We examine the effect of algorithmic trading on forced CEO turnover and how boards respond to it. We find that the sensitivity of forced CEO turnover to stock returns declines with algorithmic trading, suggesting that algorithmic trading weakens directors’ learning from market prices. Boards respond to this information loss by placing greater weight on nonmarket-based performance measures, such as accounting performance and analyst expectations, and by meeting more frequently to gather information. Despite these efforts, boards make worse CEO turnover decisions when algorithmic trading is higher. Overall, our findings suggest that, while directors try to compensate for the reduction in price informativeness caused by algorithmic trading, their adjustments fail to fully offset its negative impact on board effectiveness.

We examine whether geographic diversity - a salient characteristic of the firm's organizational structure - affects the timing and quality of voluntary disclosure. We find that firms with higher geographic diversity issue earnings forecasts that are more pessimistic, less precise, and less accurate. We also find that firms with higher geographic diversity are more likely to bundle managerial earnings forecasts with the prior quarter's earnings announcement and less likely to issue forecasts during the quarter. These results are consistent with geographic diversity increasing information acquisition costs associated with providing managerial earnings forecasts. Consistent with these findings, we provide evidence consistent with managers substituting managerial earnings forecasts with firm-initiated non-earnings press releases, which require less information acquisition, and that managerial earnings forecasts are less useful to analysts and investors when geographic diversity is higher. Overall, our findings suggest that a firm's organizational complexity is a factor that shapes the information environment of the firm.

We study the role of segment disaggregation in equity-based pay contracts in diversified firms. Disaggregated segment disclosures can improve the observability of managerial actions in internal capital markets and thus increase implicit incentives for managers to allocate resources as desired by shareholders, substituting for explicit incentives provided to CEOs. We use the adoption of Statement of Financial Accounting Standards No. 131 as an identification strategy and find that firms affected by this segment reporting mandate significantly decreased the provision of equity-based incentives in the post-adoption period, especially for firms with higher operating volatilities. This effect is also more pronounced for firms with weaker board monitoring in the pre-adoption period but with stronger external monitoring in the post-adoption period. Overall, our results suggest that disaggregated segment disclosures reduce the use of equity-based pay contracts in diversified firms by enhancing the monitoring of managers.

We study how corporate boards set earnings performance targets in CEOs' annual incentive plans (AIPs) and the implications for strategic management earning guidance. We find that corporate boards rely on management and analyst information in setting the earnings performance targets, and the weight placed on each signal increases with its precision. We also find that management earnings guidance issued before compensation committee meetings ("event-window management forecast (MF)") is more pessimistic than that issued by the same firm at other times. The pessimism in the event-window MF is more pronounced when the expected managerial benefits of having lower performance targets are greater. Ex post, the event-window MF pessimism is associated with higher bonus payouts to CEOs. We use a theoretical framework to illustrate how the use of earnings performance targets might drive our findings. This study highlights boards' tradeoffs in designing executive compensation and the resulting managerial strategic disclosure.

We examine the effect of algorithmic trading (AT) on directors’ learning from stock prices. We find that the sensitivity of forced CEO turnover to stock returns decreases with AT. We mitigate correlated omitted variable bias by using the 2016 Tick Size Pilot Program as an exogenous shock to AT. In cross-sectional analyses, we document that the negative effect of AT is more pronounced for growth firms, firms with greater exposure to macroeconomic factors, and firms with a geographically dispersed investor base, where the information that AT crowds out is more likely to be new to directors. We also find that the effect is stronger when directors’ expertise likely allows them to extract decision-relevant information from prices and when the directors’ own information set is poor. Overall, our findings suggest that stock prices aggregate information about CEO performance and CEO-firm match, which is otherwise unavailable to directors, and that directors incorporate this information into their CEO turnover decisions.

This study examines peer effects in corporate disclosure decisions. Peer effects suggest that the average behavior of a group influences the behavior of individual group members. Consistent with peer effects, I find that disclosures made by industry peers induce firm disclosure. Peer effects in disclosure are more pronounced when a firm's strategic uncertainty is higher, indicating that peer firm disclosure reduces the external uncertainty arising from the firm's interaction with its industry peers and thus increases the precision of managerial private information. I also find that peer effects are stronger when a firm's dependence on external financing is greater, suggesting that peer firm disclosure increases the costs on firm visibility and reputation in capital markets. Overall, these findings suggest that peer firm disclosure shapes a firm's information environment.

We examine whether the application of the asset impairment model spurs monitoring activities and investment decisions for long-term growth. For identification, we use the regression kink design (RKD) and focus on a narrow window around a point at which a firm’s book-to-market ratio of assets (BTM) equals 1. We first show that the sensitivity of asset impairments to the BTM ratio substantially increases when the BTM ratio exceeds 1, identifying the kink point where the application of the asset impairment model is triggered. We then test whether monitoring and investment activities change around the kink point. We find an increase in shareholder voting against management and an increased likelihood of forced CEO turnover around the kink point. We also find increased R&D investments but decreased over-investments in capital expenditures and acquisitions around the kink point. Further analyses reveal that patent filings and patent values increase at the kink point.

