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Table of Contents

The Impact of CEO Career Concerns on Accruals Based and Real Earnings Management

Elizabeth A. Demers, INSEAD - Accounting and Control Area
Chong Wang, Naval Postgraduate School

Board Composition, Audit Committee Structure, ‘Grey Directors’ and the Incidences of Corporate Failure in the UK

Hwa-Hsien Hsu, Durham University
Yu-Hsuan Wu, University of Leeds - Division of Accounting and Finance

A Critical Theory of Private Equity

Lee Harris, University of Memphis - Cecil C. Humphreys School of Law

Competing for Entrepreneurial Ideas: Matching and Contracting in the Venture Capital Market

Jose M. Plehn-Dujowich, Temple University
Konstantinos Serfes, Drexel University - Department of Economics & International Business
Veikko Thiele, Queen's School of Business

Hanging Together, Together Hung? The Role of Relationship Ties in the Context of CFO Dismissals

Volker Buettner, WHU Otto Beisheim Graduate School of Management
Stefan Hilger, European Business School (EBS) Wiesbaden, Germany - Department of Strategy, Organization & Leadership
Ansgar Richter, European Business School (EBS) Wiesbaden, Germany - Department of Strategy, Organization & Leadership
Utz Schäffer, WHU Otto Beisheim Graduate School of Management
Kevin Zander, affiliation not provided to SSRN

Auditor Downgrades During Financial Distress when the Market is Rational

Illoong Kwon, University at Albany, SUNY
Jing Pan, affiliation not provided to SSRN

CORPORATE GOVERNANCE: ACTORS & PLAYERS eJOURNAL
Sponsored by IRRC Institute

"The Impact of CEO Career Concerns on Accruals Based and Real Earnings Management" Free Download
INSEAD Working Paper No. 2010/13/AC

ELIZABETH A. DEMERS, INSEAD - Accounting and Control Area
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CHONG WANG, Naval Postgraduate School
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This paper theoretically and empirically investigates the role of CEO career concerns on accruals based and real activities earnings management. We develop a model of earnings management, rooted in career concerns, that alternatively incorporates the features of the accrual accounting performance measurement system and the negative value-destroying effects of real activities earnings management choices. Our model leads to the surprising prediction that, absent explicit compensation contracts, managers who maximize lifetime compensation in a perfectly competitive labor market would have little incentive to engage in income-increasing accruals manipulation or real activities earnings management in the early stages of their careers. By contrast, mature executives are tapped into managing earnings upward in order to influence their post-retirement labor market value even though the market correctly foresees this type of “signal jamming�. Our empirical results support the hypotheses that younger managers engage in less accruals based and real earnings management than older CEOs, even after controlling for explicit compensation and wealth based incentives, as well as other factors that have been shown to be associated with earnings management. We also find evidence that younger managers choose the “lesser of two evils� by managing accruals rather than opting for value-destroying real activities earnings management choices.

"Board Composition, Audit Committee Structure, ‘Grey Directors’ and the Incidences of Corporate Failure in the UK" Free Download

HWA-HSIEN HSU, Durham University
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YU-HSUAN WU, University of Leeds - Division of Accounting and Finance
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This study contributes to the debate by examining the characteristics of board and audit committee structures prior to failure and their relationships with the incidences of corporate failure. Specifically, this research splits board of directors into inside directors, grey directors and independent outside directors in the analyses since grey directors are not independent of management or company, but according to the UK governance codes, they are generally expected to play a monitoring role as independent outside directors. It is found that greater grey directors on the board and audit committee, the lower probability of corporate failure. However, more outside directors on board and audit committee could not effectively contribute to decrease the likelihood of corporate failure. Higher percentage of outside directors on audit committee is even unfavorable to firm survival. The findings also suggest that more inside directors on board would increase the likelihood of corporate failure. Additionally, failed firms are more likely to employ key directors on the audit committee. These findings suggest that inside, grey and outside directors may play distinguishable governance roles. The results also imply that grey directors are more informative and knowledgeable than independent directors to oversee management. Therefore, over-emphasizing on the independence of board and audit committee is not favorable to firm survival.

"A Critical Theory of Private Equity" Free Download
Delaware Journal of Corporate Law (DJCL), Vol. 35, No. 1, 2010

LEE HARRIS, University of Memphis - Cecil C. Humphreys School of Law
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In the private equity world, partnership agreements have received praise from many corners for reducing the agency costs arising between the interests of fund managers and investors. This article sets out to assess contract design in private equity partnerships. The argument here is that the importance of many of these heralded contract design features has been overstated. Part II describes the legal rights of investors in private equity funds. By default, investors in private limited partnerships have limited rights to participate in day-to-day operations or challenge decisions of fund managers. As a result of this set of default legal rules, investors in these funds face a familiar agency problem. That is, fund managers may be emboldened to pursue their own self-interest at the expense of investor interests. Some have boasted that contract design resolves many of these major agency problems. Parts III and IV describe a few of the best private contractual arrangements that investors have used to overcome these legal and economic constraints. As will be shown, however, many of these contract design features have severe shortcomings. Contract design appears to be an uncertain solution to the problem of agency costs in private equity limited partnerships.

