This paper assesses the importance of context—both observed and unobserved—in shaping a firm's governance choices. We show that observed context predicts significant variation in out-of-sample governance choices. However, the impact of context is highly nonlinear and incorporating nonlinearities substantially improves predictive accuracy. We also propose a method to obtain information about unobserved context and show that utilizing the information further increases predictive accuracy. Moreover, we construct a new measure of governance quality, context consistent governance (CCG), which outperforms unconditional governance indices and highlights the value of integrating context into the measurement of corporate governance.

A large body of empirical work provides mixed support for the central prediction from agency theory that noisier performance measures receive less weight in incentive contracts. We develop a method to calculate price-based and non-price-based performance measure weights using CEO pay and holdings of stock, options, and performance-vested awards. Consistent with theory, we find that noisier performance measures receive less weight. We find that this negative relation strengthened following the adoption of ASC 718 (formerly SFAS 123R), which equalized the accounting treatment for options and other share-based awards. We further find that firms that increased non-price incentives for CEOs realized improvements in ROA and in Tobin’s Q. Our results suggest that misaligned incentives prior to ASC 718, and the under-weighting of non-price measures in particular, negatively affected firm performance.

ABSTRACT We study how short-term changes in institutional owner attention affect managers' disclosure choices. Holding institutional ownership constant and controlling for industry-quarter effects, we find that managers respond to attention by increasing the number of forecasts and 8-K filings. Rather than alter the decision of whether to forecast or to provide more informative disclosures, attention causes minor disclosure adjustments. This variation in disclosure is primarily driven by passive investors. Although attention explains significant variation in the quantity of disclosure, we find little change in abnormal volume and volatility, the bid-ask spread, or depth. Overall, our evidence suggests that management responds to temporary institutional investor attention by making disclosures that have little effect on information quality or liquidity. JEL Classifications: G23; G32; G34; G12; G14.

We study how short-term changes in institutional owner attention affect managers’ disclosure choices. Holding institutional ownership constant and controlling for industry-quarter effects, we find that managers respond to attention by increasing the number of forecasts and 8-K filings. Rather than alter the decision of whether to forecast or to provide more informative disclosures, attention causes minor disclosure adjustments. This variation in disclosure is primarily driven by passive investors. Although attention explains significant variation in the quantity of disclosure, we find little change in abnormal volume and volatility, the bid-ask spread, or depth. Overall, our evidence suggests that management responds to temporary institutional investor attention by making disclosures that have little effect on information quality or liquidity.

In this discussion, I briefly summarize the key features of Bertomeu, Darrough, and Xue's (hereafter BDX ) model. I then examine the four key assumptions that BDX employ to arrive at their results: (i) firms contract only on earnings; (ii) conservative earnings are better for contracting; (iii) conservatism motivates upward earnings manipulation; and (iv) conservatism is endogenous. I then briefly conclude.

We measure a manager’s risk-taking incentives as the total sensitivity of the manager’s debt, stock, and option holdings to firm volatility. We compare this measure with the option vega and with the relative measures used by the prior literature. Vega does not capture risk-taking incentives from managers’ stock and debt holdings and does not reflect the fact that employee options are warrants. The relative measures do not incorporate the sensitivity of options to volatility. Our new measure explains risk choices better than vega and the relative measures and should be useful for future research on managers’ risk choices. Data and the online appendix are available at https://doi.org/10.1287/mnsc.2017.2811. This paper was accepted by Shiva Rajgopal, accounting.

We investigate the association between geographic spillovers and corporate investment and accruals decisions. We hypothesize that if geographic areas differ by the degree of information sharing among local people, then the quality of managerial decisions can be affected by higher information flow in high-spillover areas. We construct a measure of geographic spillover intensity based on distances among firms in a metropolitan statistical area and test whether geographic spillovers are related to (1) the similarity and (2) the quality of corporate decisions. The findings indicate that in high-spillover areas, managers’ investment and accruals decisions are more similar and have better quality than in low-spillover areas. Our findings contribute to a growing literature on the role of geographic information flow and its effect on corporate outcomes.

AbstractThis paper examines whether and how inside ownership mediates the relation between disclosure quality and the cost of capital. Both ownership and more transparent reporting have the potential to align incentives between managers and investors thereby reducing systematic risk. Employing a large global sample across 35 countries over the 1990-2004 period, we show that country-level disclosure regulation is negatively related to (i) inside ownership, and (ii) firms' implied cost of capital and realised returns. We then introduce ownership into the cost of capital model, and also find a negative relation. These relations extend to the systematic component of the cost of capital, estimated from Fama-French portfolio sorts on ownership and disclosure regulation. Thus, while the direct effect of disclosure on cost of capital is negative, the indirect effect via ownership is positive, consistent with disclosure quality and ownership acting as substitutes. Using path analysis to assess the relative magnitude, our estimates suggest that the direct effect of disclosure quality outweighs the indirect effect by a ratio of about five to one.

Although recent research documents a positive relation between corporate transparency and the proportion of independent directors, the direction of causality is unclear. We examine a regulatory shock that substantially increased board independence for some firms, and find that information asymmetry, and to some extent management disclosure and financial intermediation, changed at firms affected by this shock. We also examine whether these effects vary as a function of management entrenchment, information processing costs, and required changes to audit committee independence. Our results suggest that firms can alter their corporate transparency to suit the informational demands of a particular board structure.

ABSTRACTWe use changes in the value of a firm's real estate assets as an exogenous change in a firm's financing capacity to examine (1) the relation between reporting quality and financing and investment conditional on this change, and (2) firms’ reporting quality responses to the change in financing capacity. We find that financing and investment by firms with higher reporting quality is less affected by changes in real estate values than are financing and investment by firms with lower reporting quality. Further, firms increase reporting quality in response to decreases in financing capacity. Our findings contribute to the literature on reporting quality and investment, and on the determinants of reporting quality choices.

We measure a manager’s risk-taking incentives as the total sensitivity of the manager’s debt, stock, and option holdings to firm volatility. We compare this measure to the option vega and to relative measures used by the prior literature. Vega does not reflect the option value of equity, does not capture risk incentives from managers’ stock and debt holdings, and does not reflect the fact that employee options are warrants. The relative measures do not incorporate the sensitivity of options to volatility. The new measure explains risk choices better than vega and the relative measures. Our measure should be useful for future research on managers’ risk choices.

Blacconiere, Frederickson, Johnson, and Lewis identify an interesting disclosure and add to our understanding of firm disclosure of option expense. The disclosure is more nuanced than is suggested by the term “disavowal”. Some disclosures are weak, almost tautological “not necessarily … reliable” statements, whereas others are straightforward statements about the “subjective nature” of the inputs to the option valuation model. The “not necessarily … reliable” language largely disappears after SFAS 123R, while stronger language persists. A striking finding in BFJL is lack of opportunism in disavowals, but I suggest that it is preliminary to conclude that there is no opportunism.

We compute and compare risk-adjusted pay for US and UK CEOs, where the adjustment is based on estimated risk premiums stemming from the equity incentives borne by CEOs. Controlling for firm and industry characteristics, we find that US CEOs have higher pay, but also bear much higher stock and option incentives than UK CEOs. Using reasonable estimates of risk premiums, we find that risk-adjusted US CEO pay does not appear large compared to that of UK CEOs. We also examine differences in pay and equity incentives between a sample of non-UK European CEOs and a matched sample of US CEOs, and find that risk-adjusting pay may explain about half of the apparent higher pay for US CEOs.

This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.