We investigate the role of Relative Performance Evaluation (RPE) theory in CEO pay and turnover using a product similarity-based definition of peers (Hoberg and Phillips 2016). RPE predicts that firms filter out common shocks (i.e., those affecting the firm and its peers) while evaluating CEO performance and that the extent of filtering increases with the number of peers. Despite the intuitive appeal of the theory, previous tests of RPE find weak and inconsistent evidence, which we argue is due to the imprecise categorization of peers. Using product market peers, we find three pieces of evidence consistent with RPE in relation to CEO pay and forced turnover: (i) on average, firms partially filter out common shocks to stock returns, (ii) the extent of filtering increases with the number of peers, and (iii) firms completely filter out common shocks in the presence of a large number of peers.

The media commonly gauges a firm’s performance by comparing its performance to others within the same industry. We provide evidence that investors and analysts positively value improvements to the firm’s relative performance ranking (RPR) within its industry. Consistently, RPR is positively associated with the firm’s earnings persistence, which suggests that RPR provides information about the firm’s ability to capture profits within the industry. We also find that managers use non-GAAP exclusions from earnings to improve the appearance of the firm’s RPR and that not all the information found in the firm’s performance ranking is priced by investors at the time of the earnings announcement. This evidence suggests that investors and analysts use the entire distribution of earnings to evaluate a firm’s performance, allowing us to identify an alternative benchmark not previously explored.

Recent work shows that the role of accrual accounting in mitigating the timing differences between cash flows and operating performance has been disappearing over time (Bushman, Lerman, and Zhang 2016). We argue that even though there is noise in the accrual accounting process, financial analysts–as sophisticated users of financial information–are able to extract useful information from this process. Analysts use the information extracted from accrual accounting in their forecasting process to smooth the timing differences in forecasted cash flows and to predict future reported cash flows. Consistent with the argument, we find that the analysts’ forecasts of accruals and cash flows are negatively correlated and this negative correlation has not changed over time. Further, the ability of analysts’ accrual forecasts to predict future cash flows has not declined over time.

We examine whether corporate boards factor the potential cost of competitive harm caused by a departing CEO into the forced CEO turnover decision. Using staggered changes in the state-level enforceability of Covenants Not to Compete (CNC) for identification, we find that enhanced CNC enforceability increases both the likelihood of forced CEO turnover and the sensitivity of forced CEO turnover to firm performance. We present additional cross-sectional evidence that shows such effects are more pronounced when firms face more severe product market threats or operate in industries with greater potential threats of predatory hiring. Investors react to turnover announcements more positively when CNC enforceability increases, indicating that enhanced CNC enforceability increases efficiency in CEO replacement decisions.

We study how corporate boards set earnings performance targets in CEOs’ annual incentive plans (AIPs) and the implications for strategic management earning guidance. We find that corporate boards rely on management and analyst information in setting the earnings performance targets, and the weight placed on each signal increases with its precision. We also find that management earnings guidance issued before compensation committee meetings (“event-window management forecast (MF)”) is more pessimistic than that issued by the same firm at other times. The pessimism in the event-window MF is more pronounced when the expected managerial benefits of having lower performance targets are greater. Ex post, the event-window MF pessimism is associated with higher bonus payouts to CEOs. We use a theoretical framework to illustrate how the use of earnings performance targets might drive our findings. This study highlights boards’ tradeoffs in designing executive compensation and the resulting managerial strategic disclosure.

We examine how investors value changes in the relative ranking of the firm within its industry based on performance (measured as ROE, ROA and Profit Margin). We find that short window equity returns are significantly related to changes in the firm’s performance ranking within the industry, especially when the firm’s ranking has been stable in the recent past. We also provide evidence that managers manipulate earnings to improve their performance ranking. Our results suggest that the firm’s industry ranking constitutes an additional and relevant benchmark for investors and managers that has not been explored by prior research. Our final analysis also suggests that investors focus on a firm’s industry ranking is warranted due to the information gleaned about firm’s competitive advantage and sustainability of future earnings. It appears that investors use the entire distribution of earnings to evaluate a firm’s performance and not just analyst expectations or the prior period’s performance.

We view audit-quality choice as one among many that managers make to maximize firm value. We question whether audit-quality differences among publicly traded companies are of significant interest to investors, clients, and auditors and ask for research on this topic. Relatedly, we ask for research on whether auditors and their clients show behavior consistent with regulated audit quality exceeding the audit quality level demanded absent regulation. We propose that researchers incorporate the competitive advantages of auditors and the institutional features of the audit process into the definition of audit quality. We propose that audit quality research test for externalities and inefficiencies to understand whether auditors and their clients are choosing the efficient level of audit quality. We note the legislative, judicial, and executive powers residing in the PCAOB.

We study how compensation committees set CEOs’ earnings performance goals in annual incentive plans (AIPs) and their implications for managers’ strategic earning guidance behavior. We find corporate boards rely on earnings forecasts provided by both financial analysts and managers in setting performance goals. Also, the weight boards place on a manager’s earnings forecasts increases with managers’ information advantage over analysts. We next examine the implications of this process for management earnings guidance. We find that the forecasts issued by management ahead of compensation committee meetings (“event-window guidance”) are more pessimistic than those issued at other times. This pessimism in event-window earnings guidance is present when performance goals are linked to earnings-based measures such as Earnings-Per-Share (EPS), but not when they are linked to revenue, suggesting that pessimistic event-window guidance is likely motivated by a desire to depress earnings performance goals. Furthermore, pessimism in event-window guidance is associated with higher bonus payouts as well as total payouts to CEOs. Lastly, meeting or beating performance goals significantly reduces the likelihood of forced CEO turnover. Overall, this study provides insights into the process of setting managerial performance goals and management’s strategic disclosure behavior arising from this process.