Inho Suk

CEO Inside Debt and Earnings Management

This study examines the impact of CEO inside debt on earnings management. Theory predicts that CEOs with higher inside debt holdings adopt less risky corporate policies and choose investment policies that result in less volatile earnings. Under such circumstances, CEOs would face weaker demand for income smoothing. Consistent with these expectations, our results reveal that CEO inside debt is negatively associated with both accrual- and real activities-based earnings management. We also find that firms with higher levels of CEO inside debt are less likely to meet or slightly beat analysts’ earnings forecasts. Furthermore, the capital market response to positive earnings surprises is greater when CEOs hold higher positions of inside debt. Overall, our findings suggest that inside debt counteracts CEOs’ incentives to smooth earnings through earnings management and investors understand the deterrence effect of inside debt on earnings management.

Fair Value Gains and Losses in Derivatives and CEO Compensation

This study examines the sensitivity of CEO compensation to fair value gains and losses in derivatives for firms in the U.S. oil and gas industry. Our evidence indicates that firms use derivatives for both hedging and non-hedging purposes and that the derivative gains have a substantial impact on firms’ overall earnings. We find that CEOs are rewarded for hedge derivative gains, more so in firms facing high financial contracting costs. However, we find that non-hedge derivative gains are also rewarded. Furthermore, the CEO compensation is more sensitive to non-hedge derivative gains than it is to non-hedge derivative losses. This is surprising because non-hedge derivatives often relate to speculation or inefficient hedging. Overall, our results suggest that the board does not fully distinguish between the nature of derivative activities and rewards all gains in a similar fashion. The presence of accounting financial expert on the compensation committee, however, does improve efficient contracting.

CEO and Outside Director Equity Compensation: Substitutes or Complements for Management Earnings Forecasts?

Abstract This study examines how the equity compensation of chief executive officers (CEO) and that of outside directors affect management earnings forecasts (MFs) and the relationship between these two positions in terms of compensation. Our evidence reveals that CEO (director) equity compensation is positively associated with MF likelihood, frequency, and accuracy when director (CEO) equity compensation is not high. However, an increase in director (CEO) equity compensation is not effective in improving disclosure quality when the level of CEO (director) equity compensation is already high. These results suggest that the two incentive mechanisms act as substitutes when both are intensively used in the context of MF disclosure.

Bond Analysts' Forecasts on Cash Flows and Earnings

We examine the propensity and properties of bond analysts’ forecasts on cash flows and earnings. We find that the probability to issue cash flow, relative to earnings, forecasts is greater for bond analysts than for equity analysts, consistent with the notion that cash flow, relative to earnings, information is more important to bond investors than for stock investors. In addition, bond analysts’ cash flow (earnings) forecasts are more (less) accurate than equity analysts’ cash flow (earnings) forecasts. Finally, we show that bond investors’ reaction to bond analysts’ cash flow forecast revision is greater than that to bond analysts’ earnings forecast and that bond market reacts only to bond analysts’ forecast revisions but not to equity analysts’ forecast revisions. This manifests bond investors’ stronger demand for reliable information on future cash flows than for earnings. Overall, this study enhances our understanding of bond analysts’ informational role through their forecasting activities.