Abbie J. Smith

Financial Accounting Information and Corporate Governance

This paper reviews and proposes additional research concerning the role of publicly reported financial accounting information in the governance processes of corporations. We first discuss research on the use of financial accounting in managerial incentive plans and explore future research directions. We then propose that governance research be extended to explore more comprehensively the use of financial accounting information in additional corporate control mechanisms, and suggest opportunities for expanding such research. We also propose cross-country research to investigate more directly the effects of financial accounting information on economic performance through its role in governance and more generally. r 2001 Elsevier Science B.V. All rights reserved. JEL: D8; F3; G3; J3; M4

Financial accounting information, organizational complexity and corporate governance systems

The purpose of this paper is to investigate how governance systems of large public U.S. corporations vary with information properties of numbers produced by their financial accounting systems. We argue that in firms whose current accounting numbers do a relatively poor job of capturing the effects of the firm’s current activities and outcomes on shareholder value, the accounting numbers are less effective in the governance setting. We predict that such firms will substitute costly governance mechanisms to compensate for their less useful accounting numbers. We explore whether governance systems vary with the timeliness of earnings by examining the cross-sectional relation between proxies for earnings timeliness and subsequent corporate governance systems of 784 firms in the Fortune 1000. The governance systems we consider include board composition, stockholdings of inside and outside directors, ownership concentration and the structure of executive compensation. Our results support a significant negative relation between our timeliness metrics and subsequent costly corporate governance mechanisms after controlling for other firm characteristics. JEL classification: G30, M41, J33

AN EMPIRICAL-INVESTIGATION OF THE RELATIVE PERFORMANCE EVALUATION OF CORPORATE-EXECUTIVES

This paper investigates empirically whether top corporate executives are compensated as if their performance is evaluated relative to the performance of competitors.1 This research extends previous investigations into the structural relation between executive compensation and absolute measures of firm performance.2 The premise of these investigations was that tying executive pay to firm performance helps align the goals of executives with the goals of the firms owners. The efficiency

Corporate ownership structure and performance *1: The case of management buyouts

Abstract I investigate changes in operating performance after 58 management buyouts of public companies completed during 1977–1986. Operating returns increase significantly from the year before to the year after buyouts as measured by operating cash flows (before interest and taxes) per employee and per dollar of operating assets. Subsequent changes in operating returns suggest that this increase is sustained. Adjustments in the management of working capital contribute to the increase in operating returns. The increase is not, however, the result of layoffs or reductions in expenditures for advertising, maintenance and repairs, research and development, or property, plant, and equipment.

Effects of recontracting on shareholder wealth: The case of voluntary spin-offs

Abstract This paper investigates the effect of voluntary corporate spin-off announcements on shareholder wealth. A significant positive share price reaction is documented for 93 voluntary spin-off announcements between 1963 and 1981. These shareholder gains do not appear to come wholly at the expense of bondholders. Evidence suggests the gains to shareholders may arise from tax and regulatory advantages and/or improved managerial efficiency resulting from the spin-off.

A comparison of equity carve-outs and seasoned equity offerings : Share price effects and corporate restructuring

Abstract This paper investigates share price reactions of parent firms to announcements of public offerings of stock of wholly-owned subsidiaries. The average abnormal gains associated with ‘equity carve-out’ announcements contrast with the average abnormal losses documented here and elsewhere upon announcements of public offerings of parent equity. Four features distinguishing equity carve-outs from parent equity offerings are discussed. Evidence is provided on these features as potential explanations for the positive average share price reaction associated with announcements of equity carve-outs.

