AbstractWe examine the relationship between dividend smoothing and firm valuation across 21 countries using several empirical methods and smoothing measures. Our main results show that dividends are capitalized at significantly larger values for high-smoothing firms than for low-smoothing firms. We also find that dividend-smoothing premiums are higher in countries with weak shareholder protection – suggesting that smoothing serves as a substitute mechanism to reduce agency costs. Overall, our findings support the view that managers use dividend smoothing predominantly as a bonding mechanism to reduce agency costs (Leary and Michaely (2011)), and not as a rent extraction mechanism (Lambrecht and Myers (2012)).

We exploit a quasi-natural experiment (the adoption of state anti-recharacterization laws) to study the effect of strengthened creditor rights on corporate mergers and acquisitions. We find that, following the passage of anti-recharacterization laws, firms decrease overall acquisition activities. This effect is stronger for firms with worse agency problems. Announcement returns to shareholders are larger and post-merger operating cash flows are better for acquirers with weaker governance. Furthermore, returns to bondholders of these firms are also higher, indicating no wealth transfers. Taken together, our evidence suggests that ex-ante strengthened creditor rights can discipline firm managers to reduce value-destroying acquisitions and conduct higher quality deals.

We find that managers are less likely to repurchase stocks when they lose money on past stock repurchases but find no robust evidence that past gains on repurchases influence future repurchasing activity. This asymmetric sensitivity is strongest for young CEOs and those with the shortest tenure. Also, future repurchases are more sensitive to past repurchase losses for CEOs whose previous lifetime experience with the stock market is unfavorable. The sensitivity of future repurchases to past losses costs firms, on average, about 3.7% per year. When this cost is decomposed into systematic and idiosyncratic components, we find that nearly half (1.8%) comes from mistiming idiosyncratic shocks. Past losses on repurchases have a significant and negative impact on the CEO’s future bonus and increase the likelihood that future CEO termination is involuntary. We also find that negative outcomes from past repurchases encourage the subsequent use of dividends. Our findings suggest that outcomes of past repurchases have economically significant consequences through both nonbehavioral (career concerns) and behavioral (snakebite effect) factors. This paper was accepted by Tyler Shumway, finance.

Purpose Studies on corporate boards examine how social ties between the CEO and independent board members affect the effectiveness of board monitoring. Much evidence suggests that social connections between the CEO and independent directors are associated with inadequate monitoring and lower firm value (Hwang and Kim, 2009; Fracassi and Tate, 2012). In this study, the authors note that social connections of the independent directors are of different nature and thus should not be treated as a homogeneous group; that is, the nature of connections among directors can be quite different from that between the CEO and directors, which is the primary focus of previous studies. Design/methodology/approach The authors classify independent directors into four mutually exclusive groups based on their social connections to the CEO and other independent board members and examine what role each type of connection plays in corporate monitoring using panel data and cross-sectional fixed effect regressions. Findings The authors find that Only_CEO% , the proportion of independent directors who are connected only to the CEO, is negatively associated with monitoring intensity. Specifically, firms with higher Only_CEO% have larger CEO compensation, lower likelihood of dismissing the CEO, more co-opted board and worse firm performance. In contrast, No_CEO_Ind% , the proportion of independent directors who have no connection to either the CEO or other independent directors is associated with more effective monitoring. These findings suggest that independent directors with different degrees of social connections exhibit different monitoring qualities. Practical implications When more independent directors, who are connected exclusively to the CEO, are on the board, they consistently deliver low monitoring quality. However, when more independent directors with no connections to either the CEO or any independent directors are on the board, they enhance monitoring quality. These findings can be used to construct board structures with more effective monitoring ability. Originality/value This paper extends the literature on social networks in corporate finance. The authors show that independent directors with exclusive connections to other independent directors do not have a significant effect on board monitoring, but those truly independent directors are associated with better monitoring quality. These findings suggest that different types of social connections of independent directors play a different role in board monitoring and help extend our understanding of the function of social connections of independent directors in corporate governance.

We examine the usefulness of other comprehensive income (OCI) to debt investors in nonfinancial companies. Motivated by Merton's (1974) real options framework, we construct a measure of incremental OCI volatility, designed to capture the effect of OCI on overall firm asset volatility, which is a primary driver of credit risk in Merton's (1974) model. We find that the volatility of incremental OCI influences the likelihood of default, credit ratings, and the cost of debt. Overall, our evidence suggests that creditors use information from OCI in their assessment of firm credit risk and in pricing debt contracts.

