This paper addresses Alvin Roth’s findings of market contracting at times earlier than optimal for market participants, which Roth describes as market “unraveling,” a market failure he proposes to solve by designing centralized buyer‐seller matching programs. This paper shows that, while Roth’s engineering solutions are ingenious, the early contracting phenomena derive from labor market monopsony. Under monopsony, price is unavailable to clear the market; time of contract becomes the currency for working out market forces. Roth’s matching serves to shore up the monopsony and would be unnecessary if the monopsony were removed; a superior solution is to end the monopsony.

In their investigation of the new PCAOB Inspections, Lennox and Pittman [Lennox, C., Pittman, J., 2009. Auditing the auditors: evidence on the recent reforms to the external monitoring of the audit firms. Journal of Accounting and Economics, forthcoming] address one of the most important and controversial features of the recent shift from self-regulation to government regulation in the US audit markets. In this paper I attempt to place their investigations into the broader auditing and regulatory literature, critique what we learn and do not learn from their analysis, and make suggestions for future related research.

This discussion makes several observations regarding the earnings quality research reviewed in Dechow, Ge and Schrand (2010) (DGS). I discuss some of the factors that led to the large growth in the earnings quality literature over the past two decades, and note a few of the important contributions from this literature. I also present what I view as several major challenges the literature faces as well as some avenues for future research. In addition, I discuss the difficulties in evaluating such a diverse body of literature, and comment on DGS’s major conclusions.

This paper examines how executive compensation influences the market value of the firm's assets. After controlling for endogeneity, we find that boards have set the incentive to incur risk (vega) to maximize shareholder value, but that incentives to increase returns (delta) do not maximize shareholder value. We also find that current levels of cash compensation do not maximize shareholder value. Finally, we consider the moneyness of stock options. We find that the level of at- and out-of-the money options maximize shareholder value, but the level of in-the money options do not maximize shareholder value.

We investigate whether a departure from a tax-based accounting system toward the adoption of International Financial Reporting Standards encourages tax noncompliance. We also examine whether such a departure, which weakens book-tax conformity, affects the informativeness of book-tax differences for tax noncompliance. Our evidence suggests that as book-tax conformity decreases, tax noncompliance increases. Although book-tax differences remain informative of tax noncompliance, the informativeness attenuates as book-tax conformity weakens. Additionally, firms with high incentives to inflate book income are more tax compliant than their counterparts after the departure from a tax-based accounting system.

This paper argues that academics, politicians, and the media have six commonly held but misguided beliefs about corporate governance. While Armstrong et al. (2010) discuss some of these misconceptions, a wider recognition that these beliefs are actually “myths” is important. They include: (1) a common definition of “corporate governance” exists; (2) a useful distinction is “internal” versus “external” governance mechanisms; (3) outside directors perform two separable roles: to advise and monitor managers; (4) research has identified “good” and “bad” governance practices; (5) a “good” governance index can be constructed; and (6) corporate governance “best practices” can be deduced from peer data.

ABSTRACT I investigate how the use and voluntary disclosure of synthetic leases is affected by incentives to defer cash outflows and manage the financial statements by keeping debt off the balance sheet. I find that managers of cash‐constrained firms with incentives to defer cash payments are more likely to finance asset purchases with synthetic leases. The mandated reporting for synthetic leases allows managers to avoid disclosing the financial consequences of these transactions. Managers of firms with incentives to use off‐balance‐sheet financing do not provide transparent disclosure about their synthetic leases. However, managers of cash‐constrained firms, which are less likely to use synthetic leases for financial reporting reasons, do voluntarily disclose the existence and financial consequences of these contracts. Alternative tests around FIN 46 adoption corroborate these findings.

We develop and implement a technique for closed-form maximum likelihood estimation (MLE) of multifactor affine yield models. We derive closed-form approximations to likelihoods for nine Dai and Singleton (2000) affine models. Simulations show our technique very accurately approximates true (but infeasible) MLE. Using US Treasury data, we estimate nine affine yield models with different market price of risk specifications. MLE allows non-nested model comparison using likelihood ratio tests; the preferred model depends on the market price of risk. Estimation with simulated and real data suggests our technique is much closer to true MLE than Euler and quasi-maximum likelihood (QML) methods.

We empirically examine whether risk-taking by publicly traded US companies declined significantly after adoption of the Sarbanes-Oxley Act of 2002 (SOX). Several provisions of SOX are likely to discourage risk-taking, including an expanded role for independent directors, an increase in director and officer liability, and rules related to internal controls. We find several measures of risk-taking decline significantly for US versus non-US firms after SOX. The magnitudes of the declines are related to several firm characteristics, including pre-SOX board structure, firm size, and R&D expenditures. The evidence is consistent with the proposition that SOX discourages risk-taking by public US companies.