Ellen Engel

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

Discretionary behavior with respect to allowances for loan losses and the behavior of security prices

Abstract The study examines the capital market pricing of discretionary and nondiscretionary components of a major accrual in the banking industry, the allowance for loan losses. The analysis employs a two-stage approach in which the allowance account is first decomposed into estimates of its nondiscretionary and discretionary components. The second stage evaluates the markets valuation of the estimates of the components. Evidence suggests that the capital market perceives the allowance to be comprised of two components, a nondiscretionary component which is negatively priced and a discretionary component whose incremental pricing coefficient is positive.

An Analysis of the Relation between the Stewardship and Valuation Roles of Earnings

In this paper, we seek a deeper understanding of how accounting information is used for valuation purposes relative to how it is used for incentive contracting purposes. We explore linkages between the weight placed on earnings in compensation contracts and the weight placed on earnings in stock price formation. This clean distinction between the valuation and incentive contracting roles of earnings isolated in Paul (1992) provides a powerful point of departure for our analysis. Paul (1992) leads to the null hypothesis that valuation earnings coefficients (VECs) and compensation earnings coefficients (CECs) are unrelated. Our empirical analysis rejects the Paul (1992) hypothesis of no relation between CECs and VECs. We also document that across the sub-periods (1971-1985) and (1986-2000) there is an increasing weight on other performance information (proxied by stock returns) in the determination of cash compensation. That is, the incentive coefficient on stock returns relative to the incentive coefficient on accounting earnings is much higher in the later sub-period.. JEL Classification: J33, M41

The Roles of Performance Measures and Monitoring in Annual Governance Decisions in Entrepreneurial Firms

This paper analyzes annual corporate governance decisions at firms making initial public offerings (IPOs) of common stock between 1996 and 1999. Our objective is to examine relations between firms’ corporate governance decisions and the informativeness of available measures of managerial performance. We consider financial measures such as earnings and stock return, as well as direct monitoring. We collect a sample of IPO firms from the manufacturing, Internet, and technology (non‐Internet) industries, and examine how the use of various performance measures in annual compensation grants and turnover decisions varies with the information environment of the firm and with the extent of venture capital influence. Consistent with prior research that finds earnings are of limited usefulness in firm valuation for Internet firms, we find Internet firms place less importance on earnings and greater importance on stock returns in determining compensation grants than do non‐Internet firms. We also find that compensation grants of firms with little or no venture capital influence display significantly stronger association with accounting and stock performance measures than those of firms with more intense monitoring by venture capitalists. This result is consistent with direct monitoring and the use of explicit performance measures acting as substitute governance mechanisms.

Discussion of Does the Market Value Financial Expertise on Audit Committees of Boards of Directors

CorporateAmericaanditsshareholderscontinuetosortoutthecostsandbenefits of the requirements imposed on public companies by the Sarbanes-Oxley Act (SOX) and related recent New York Stock Exchange (NYSE) andNASDAQ exchange corporate governance initiatives. These initiatives wereimplemented to address concerns relating to corporate governance andaudit quality in response to instances of massive fraud and audit failure atseveral high-profile companies. Researchers have probed various aspects ofthe provisions of SOX from announcement effects of the events leading upto the passage of SOX to analyses of actions resulting from SOX to evaluateexpected and real costs and benefits of the provisions of SOX.