Aggregate performance measures in business unit manager compensation: The role of intrafirm interdependencies

The purpose of this paper is to investigate the determinants of the extent to which the incentive compensation of business unit managers is based on aggregate performance criteria measured at an organizational level higher than a managers business unit level. We present a simple agency model of a multidivisional firm to show that the use of aggregate performance measures relative to more localized performance measures is an increasing function of intrafirm interdependencies. Using proprietary compensation data from Hewitt Associates LLC, we test whether the relative use of aggregate performance measures is related to our empirical proxies for intrafirm interdependencies and find evidence consistent with our predictions. Management accounting textbooks usually emphasize the controllability principle within the framework of responsibility accounting as the basis for

Agency costs and innovation some empirical evidence

Abstract This paper examines the empirical relation between corporate ownership structure and innovation. We test the hypothesis that diffusely-held firms are less innovative than firms with either a high concentration of management ownership or a significant equity block held by an outside investor. Overall, the evidence indicates that diffusely-held firms are less innovative along the dimensions we examine: patent activity, growth by acquisition versus internal development, and timing of long-term investment spending. These results are consistent with the conjecture that concentrated ownership and shareholder monitoring are effective at alleviating the high agency and contracting costs associated with innovation.

Insider Trading Restrictions and Analysts' Incentives to Follow Firms

Motivated by extant finance theory predicting that insider trading crowds out private information acquisition by outsiders, we use data for 100 countries for the years 1987– 2000 to study whether analyst following in a country increases following restriction of insider trading activities. We document that analyst following increases after initial enforcement of insider trading laws. This increase is concentrated in emerging market countries, but is smaller if the country has previously liberalized its capital market. We also find that analyst following responds less intensely to initial enforcement when a country has a preexisting portfolio of strong investor protections. THE AVAILABILITY OF INFORMATION IS A KEY determinant of the efficiency of resource allocation decisions in economies and their securities markets. There is, however, considerable cross-country variation in the quality and quantity of corporate reporting, information intermediation, and information dissemination structures (e.g., Bushman, Piotroski, and Smith (2004)). Hence an important research task is to understand why information infrastructures vary and what factors determine their evolution over time. In this paper, we focus on one element of information infrastructure, sellside analysts. We exploit cross-country and intertemporal variation in analyst following for 100 countries for the years 1987–2000 to test the hypothesis that analyst following increases upon the restriction of insider trading. Our analysis specifically tests whether analyst following increases after adoption of insider trading legislation and/or the initial act of enforcement of these laws. This research builds directly on three prior strands of research. The first is theoretical research predicting that insider trading crowds out private information acquisition by outside investors (e.g., Fishman and Hagerty (1992) and Khanna, Slezak, and Bradley (1994)). In these papers, insiders with free access to information about a firm’s payoff reduce trading profits available to ∗Bushman is at the University of North Carolina Kenan-Flagler Business School, and Piotroski and Smith are at the University of Chicago Graduate School of Business. We thank Jeff Abarbanell, Mark Lang, Darius Miller, Jake Thomas, Jerry Zimmerman, an anonymous referee, and workshop participants at University of Chicago, University of Colorado, Harvard Business School, University of Illinois (Chicago), University of Rochester, Stanford University, UCLA, and Yale University for helpful discussions, comments, and suggestions. We also appreciate the research assistance of Sara Eriksen and the financial support of Harvard Business School, Kenan-Flagler Business School, the William Ladany Faculty Research Fund, and the Institute of Professional Accounting of the GSB, University of Chicago.

Capital Allocation and Timely Accounting Recognition of Economic Losses

This paper explores direct relations between corporate investment behavior and the timeliness of accounting recognition of economic losses (TLR) reflected in a country’s accounting regime. We explicitly investigate the extent to which TLR influences investment decisions of firm managers. Given the asymmetric emphasis on negative outcomes inherent in TLR, we hypothesize that TLR will most strongly influence investment behavior when managers face deteriorating investment environments. We conjecture that TLR will have an asymmetric impact on investment behavior whereby TLR impacts firms’ investment decisions in the face of declining investment opportunities, but not in the face of increasing in investment opportunities. Using firm-level investment decisions spanning twenty five countries, we find that investment responses to declining opportunities increases with TLR, while we find no evidence that TLR influences the sensitivity of investment to increasing investment opportunities. Our results are robust to alternative estimates of TLR, alternative estimates of investment responses to changing investment opportunities, and to controls for important country-level, industry-level, and firm-level variables that may impact firms’ investment decisions.