Annita Florou

Are boards and institutional investors active monitors? Evidence from CEO dismissal

Purpose - The purpose of this paper is to investigate how the turnover-performance relation depends on the proportion of outside directors and institutional ownership concentration and to explore the relative roles of accounting- and stock-based performance measures in the process of CEO dismissals. Design/methodology/approach - Probit analysis using an unbalanced panel of the top 460 UK listed companies from 1990 to 1998 was employed. Findings - No evidence of effective board monitoring was found. On the other hand, evidence of institutional shareholder activism was found. In particular, when institutional concentration is high, the turnover-performance link is more negative in relation to stock returns but less negative in relation to accounting performance. This is consistent with institutional investors using a richer set of information than that contained in reported accounting earnings. Research limitations/implications - Further research may examine the effect of board monitoring on the turnover-performance relation after considering the endogeneity of board structure and membership. Moreover, further research may examine the complementarity of the two governance mechanisms considered, i.e. the board of directors and institutional investors. Originality/value - In the aftermath of Enron and other corporate frauds world-wide, the paper exploits a unique dataset of institutional ownership and provides additional evidence on the controversial role of boards and institutional investors in replacing inefficient CEOs, as well as on the role of accounting information in the effectiveness of governance processes.

Are International Accounting Standards More Credit Relevant than Domestic Standards

We examine whether the credit relevance of financial statements, defined as the ability of accounting numbers to explain credit ratings, is higher after firms are required to report under International Financial Reporting Standards (IFRS). We find an improvement in credit relevance for firms in 17 countries after mandatory IFRS reporting is introduced in 2005; this increase is higher than that reported for a matched sample of US firms. The increase in credit relevance is particularly pronounced for higher risk speculative-grade issuers, where accounting information is predicted to be more important; and for IFRS adopters with large first-time reconciliations, where the impact of IFRS is expected to be greater. These tests provide reassurance that the overall enhancement in estimated credit relevance is driven by accounting changes related to IFRS adoption. Our results suggest that credit rating analysts’ views of economic fundamentals are more closely aligned with IFRS numbers, and that analysts anticipate at least some of the effects of the IFRS transition.

The Role of Taxes in Compensation: A Case of Shareholder Expropriation

In this paper I exploit a unique feature of the Greek institutional environment, whereby alternative cash compensation payments to directors are taxed differently from the point of view of both personal and corporate taxes. Board directors can receive cash compensation either in the form of taxable salary or in the form of tax-free profit distributions. Salary payments are deductible for corporate tax purposes whereas profit distributions are not, making a unit of profit distribution more costly to shareholders than a unit of salary. Ceteris paribus, rational directors prefer profit distribution to salary given that in the former case their personal taxes are paid by shareholders. Using this setting I document that board directors increase their net compensation by shifting their personal taxes to outside shareholders, who consequently earn lower after-tax income. Moreover, I show that profit distributions reduce shareholder value. Collectively, my findings are consistent with board compensation via profit distributions indicating shareholder expropriation. I also find that the degree of tax-shifting reduces as board ownership increases. This is particularly the case for family board members. Overall, the studys results have implications for both researchers and financial reporting regulators considering compensation issues.

The Costs and Benefits of Public Oversight Design: Evidence from the EU

We examine the audit pricing and audit quality consequences of three public oversight design features: a) membership; b) powers; and c) the content of inspection reports. We hand-collect a new dataset covering 24 EU countries and we document significant variation in the design of public oversight systems across the EU. Further, using a large sample of listed firms during 2005-2013 we report a significant increase in audit fees when auditor oversight is performed only by non-practitioners, who are potentially more independent and objective, or by regulators with higher enforcement power, who are potentially more efficient. However, based on methodologies used in extant archival studies we do not provide any evidence suggesting that audit quality varies across alternative public oversight systems. Overall, our study provides evidence regarding the effect of different public oversight designs on audit fees and audit quality, including the long-standing debate about the merits of monitoring by experienced practitioners vs. monitoring by independent non-practitioners.