Search

To improve our understanding of the succession process we utilize a sample of 832 successions to examine firm and predecessor characteristics that influence the board’s choice of a successor’s functional and educational background. We find that outgoing CEO and firm characteristics influence the selection of successors’ functional backgrounds. Firms are more likely to hire new CEOs with functional backgrounds similar to the outgoing CEO. Research-oriented firms hire CEOs with the functional background that would permit them to understand the firm’s research processes. Firms with poor prior operating performance tend to hire successors with a financial/accounting background. Riskier firms are less likely to hire CEOs with a degree from an Ivy League institution. We also find that firms are more likely to change the functional background of the successor relative to the predecessor when there has been poor prior performance and the firm has higher institutional investor ownership. However, we do not find evidence that changing the functional background and/or the education level of the successor CEO improves firm performance.

We relate the agency issues inherent in management buyouts and in earnings management. Income-reducing earnings management occurs prior to management buyouts. When insiders own small amounts of stock, outside monitoring mechanisms such as institutional ownership and Big Six audit firms reduce the level of earnings management. However, when insiders own large amounts of stock, the outside monitors have very little effect and inside monitors become more important. In these cases, smaller and more active audit committees reduce the level of earnings management. MBO firm earnings management does not appear to fool the stock market because the level of earnings management does not influence announcement-period abnormal returns. In a post-hoc examination of these issues in the years following Sarbanes-Oxley, we find that the pre-MBO earnings management becomes insignificant. This change may be due to the improvement in board and audit committee structure that we find in MBO firms following Sarbanes Oxley.

By examining only firms that experience net losses and negative cash flows, we are able to analyze a sample of firms that face a discrete refinancing point with no internal equity available, as well as a liquidity mismatch between assets and liabilities. These unique characteristics of our sample allow us to draw conclusions concerning a wide range of corporate financial decisions covering capital structure, dividend policy, and working capital management. We document that widespread changes in leverage are driven mainly by the decline in the book value of equity that occurs with a loss and are consistent with both the pecking order and the static trade-off models. Managers are reluctant to cut dividends, even when faced with seemingly high opportunity costs that sacrifice future productivity. Last, a firm’s liquidity position is managed by shifts between current asset items, as well as an overall change in net working capital.

This study investigates the impact of Delaware law on the composition and size of the board of directors. Our empirical evidence reveals that Delaware firms have smaller and more independent boards than their non-Delaware counterparts. Given that we find no value-premium for firms that incorporate in Delaware, we interpret our findings as being consistent with Delaware law benefiting managers. The more shareholder-friendly boards in Delaware exist to offset the benefits that managers derive from Delaware incorporation.

We investigate the impact of regulation on shareholder rights and corporate governance. We gauge the strength of shareholder rights by measuring the number of restrictive governance provisions that suppress shareholder rights – the more restrictive the governance, the weaker the shareholder rights. We find that financial firms have less restrictive corporate governance, suggesting that financial regulations promote shareholder rights. On the other hand, regulation does not seem to impact shareholder rights in the utility industry.

We investigate whether CEO compensation is influenced by the strength of shareholder rights. Agency theory suggests that CEOs may exploit shareholders when shareholder rights are weak, placing their own private benefits ahead of those of the stockholders. Our evidence reveals that CEOs of firms where shareholder rights are weak obtain more favorable compensation. Higher CEO pay is associated with a higher degree of potential managerial entrenchment. We also examine the change in CEO compensation relative to the change in shareholders' wealth. The evidence shows that when there is an increase in shareholders' wealth, the CEO is able to obtain higher incremental compensation if shareholder rights are weak. On the contrary, when shareholders' wealth falls, there is no corresponding decline in CEO compensation if shareholder rights are weak. Given the empirical evidence, we argue that CEO compensation practices reflect rent expropriation rather than optimal contracting.

Companies change auditors for a variety of reasons. At one end of the continuum, companies change auditors to improve operating performance. At the other, managers change auditors to enhance their own position. If auditor changes are driven by managerial opportunism, companies may increase their level of earnings management after the change. In this paper we reexamine prior research in earnings management that surround auditor changes (DeFond & Subramanyam, 1998) and extend prior work by examining earnings management and auditor changes while controlling for prior audit opinion. We find that, on average, earnings management does not increase following auditor changes. However, we do find that the level of earnings management is larger for companies that switch from Big Six to non-Big Six auditors following the receipt of a modified audit opinion from their original auditor.

While research has documented that board of director composition may be important in certain agency-related situations, the impact of board composition on overall financial performance is not at all clear. One problem may be that board of director composition and financial performance are endogenously determined. Using causality tests in panel regressions with three years of data for 130 closed-end mutual funds, we find very limited evidence of endogeneity. We do find that prior financial performance impacts board composition, but the relation depends on how we define board composition. The evidence that board composition influences financial performance is very limited.

Not all firms that intend to go private do so successfully. A number of management buyouts are announced but subsequently withdrawn. It is documented in this study that the stock market reacts negatively to MBO withdrawal announcement. This adverse effect, however, is alleviated in firms where inside directors hold higher proportions of equity ownership and where boards of directors are dominated by independent directors. The results suggest that higher ownership by inside directors helps align management’s and shareholders’ interests whereas outside-dominated boards better monitor management, whose fiduciary duties to shareholders may be compromised by conflicts of interest inherent in management buyouts. Finally, there is evidence that firms that could have taken the offer by another bidder but decided in favor of the MBO, which subsequently fails, suffer more adverse market reactions when the MBO is withdrawn.

We examine the role of the board of directors, the audit committee, and the executive committee in preventing earnings management. Supporting an SEC Panel Report's conclusion that audit committee members need financial sophistication, we show that the composition of a board in general and of an audit committee more specifically, is related to the likelihood that a firm will engage in earnings management. Board and audit committee members with corporate or financial backgrounds are associated with firms that have smaller discretionary current accruals. Board and audit committee meeting frequency is also associated with reduced levels of discretionary current accruals. We conclude that board and audit committee activity and their members' financial sophistication may be important factors in constraining the propensity of managers to engage in earnings management.