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Industry Expertise of Independent Directors and Board Monitoring
We examine whether the industry expertise of independent directors affects board monitoring effectiveness. We find that the presence of independent directors with industry experience on a firm’s audit committee significantly curtails firms’ earnings management. In addition, a greater representation of independent directors with industry expertise on a firm’s compensation committee reduces chief executive officer (CEO) excess compensation, and a greater presence of such directors on the full board increases the CEO turnover-performance sensitivity and improves acquirer returns from diversifying acquisitions. Overall, the evidence is consistent with the hypothesis that having relevant industry expertise enhances independent directors’ ability to perform their monitoring function.
Journal Article
Chief Executive Officer Equity Incentives and Accounting Irregularities
This study examines whether Chief Executive Officer (CEO) equity-based holdings and compensation provide incentives to manipulate accounting reports. While several prior studies have examined this important question, the empirical evidence is mixed and the existence of a link between CEO equity incentives and accounting irregularities remains an open question. Because inferences from prior studies may be confounded by assumptions inherent in research design choices, we use propensity-score matching and assess hidden (omitted variable) bias within a broader sample. In contrast to most prior research, we do not find evidence of a positive association between CEO equity incentives and accounting irregularities after matching CEOs on the observable characteristics of their contracting environments. Instead, we find some evidence that accounting irregularities occur less frequently at firms where CEOs have relatively higher levels of equity incentives.
Journal Article
Managerial Risk-Taking Incentive and Firm Innovation: Evidence from FAS 123R
We investigate how chief executive officers’ (CEOs) risk incentive (VEGA) affects firm innovation. To establish causality, we exploit compensation changes instigated by the FAS 123R accounting regulation in 2005 that mandated stock option expensing at fair values. Our identification tests indicate a positive and causal effect of CEOs’ VEGA on innovation activities. Furthermore, dampened managerial risk-taking incentive after the implementation of FAS 123R leads to a significant reduction in innovation related to firms’ core business and explorative inventions. It implies that managers diversify their innovation portfolios and decrease explorative inventions to curtail business risk when their risk-taking incentive is reduced.
Journal Article
The Impact of Corporate Sustainability on Organizational Processes and Performance
We investigate the effect of corporate sustainability on organizational processes and performance. Using a matched sample of 180 U.S. companies, we find that corporations that voluntarily adopted sustainability policies by 1993—termed as
high sustainability
companies—exhibit by 2009 distinct organizational processes compared to a matched sample of companies that adopted almost none of these policies—termed as
low sustainability
companies. The boards of directors of high sustainability companies are more likely to be formally responsible for sustainability, and top executive compensation incentives are more likely to be a function of sustainability metrics. High sustainability companies are more likely to have established processes for stakeholder engagement, to be more long-term oriented, and to exhibit higher measurement and disclosure of nonfinancial information. Finally, high sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance.
This paper was accepted by Bruno Cassiman, business strategy.
Journal Article
Do green HRM practices influence employees' environmental performance?
PurposeRecent research has demonstrated an increasing awareness among business communities about the importance of environmental concerns. Green human resource management (GHRM) has become a crucial business strategy for organizations because the human resource department can play a key role in going “green.” This study tests an integrative model incorporating the indirect effects of GHRM practices on employee organizational citizenship behavior toward environment (OCBE), through green employee empowerment. Moreover, this study investigates the moderating effect of individual green values on OCBE.Design/methodology/approachUsing a paper–pencil survey, we collected multisource data from 365 employees and their immediate supervisors from Pakistan.FindingsThe results of structural regression revealed that GHRM has a significant indirect effect on OCBE through green employee empowerment. The results also indicated that individual green values moderated the positive relationship between green employee empowerment and OCBE.Practical implicationsOrganizations should appropriately appraise workers’ green behavior and align their behavior to pay and promotion. Organizations should also encourage and motivate employees to be engaged in green activities and contribute to environmental management.Originality/valueThis study suggests that green employee empowerment and individual green values are important factors that influence the relationship between GHRM and employees' OCBE, and it empirically analyzes these proposed relationships in a developing country context.
Journal Article
Executive equity incentives and opportunistic manager behavior: new evidence from a quasi-natural experiment
This study provides plausible causal evidence on the effect of executive equity incentives on opportunistic manager behavior. I exploit a unique setting created by the introduction of Financial Accounting Standard (FAS) 123R in 2005, which led to an exogenous increase in the cost of option pay, causing a substantial decline in option pay for some firms while leaving others largely unaffected. Using difference-in-differences analyses with a treatment group of firms that show a decline in option pay and two control groups, I find that the likelihood of a treatment firm meeting or beating analyst forecasts decreases by 14–20%. The results show that the relatively high levels of meet-or-beat before FAS 123R were largely driven by real activities manipulation such as abnormal asset sales and sales manipulation to beat analysts’ benchmarks, while accrual manipulation and analyst management were less relevant. Together, the results suggest that equity incentives encourage opportunistic actions to meet or beat earnings expectations, and a decline in option pay results in a decline in earnings management to meet earnings expectations.
Journal Article
The Effect of Employee Treatment Policies on Internal Control Weaknesses and Financial Restatements
This study investigates the role of employment policies in reducing internal control ineffectiveness and financial restatements. We provide new evidence that employee treatment policies are an important predictor of ineffective internal control. We also find that employee-friendly policies significantly reduce the propensity for employee-related material weaknesses. These results suggest that greater employee benefits facilitate the acquisition, development, and motivation of the workforce and ameliorate the loss of valuable human capital, thereby mitigating employee failures to implement internal control tasks properly. Moreover, we document novel results that financial restatements, especially those caused by unintentional errors, are less likely to arise in firms that invest more in employee benefits. Collectively, our emphasis on the effect of employee treatment policies on the integrity of internal control and financial reporting distinguishes our paper from previous studies that focus on the role of top executives in accounting practices.
Journal Article
CEO Contractual Protection and Managerial Short-Termism
How to address managerial short-termism is an important issue for companies, regulators, and researchers. We examine the effect of CEO contractual protection, in the form of employment agreements and severance pay agreements, on managerial short-termism. We find that firms with CEO contractual protection are less likely to cut R&D expenditures to avoid earnings decreases and are less likely to engage in real earnings management. The effect of CEO contractual protection is both statistically and economically significant. We further find that this effect increases with the duration and monetary strength of CEO contractual protection. The cross-sectional analyses indicate that the effect is stronger for firms in more homogeneous industries and for firms with higher transient institutional ownership, as protection is particularly important for CEOs in these firms, and is stronger when there are weaker alternative monitoring mechanisms.
Journal Article
Restraining Overconfident CEOs through Improved Governance: Evidence from the Sarbanes-Oxley Act
The literature posits that some CEO overconfidence benefits shareholders, though high levels may not. We argue that adequate controls and independent viewpoints provided by an independent board mitigates the costs of CEO overconfidence. We use the concurrent passage of the Sarbanes-Oxley Act and changes to the NYSE/NASDAQ listing rules (collectively, SOX) as natural experiments, to examine whether board independence improves decision making by overconfident CEOs. The results are strongly supportive: after SOX, overconfident CEOs reduce investment and risk exposure, increase dividends, improve postacquisition performance, and have better operating performance and market value. Importantly, these changes are absent for overconfident-CEO firms that were compliant prior to SOX.
Journal Article