We present empirical evidence that firms inflate earnings around seasoned equity offerings in the presence of large outsider blockholdings, but not in their absence. The finding is robust to several alternative explanations, including differences in firm characteristics, growth, performance, CEO incentives, and capital usage. While we do not dispute that CEOs behave opportunistically, we challenge that earnings management is solely a symptom of weak governance. We conclude that strengthening shareholder power to alleviate the conflict between shareholders and management can also have the unintended consequence of intensifying the conflict between current and future shareholders.

ABSTRACT Chhaochharia and Grinstein estimate that CEO pay decreases 17% more in firms that were not compliant with the recent NYSE/Nasdaq board independence requirement than in firms that were compliant. We document that 74% of this magnitude is attributable to two outliers of 865 sample firms. In addition, we find that the compensation committee independence requirement increases CEO total pay, particularly in the presence of effective shareholder monitoring. Our evidence casts doubt on the effectiveness of independent directors in constraining CEO pay as suggested by the managerial power hypothesis.