We examine the accounting and market performance of reverse leveraged buyouts (i.e., firms making their first public offering after previously completing a leveraged buyout). On average, the accounting performance of these firms is significantly better than their industries at the time of the initial public offering (IPO) and for at least the following four years, though there is some evidence of a decline in performance. Cross-sectional variation in accounting performance subsequent to the IPO is related to changes in the equity ownership of both operating management and other insiders, and is unrelated to changes in leverage. Finally, there is no evidence of abnormal common stock performance after the reverse leveraged buyout.

This paper examines the economic consequences associated with the board of director’s choice of whether to adhere to proxy advisory firm policies in the design of stock option repricing programs. Proxy advisors provide research and voting recommendations to institutional investors on issues subject to a shareholder vote. Since many institutional investors follow the recommendations of proxy advisors in their voting, proxy advisor policies are an important consideration for corporate boards in the development of programs that require shareholder approval such as stock option repricing programs. Using a comprehensive sample of stock option repricings announced between 2004 and 2009, we find that repricing firms following the restrictive policies of proxy advisors exhibit statistically lower market reactions to the repricing, lower operating performance, and higher employee turnover. These results are consistent with the conclusion that proxy advisory firm recommendations regarding stock option repricings are not value increasing for shareholders.

[This paper examines the factors influencing the relative weights placed on financial and non-financial performance measures in CEO bonus contracts. We find that the use of non-financial measures increases with the level of regulation, the extent to which the firm follows an innovation-oriented strategy, the adoption of strategic quality initiatives, and the noise in financial measures. We find no evidence that the choice of performance measures in bonus contracts is associated with the level of financial distress or the value of CEO equity holdings relative to salary and bonus. Our results also provide no support for the hypothesis that CEOs with greater influence over the board of directors are more likely to be compensated based on non-financial measures.]

[This paper provides an analysis of the association between the accounting gain produced by an equity-for-debt swap and executive compensation. Our results suggest that the executives of firms completing a swap transaction experience an increase in cash compensation (salary plus bonus). The increase is largest both in absolute magnitude and in statistical significance for firms whose compensation plans are more "accounting-oriented" (i.e., firms whose executives would be expected to experience the greatest increase in compensation under the hypothesis that firm's compensation plan is not adjusted for the accounting gain produced by the swap). We also find that, on average, the value of the executives' personal equity holdings decreases in the period surrounding the announcement of the swap. The magnitude of this decrease is, on average, comparable in size to the increase in their compensation. However, there is some weak evidence that executives of firms whose compensation plans are more "accounting-oriented" experience a statistically significant increase in their total wealth (i.e., the sum of excess compensation and the value of personal equity holdings) as a result of the swap transaction.]

Diverse interpretations of the security market reaction to the Exposure Draft for FASB Statement No. 19 exist. This paper provides a detailed analysis of the oil and gas accounting controversy, First, expanded theoretical models for the potential incentive effects and political effects that have been proposed as explanations for the observed security price behavior are developed. Second, the independent variables isolated by our models are used to explore the differential security market reactions of the full cost firms to the Exposure Draft. The empirical results indicate that the variables posited by our theoretical models explain a non-trivial portion of the differential security market reaction for full cost firms. These results provide evidence which is consistent with the existence of an incentive effect.

Prior work has examined models in which the reciprocal cost allocation method yields allocation rates that are equal to the marginal costs of operating service departments. We extend this work by analyzing more general production functions for service departments and by incorporating uncertainty. The results demonstrate that the allocation rates derived from the reciprocal cost allocation method are random variables that, in general, are not equal to the expected marginal costs of operating the service departments. In particular, the reciprocal cost allocation rates are biased estimates of these expected marginal costs if any of the service departments operate at a point on their production functions at which the marginal physical product is not equal to the average physical product of their inputs. We also analyze three econometric procedures that provide consistent estimates of the marginal costs. The simulation results indicate that the standard deviations of these estimators are considerably larger than those of the reciprocal cost allocation rates. Because the estimates of the marginal costs provided by the reciprocal cost allocation method have a greater degree of bias, but a lower standard deviation than the estimates provided by the other methods, none of the methods provide estimators that are unambiguously best. Factors that affect the magnitudes of the bias and relative efficiency of the reciprocal cost allocation rates are also discussed.

Linear model and retrospective process tracing methods of judgment modeling are compared in terms of predictive validity and convergence between measures of cue importance, in addition, the reliability of the linear model is examined. The experimental task required each of 31 subjects to provide either a buy or no-buy decision for 45 stocks (each described by six information cues). For each subject, a linear model was estimated and a retrospective process tracing model was generated by reference to post-experimental verbal reports. The results indicated that (1) each approach exhibited predictive validity, but the retrospective process tracings exhibited a superior ability to replicate the observed judgments, (2) linear model and retrospective process tracing measures of cue importance were related (exhibited convergent validity), and (3) the linear models were generally reliable.

This paper analyzes the valuation of a compensation contract from a manager's perspective. This perspective is appropriate, for example, in research on the incentive effects of a compensation plan, because such effects are determined by how the manager's actions affect his valuation of his compensation. In contrast, in a study of the cost-effectiveness of a compensation plan, the shareholders' perspective is appropriate. Measuring the value to a manager of his compensation is difficult because some of the diverse components of compensation packages (e.g., executive stock options and restricted stock) have payoffs that are uncertain when the compensation is granted. In most empirical studies, each component is valued independently (without consideration of the structure of the compensation package as a whole), and these values are summed. Moreover, the values are frequently determined using formulas for publicly traded securities with similar payoff structures (i.e., from the perspective of security market participants). Market imperfections create divergence between managers' and shareholders' valuations of a component of a compensation scheme. In particular, moral hazard and adverse selection issues cause shareholders to tie