Although corporate lobbying can be motivated for numerous reasons, much of corporate lobbying is aimed to secure public subsidies for the firm's high-risk R&D investment, which aggravates the shareholder-creditor conflict. This paper examines how creditors respond to the firm's lobbying that pursues R&D subsidies. Using syndicated bank loan data, we show that R&D-targeted lobbying activity aggravates shareholder-debtholder conflicts and results in debt rationing, shorter debt maturity, and larger loan spreads. We find weak evidence that creditors also impose tighter covenants. We also show that these effects are generally increasing in the firm's R&D intensity. These results are robust to instrumental variable estimations that endogenizes the decision to lobby by instrumenting cost of lobbying with the number of Electoral College representation in the firm's headquarters state. Further analyses show that R&D-targeted lobbying activity is positively related to the value of equity, suggesting that costs of creditor-imposed restrictions do not dominate the benefits of R&D-targeted lobbying. Overall, our findings suggest that the firm's lobbying activity provides useful incremental information to creditors in resolving informational and adverse selection problems in lending transactions.

In this paper, we focus on the usefulness of other comprehensive income (OCI) to debt investors. We conceptualize OCI’s usefulness to be its risk relevance. We hypothesize that credit risk is associated with OCI volatility and so we contribute to the debate whether this volatility is viewed by creditors as capturing useful information about debt risk or just “noise.” Specifically, we consider whether OCI’s volatility that is linked to accounting standards in the recent two decades is associated with cost of debt, non-price terms of debt contracting (i.e. covenants, security), capital and maturity structure, and credit ratings. We construct three samples to conduct our tests: (1) a new loan sample from Dealscan and (2) a comprehensive sample from COMPUSTAT and (3) credit ratings sample. We find strong evidence that higher volatility of OCI is associated with a higher cost of debt, higher likelihood of collateral requirement, and stronger credit rationing (lower use of debt). We also find statistically significant but economically weak evidence that OCI volatility is related to shorter debt maturity and lower credit ratings. Overall, our evidence suggests that OCI volatility provides useful information to credit markets and shapes debt contracting and the firm’s capital structure accordingly.

IntroductionWhen a firm securitizes, it sells financial assets that it has originated (as originator) to a special purpose entity (SPE) in exchange for cash. The SPE then directly or through an investment bank or other underwriter issues securities to investors.1 Securitization was historically considered attractive to originators because they could monetize long-term assets at a potentially lower effective cost of capital than alternative financing methods; it may also have provided regulatory and/or accounting advantages.2 It was considered attractive to investors because, at least until the financial crisis, it diversified risk, reduced exposure to the creditworthiness of the originator, and permitted trading in the issued securities.3 It was thought to enhance consumer welfare because it created financing opportunities not otherwise available.4Prior to the financial crisis of 2008, legal analysts expressed some concern about the potential agency and social costs of securitization, but were vague about the form such costs would take.5 Since then, there has been increased attention to the role that both securitization and executive compensation played in the financial crisis, and how each may have reflected misaligned incentives that led to the crisis. Asset-backed securities were at the core of the financial crisis of 2007-2008, Gorton and Metrick tell us.6 There Bebchuk and Spamann observe, widespread concern that executive compensation arrangements could have encouraged excessive risk-taking.7Although compensation is perhaps the purest form of incentive, there has been little effort to understand the regulatory implications of the pattern in securitization and pay.8 Instead, scholarship on securitization and compensation tends to be siloed. Literature on securitization typically focuses on ways that this type of transaction promoted short-termist behavior by shareholders,9 or how its complexity creates leverage and linkages between firms that produced systemic and instability.10 Literature on executive compensation focuses on the fact that CEOs of investment banks (for example, Bear Stearns) or mortgage brokers (for example, Countrywide) profited even as their firms ultimately foundered.11In the wake of the financial crisis, Congress enacted the 2010 DoddFrank Wall Street Reform and Consumer Protection Act (Dodd-Frank).12 At one level, the policy goal was simple: As Senator Dodd explained in the first of many Senate hearings that led to the act: will seek to ensure that executives' incentives are better aligned with the long-term health of their companies, not simply short-term profits.13 Federal regulators thus claim to recognize that when incentives are not properly aligned and there is a lack of discipline in the credit origination process, securitization can result in harmful consequences to investors, consumers, financial institutions, and the financial system.14Dodd-Frank contains extensive provisions on both securitization and executive compensation, notably rules that would require securitizers to retain risk and that would give regulators the power to claw back excessive pay.15 These rules suffer from a variety of flaws, however. Most basically, and as explained in this paper, they, too, are siloed, disconnected from one another, and so fail to recognize the possibility that firms that securitize might pay more than those that do not: that is, that securitization may have incentive effects. If securitization does affect pay, then understanding the pattern in securitization and compensation is important to achieving DoddFrank's stated goal of better aligning and reward in financial services.To explore this pattern, we created a unique dataset of over 20,000 firm-year observations from 1993-2009 of commercial banks and industrial (non-financial) firms, the largest and most detailed set of its kind.16 We find that securitizing banks on average pay their CEOs twice as much as nonsecuritizing banks ($3. …

