CFO Co-Option and CEO Compensation, with Shane S. Dikolli, William J. Mayew, and Mani Sethuraman (Forthcoming in Management Science)
ABSTRACT: We study whether relative power in the CEO-CFO relationship influences CEO compensation. To operationalize relative power of a CEO over a CFO, we define CFO co-option as the appointment of a CFO after a CEO assumes office. We find that CFO co-option is associated with a CEO pay premium of about 10%, which is concentrated more in the early years of the co-opted CFO’s tenure and in components of compensation that vary with the achievement of analyst-based earnings targets. Our evidence also indicates that a primary channel through which CEO power over a co-opted CFO yields the achievement of earnings targets is the use of earnings management to inflate earnings. Co-opted CFOs rely primarily on using discretionary accruals to manage earnings prior to the Sarbanes-Oxley regulatory intervention and switch to real activities manipulation afterwards. The evidence thus suggests that the form of earnings management depends on costs imposed on the CFO to inflate earnings.
Intended Benefits and Unintended Consequences of Improved Performance Disclosure, Job Market Paper
ABSTRACT: I document significant unintended consequences of a seemingly innocuous, well-intentioned disclosure rule change. In 1998, the SEC required that all funds disclose a self-selected, primary benchmark. I find that investor sensitivity to excess benchmark returns increases after 1998. Fund manager responses to the disclosure change resulted in significant real effects and externalities. I find that two-thirds of funds select an inaccurate benchmark and outperform non-strategic funds via higher risk taking. The new disclosures also exacerbate the well-documented tendency of underperforming fund managers to increase risk in the second half of the year.
Aggregate Accruals and Market Returns: The Role of Aggregate M&A Activity, with Suresh Nallareddy and Mohan Venkatachalam
ABSTRACT: Extant literature documents that aggregate accruals positively predict future market returns and attribute this to change in discount rates or systematic earnings management. We offer an alternative explanation and provide supporting evidence that the positive relation between aggregate accruals and future market returns is due to aggregate merger and acquisition (M&A) activity. Aggregate M&A activity affects the magnitude of aggregate accruals estimated from the balance sheet, and drives the market return predictability of accruals. Controlling for the aggregate M&A activity, we find that the robust positive relation between aggregate accruals and future market returns disappears, and instead aggregate M&A activity predicts future market returns. Moreover, the positive relation between discretionary aggregate accruals (a measure of systematic earnings management) and market returns also disappears after controlling for the aggregate M&A activity.
The Death of Stock Splits: An Increase in the Costs to Split, with Qin Tan and Frank Zhang
ABSTRACT: Stock split activity has significantly declined in recent years. From the 1980s to the 2010s, the proportion of public firms that would engage in at least one stock split per year on average has declined from 8.6% to just 1.0%. We first show that abnormal returns in the post-split period decline from 11.4% for firm-years 1980-1989 to just 3.4% for firm years 2010-2017, indicating that the benefits to splitting have declined substantially. We also show that this decline only occurs for publicly listed companies—abnormal returns for exchange traded and closed-end funds do not vary significantly over this period. Second and more important, we document a previously unknown cost of stock splits, leading to decreasing net benefits from stock split activity over the same period. Namely, stock splits make earnings targets more difficult to beat, an issue that becomes more important as firms face increasing capital market pressure over time. Overall, we conclude that the signaling benefits of stock splits have declined while costs have increased, leading most firms to abstain from splitting their shares.