CFO Co-Option and CEO Compensation, with Shane S. Dikolli, William J. Mayew, and Mani Sethuraman (Management Science, 2021)
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.
Aggregate Accruals and Market Returns: The Role of Aggregate M&A Activity, with Suresh Nallareddy and Mohan Venkatachalam (Forthcoming Journal of Accounting and Economics, 2021)
Presented at the Journal of Accounting and Economics 2020 Conference: https://www.youtube.com/watch?v=46g7_p-VvI0&t=235m55s
ABSTRACT: Extant literature documents that aggregate accruals positively predict future market returns and attributes this relation to either changes in discount rates or systematic earnings management. We offer an alternative explanation: aggregate merger and acquisition (M&A) activity drives this relation. M&A activity affects the magnitude of accruals, which in turn drives the market return predictability of aggregate accruals. We find that the ability of both aggregate accruals and discretionary aggregate accruals (a measure of systematic earnings management) to predict market returns disappears after controlling for aggregate M&A activity. Furthermore, aggregate M&A activity predicts future market returns, consistent with a price response to improvements in macroeconomic outcomes due to aggregate M&A activity.
Mandated Performance Disclosure and Managerial Risk-Taking, Job Market Paper
ABSTRACT: I document that mandated performance disclosure increased managerial risk-taking, resulting in significant unintended consequences and agency conflicts. In 1998, the SEC required that all mutual funds disclose a self-selected, primary benchmark. I find that most funds chose a benchmark that was not their best fit index. Furthermore, fund managers’ response to the disclosure change resulted in significant real effects within portfolios. I provide evidence that actively managed funds increased risk-taking relative to their disclosed benchmark in response to the rule change. Lastly, the mandated disclosure requirement exacerbated the well-documented tendency of underperforming managers during the first half of the year to increase the risk they take in the second half of the year.
The Death of Stock Splits: An Increase in the Costs to Split, with Qin Tan, Ye Liu and Frank Zhang
ABSTRACT: The percent of firms engaging in stock splits has declined from 8.6% in the 1980s to just 1.0% in the 2010s. In this paper, we document a previously unknown cost of stock splits: failure to sufficiently beat earnings targets and its associated capital markets punishment. We show that both firms’ earnings announcement returns and likelihood of beating analysts’ expectations by at least two cents decline post-stock split. This patterned decline in both split activity and post-split returns only occurs for publicly-listed firms, whereas abnormal returns for exchange-traded and closed-end funds do not vary over time. Overall, the results suggest that declining signaling benefits and increasing costs led to fewer stock splits in recent years.