"Competing for Entrepreneurial Ideas: Matching and Contracting in the Venture Capital Market" Free Download

JOSE M. PLEHN-DUJOWICH, Temple University
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KONSTANTINOS SERFES, Drexel University - Department of Economics & International Business
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VEIKKO THIELE, Queen's School of Business
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We propose an equilibrium model of the VC market with two-sided matching between heterogeneous VCs and entrepreneurs in a principal-agent framework. Each VC matches endogenously with an entrepreneur, offering an equity share and investment. There is positive assortative matching (PAM), which enhances investment and effort. Entry at the bottom of the ladder induces improvements across all ventures in the market, but exit at the bottom may trigger a wave of failures as it travels up the ladder. Entry ameliorates match qualities, but entry by an entrepreneur or entrepreneur-VC pair dampens investment and effort, while entry by a VC enhances them.

"Hanging Together, Together Hung? The Role of Relationship Ties in the Context of CFO Dismissals" Free Download
European Business School Research Paper No. 10-06

VOLKER BUETTNER, WHU Otto Beisheim Graduate School of Management
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STEFAN HILGER, European Business School (EBS) Wiesbaden, Germany - Department of Strategy, Organization & Leadership
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ANSGAR RICHTER, European Business School (EBS) Wiesbaden, Germany - Department of Strategy, Organization & Leadership
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UTZ SCHÄFFER, WHU Otto Beisheim Graduate School of Management
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KEVIN ZANDER, affiliation not provided to SSRN
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Is it good or bad for senior executives to have close relationship ties with the CEO? This paper investigates the role and importance of those ties in the particular context of CFO dismissals. Building on the top management team and governance literatures, we use data on 121 CFO turnover events in the largest German stock-market quoted companies between 1999 and 2006 and make three contributions: First, we show that poor firm performance and CEO dismissal both independently increase the likelihood of CFO dismissal. Strong relationship ties with the dismissed CEO increase it even further. Second, a CEO dismissal reduces the chances of the incumbent CFO being promoted into the vacant CEO position, which is also an indicator for the disadvantages of close relationship ties with the CEO. Third, our results underline the prominent role of CFOs alongside CEOs on management boards and suggest a more detailed consideration of CFOs in further research.

"Auditor Downgrades During Financial Distress when the Market is Rational" Free Download

ILLOONG KWON, University at Albany, SUNY
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JING PAN, affiliation not provided to SSRN
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This paper provides both theoretical and empirical analyses of the relationship between firms' performance and auditor change. The theoretical analysis focuses on the auditor's role as a commitment device not to overstate firms' earnings. We show that even when the investors are fully rational and firms cannot gain from overstatement, firms are more likely to switch to a lower quality auditor during financial distress. This tendency is stronger when firms are less myopic. This paper also discusses empirical evidence from U.S. data, and presents new evidence based on Chinese data.

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Corporate Governance: Actors & Players eJournal

PATRICK BOLTON
Barbara and David Zalaznick Professor of Business, Columbia Business School - Department of Economics

BRIAN R. CHEFFINS
S.J. Berwin Professor of Corporate Law, University of Cambridge - Faculty of Law, Fellow, European Corporate Governance Institute (ECGI)

JOHN C. COFFEE
Adolf A. Berle Professor of Law and Director of the Center on Corporate Governance, Columbia Law School, Fellow, European Corporate Governance Institute (ECGI), Fellow, American Academy of Arts & Sciences

JULIAN R. FRANKS
Professor of Finance, London Business School, Fellow, Centre for Economic Policy Research (CEPR), Fellow, European Corporate Governance Institute (ECGI)

HENRY HANSMANN
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OLIVER HART
Andrew E. Furer Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

BENGT R. HOLMSTRÖM
Paul A. Samuelson Professor of Economics, Massachusetts Institute of Technology (MIT) - Department of Economics, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)

KLAUS J. HOPT
Director (em.), Max Planck Institute of Foreign Private and Private International Law, European Corporate Governance Institute (ECGI)

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Professor of Law, University of Tokyo - Graduate School of Law and Politics

STEVEN N. KAPLAN
Neubauer Family Professor of Entrepreneurship and Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

RAKESH KHURANA
Marvin Bower Professor of Leadership Development, Harvard Business School

DAVID F. LARCKER
James Irvin Miller Professor of Accounting, Stanford University - Graduate School of Business

CHRISTIAN LEUZ
J. Sondheimer Professor of International Economics, Finance and Accounting, University of Chicago - Booth School of Business, Research Associate, National Bureau of Economic Research (NBER), Research Associate, European Corporate Governance Institute (ECGI), Fellow, University of Pennsylvania - Wharton Financial Institutions Center

MARCO PAGANO
Professor of Economics, University of Naples Federico II - Department of Economics, Fellow, Centre for Economic Policy Research (CEPR), Fellow, European Corporate Governance Institute (ECGI)

RAGHURAM G. RAJAN
Eric J. Gleacher Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, International Monetary Fund (IMF), National Bureau of Economic Research (NBER)

ROBERTA ROMANO
Oscar M. Ruebhausen Professor of Law, Yale Law School, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ANDREI SHLEIFER
Professor of Economics, Harvard University - Department of Economics, Fellow, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

LAURA T. STARKS
Charles E. and Sarah M. Seay Regents Chair in Finance, University of Texas at Austin - Department of Finance

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Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

JEAN TIROLE
Scientific Director, University of Toulouse 1 - Industrial Economic Institute (IDEI), University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ), Fellow, Centre for Economic Policy Research (CEPR)

LUIGI ZINGALES
Robert C. McCormack Professor of Entrepreneurship and Finance and David G. Booth Faculty Fellow, University of Chicago Booth School of Business, National Bureau of Economic Research (NBER), Fellow, Centre for Economic Policy Research (CEPR), University of Chicago - Polsky Center for Entrepreneurship, Fellow, European Corporate Governance Institute (ECGI)

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