The Dodd-Frank financial reforms of 2010 promised to better align risk-reward incentives by, among other things, reducing imprudent securitzation (i.e., sales of financial assets) and excessive executive compensation. This would, in turn, promote systemic stability. To assess whether Dodd-Frank’s elaborate rules on securitization and compensation are likely to achieve this goal, we explore the connection between the two empirically. Using a unique dataset covering 1993-2009 — the largest of its kind — we find that securitizing banks (regulated depositaries) on average paid their CEOs twice as much as non-securitizing banks, a finding that is both statistically and economically significant. By contrast, non-bank (industrial) firms that securitized actually paid their CEOs less than non-securitizers. Because securitizing banks performed no better than other firms (non-securitizing banks or industrials), we find evidence of agency cost; because bank-originated securitizations performed especially poorly in the financial crisis, we find evidence of social cost. Our findings have important implications for Dodd-Frank, because its rules on securitization and compensation fail to account for the incentive effects of securitization by banks. Its compensation provisions are disconnected from controls on securitization, in particular its risk-retention (“skin in the game”) rules. Moreover, it focuses not on those who “originate” securitizations, such as the banks we study, but instead the “securitizers” who issue securities backed by the financial assets in question. Because banks originated many of the worst securitizations — and yet paid their CEOs more for doing so — Dodd-Frank may be aimed at the wrong segment of securitization. Simpler, better-tailored regulation that accounts for the pattern we observe would more likely achieve Dodd-Frank’s goals of systemic stability and accountability.

We posit that firms use dividend payout policy to reduce information asymmetry and agency costs caused by country-level institutional weaknesses. Firms operating in countries with weak insider trading laws attempt to mitigate this institutional weakness by committing themselves to paying out large and stable cash dividends. We test this central hypothesis (among others) using an international sample of firms across 24 countries, as well as by conducting a case study during an enforcement action. The results show that weak insider trading laws lead to a higher propensity of paying dividends, larger dividend amounts and greater dividend smoothing. We also show that the market's valuation of dividend payouts is significantly higher when insider trading protection is weak. It is important to note that these insider trading results are not due to cross-country variations in investor or creditor protection, nor are they contingent on the enforcement of insider trading laws. Overall, our evidence supports the view that dividend payouts serve as a substitute bonding mechanism when country-level legal protections fail.

Our paper provides evidence regarding the use of share repurchases as an earnings management mechanism in the presence of debt-financing constraints as well as the impact of these constraints on the use of accruals and other real earnings management techniques. We document that share repurchases are prevalent as a mechanism to increase earnings per share. Next, we show that the presence of debt-financing constraints discourages the use of repurchase-based earnings management. We also find that for firms more likely to be engaged in earnings management, high financing constraints appear to increase the use of accruals based earnings management and decrease the use of other real earnings management techniques.

We assess the effect that asset securitization has on executive compensation among banks and non-bank (“industrial”) firms. Securitization is the process whereby firms “sell” financial assets in transactions that bear many characteristics of a loan. Scholars and policy makers have expressed concern about the agency costs associated with such transactions because they inject liquidity that managers may be tempted to capture through excessive compensation. Using a set of over 20,000 firm-year observations, we compare the effect that securitization has on CEO compensation at roughly 2,500 unique firms. We find that banks that securitize pay their executives more than banks that do not, and this difference is both statistically and economically significant. Interestingly, we find no meaningful difference when comparing the compensation practices of industrial firms that do and do not securitize. We attribute the difference between banks and industrials on these measures to special regulatory and informational attributes of banks. Our findings advance understandings of the causes of the credit crisis, and have implications for ongoing debates about the scope and nature of efforts to reform both securitization and executive compensation.

We assess the effect that asset securitization has on executive compensation. Securitization is the process whereby firms “sell” financial assets in transactions that bear many economic characteristics of a loan. Scholars and policy makers have expressed concern about the agency costs associated with such transactions, including that they create opportunities for managers to loot companies that engage in them.

We examine the agency cost version of the lifecycle theory of dividends by taking advantage of cross-country variations in disclosure environments. The outcome hypothesis posits that transparent disclosure environments lead to higher dividend payouts because shareholders can more accurately measure (and therefore demand) excess cash flows. In contrast, the substitute hypothesis argues that opaque disclosure environments lead to higher payouts because managers have stronger incentives to establish their reputation for fair treatment. Our empirical results confirm both hypotheses and contribute to the literature in two primary ways. First, we confirm that the lifecycle theory of dividends explains dividend payout patterns around the world. Second, and more important, we show that the firm’s disclosure environment plays a significant role in dividend payouts through its effect on agency costs; that is, we confirm an agency cost-inclusive lifecycle theory of dividends.

For a sample of over 700 celebrity appointments to corporate boards of directors over the period 1985–2006, we find positive excess market returns at the time of their announcement. The 1-, 2-, and 3-year long-run performance of the appointing firms provide corroborating evidence of the value of these appointments. We conclude that the appointment of celebrities as directors increase a firm’s visibility in a fashion consistent with Merton’s (J Finance 42:483–510, 1987 ) investor recognition hypothesis.