests show that managers preferred to use discretion in deferred revenue before the Sarbanes-Oxley Act of 2002 went into effect, consistent with them choosing to manage an account with the lowest real costs to the firm (i.e., future cash consequences). My results suggest that the Revenue Recognition joint project undertaken by the FASB and IASB to reduce managerial estimation in revenue recognition may have the unintended consequence of leading to greater real costs imposed on shareholders as firms are likely to use even greater discretion in accounts receivable.

Revenue recognition, earnings surprises, earnings management, accounts receivable, deferred revenue, Sarbanes–Oxley Act

Abstract:
I examine whether managers use discretion in the two accounts related to revenue recognition, accounts receivable and deferred revenue, to avoid three common earnings benchmarks. I find that managers use discretion in both accounts to avoid negative earnings surprises. I find that neither of these accounts is used to avoid losses or earnings decreases. For a common sample of firms with both deferred revenue and accounts receivable, I show that managers prefer to exercise discretion in deferred revenue vis-à-vis accounts receivable. I provide a reason for why managers might prefer to manage a deferral rather than an accrual: lower costs to manage (i.e., no future cash consequences). My results suggest that if given the choice, managers prefer to use accounts that incur the lowest costs to the firm.

Revenue recognition, earnings surprises, earnings management, accounts receivable, deferred revenue

Abstract:
We examine the association between quarterly stock returns and total earnings news conditional on the timing in which earnings information is revealed to the market. Evidence in prior research suggests that managers try to avoid reporting a negative earnings surprise and that market participants place greater weight on the information contained in earnings announcements than on earnings forecast revisions during a quarter (Soffer et al. 2000; Bartov et al. 2002). This notion is consistent with recency theory in the context of individual judgment and decision-making behavior (Hogarth and Einhorn, 1992). We extend prior research by investigating the descriptive validity of recency theory to a comprehensive set of potential earnings paths. Our evidence suggests, contrary to conclusions in the prior literature, that investors do not always assign more weight to earnings surprises than to analyst forecast revisions. Rather, our results suggest that the market response to earnings news is more consistent with prospect theory, an alternative cognitive psychology theory developed by Kahneman and Tversky (1979).

earnings surprises, analysts' forecast revisions, value relevance, recency theory, prospect theory