Kin Lo

Use of R2 in accounting research: measuring changes in value relevance over the last four decades

This study examines the properties of the R-squared metric frequently used in accounting research as a measure of value relevance. Analytical results show that the metric is unreliable in the presence of scale effects. Specifically, we show that the metric is upwardly biased for accounting studies, and the bias is increasing in the scale factors coefficient of variation. We conclude that it is invalid to make cross-sample comparisons of R-squared, whether the samples are drawn cross-sectionally or over time, unless the researcher controls for differences in the coefficient of variation across the samples. Applying this theory empirically, our results show that the finding of increasing value relevance in Collins, Maydew, and Weiss (1997) and Francis and Schipper (1998) are attributable to over time increases in the coefficient of variation of scale. After controlling for these effects, we find that there has been a decline in value relevance as measured by R-squared.

The Ohlson Model: Contribution to Valuation Theory, Limitations, and Empirical Applications

The work of Ohlson (1995) and Feltham and Ohlson (1995) had a profound impact on accounting research in the 1990s. In this paper, we first discuss this valuation framework, identify its key features, and put it in the context of prior valuation models. We then review the numerous empirical studies that are based on these models. We find that most of these studies apply a residual income valuation model without the information dynamics that are the key feature of the Feltham and Ohlson framework. We find that few studies have adequately evaluated the empirical validity of this framework. Moreover, the limited evidence on the validity of this valuation approach is mixed. We conclude that there are many opportunities to refine the theoretical framework and to test its empirical validity. Consequently, the praise many empiricists have given the models is premature.

'Say-on-Pay' Votes and Compensation Practices

We examine the causes and consequences of “say-on-pay” votes mandated by the Dodd-Frank Act of 2010. We hypothesize and find that shareholder disapproval increases with the amount of total and abnormal compensation, decreases with the number of pay-restraining provisions, and decreases with the quality of compensation disclosures. Shareholder disapproval also correlates with contemporaneous director turnover. We also find that boards respond to shareholder disapproval by amending compensation policies to reduce that opposition. Such alterations do have the hypothesized effect of reducing the amount of shareholder dissent for the following year.

Private Information in Executive Compensation: The Information Role vs. The Monitoring Role of the Board

Manuscript Type: Empirical.Research Question/Issue: This paper examines the effect of boards of directors’ characteristics on the use of private information in executive compensation. Research Findings/Insights: We predict and find that boards’ competence both in information acquisition and in monitoring influences the extent to which boards use private performance measures in CEO compensation. Specifically, smaller and more independent boards with their CEOs as the board chair are found to rely more heavily on private performance measures. The documented effects of board characteristics disappear after the passage of SOX, likely due to the homogenized composition of boards and compensation committees brought by the legislated changes. Theoretical/Academic Implications: The paper extends the literature on the boards role in executive compensation. Although prior evidence is abundant on how boards affect the alignment of CEO compensation with public performance measures, little is known about boards’ use of private information to compensate CEOs. It also extends the literature on the role of corporate boards by examining both their monitoring and information roles. Practitioner/Policy Implications: This study offers insights to regulators regarding the role of boards of directors in monitoring and their role in private information acquisition. It highlights the importance of considering the tradeoff between these two roles when regulating corporate governance rules.

A Market Economics Approach to Taxation and Regulation of Non-Profit Organizations Analyses and Recommendations for China

There is little disagreement that tax laws and regulations relating to non-profit organizations in China need to be changed. In this paper, we recommend comprehensive, not marginal, changes to Chinas tax laws for non-profit organizations (NPOs). The fundamentals of the sector and market economics suggest that the government should regulate the sector according to these principles: allowing people to make choices; using information conveyed by peoples choices to identify NPOs worthy of government support; and providing incentives to organizations that help to achieve fairness in resource distribution.