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Abstract:
We present empirical evidence that firms inflate earnings around seasoned equity offerings in the presence of large outsider blockholdings, but not in their absence. The finding is robust to several alternative explanations, including differences in firm characteristics, growth, performance, CEO incentives, and capital usage. While we do not dispute that CEOs behave opportunistically, we challenge that earnings management is solely a symptom of weak governance. We conclude that strengthening shareholder power to alleviate the conflict between shareholders and management can also have the unintended consequence of intensifying the conflict between current and future shareholders.

blockholder monitoring, corporate governance, earnings management, equity offerings, insider-outsider conflict

Abstract:
The fair value option under SFAS 159 provides a unique setting to examine accounting choice, as firms have complete discretion about which assets and liabilities to elect on a contract-by-contract basis. The purpose of our study is to shed light on the extent and characteristics of adoption of the fair value option, as well as the motivation behind that choice. We hand collect data on firms’ adoption decisions from Form 10-Q filings for all constituents of the S&P 1500 for the first quarters of fiscal years 2007 and 2008. We find that 72 firms adopt the fair value option, of which 21 firms are early adopters and 53 firms are in the financial industry. We identify seven individual firms that benefit from electing instruments with sufficient gains in the adoption quarter to meet or beat their consensus earnings forecast. Only three of these firms subsequently faced pressure from regulators to rescind their adoption decision. We also identify 16 firms that are able to avoid recognizing losses in future income statements in excess of five percent of expected quarterly earnings. Overall, we find that opportunistic election for current gains is concentrated among early adopters, as well as adopters with an earnings shortfall and a higher propensity to meet their consensus forecasts. However, we find no systematic pattern among adopters with future gains. Our findings suggest that issuing an optional accounting standard potentially undermines the credibility of firms’ stated reasons for adoption.

SFAS 159, fair value option, fair value, mark-to-market, accounting choice, optional accounting standard

Abstract:
We develop a principal-agent model linking CEO incentive pay to overstatements that allows us to differentiate between boards that prevent and boards that encourage overstatements. Using the Sarbanes-Oxley Act of 2002 as an exogenous increase in the cost of overstatements, we infer from the observed decrease in CEO incentives that boards must benefit from overstatements. Empirical proxies for board benefits from overstatements are also indicative of higher CEO incentives in the cross-section, and the decrease in CEO incentives around SOX is concentrated in firms whose boards are more likely to benefit from overstatements.

principal, agent, SOX, CEO, pay, incentives, pay-for-performance, board, director, corporate governance, overstatement, myopia