We investigate the relation between CEO compensation and accounting performance measures as a function of ownership structure. We use publicly-held property-liability insurers to consider the relation for firms with diffusely-held ownership and use privately-held property-liability insurers to consider the relation for firms with closely-held ownership. We find a significant positive association between return on assets and the level of compensation for publicly-held insurers. Consistent with optimal contracting theory, we find no such relationship for privately-held insurers. Results suggest that within closely-held firms CEO compensation is less based on objective measures like accounting information and more on subjective measures.

We assess the impact of Regulation Fair Disclosure (Reg FD) on the trading behavior of transient institutional investors in the quarter prior to a bad news break in a string of consecutive earnings increases. Bad news breaks are defined as breaks that are by growth firms, preceded by longer strings of consecutive earnings increases, followed by longer strings of consecutive earnings decreases, and associated with larger declines in earnings. Pre–Reg FD transient institutions have abnormal selling of stocks in the quarter immediately preceding a bad news break. This abnormal selling is confined to firms that hold conference calls in the pre–Reg FD period. However, in the post–Reg FD period transient institutions do not exhibit similar abnormal selling of stocks in the quarter before a bad news break. Furthermore, after Reg FD transient institutions allocate less of their stock portfolios to conference call firms relative to non–conference call firms in the quarters prior to a bad news break. These results demonstrate that Reg FD has had an impact on management's selective disclosure behavior and significantly changed the trading behavior of transient institutions.

This paper assesses whether insurers’ state taxes reduce purchases of property-casualty coverage. Tests are conducted using state aggregates of insurer-level data from publicly available, annual accounting reports for 1993–1995. A positive relation between self-insurance and state taxes is detected, consistent with consumers opting to self-insure rather than bear the incidence of higher insurer taxes. As expected, tax effects vary with the elasticity of demand. When demand is largely inelastic, e.g., automobile liability coverage, taxes do not affect self-insurance.

We compare the sensitivity of managerial cash compensation to firm performance, the level of long term managerial incentives, and the sensitivity of CEO turnover to firm performance for three types of state-controlled Chinese firms: A shares (firms incorporated and listed in mainland China), H shares (firms incorporated in mainland China but listed in Hong Kong), and Red Chip shares (firms incorporated outside mainland China and listed in Hong Kong). We find no difference in the three pay-for-performance sensitivity measures between H shares and A shares. The cash pay-for-performance sensitivity and the level of long-term managerial incentives are higher for Red Chip shares than for the other two firm types. However, the sensitivity of CEO turnover to firm performance is insignificant for all three firm types. Our study illustrates the complexity in the influence of mainland China’s versus Hong Kong’s institutional forces on state-controlled Chinese firms listed in Hong Kong.

We examine whether home country investor protection and ownership structure affect cross‐listed firms' compliance with SOX ‐mandated internal control deficiency ( ICD ) disclosures. We develop a proxy for the likelihood of cross‐listed firms' ICD misreporting during the Section 302 reporting regime. For cross‐listed firms domiciled in weak investor protection countries, we have three main findings. First, firms whose managers control their firms and have voting rights in excess of cash flow rights are more likely to misreport ICD than other firms during the Section 302 reporting regime. Second, there is a positive association between the likelihood of ICD misreporting and voluntary deregistration from the SEC prior to the Section 404 effective date. Third, for firms that chose not to deregister, there is a positive association between the likelihood of ICD misreporting and the reporting of previously undisclosed ICD s during the Section 404 reporting regime. We do not find similar evidence for cross‐listed firms domiciled in strong investor protection countries. Our findings are consistent with the hypothesis that, for cross‐listed firms domiciled in weak investor protection countries, managers who have the ability and incentive to expropriate outside minority shareholders are reluctant to disclose ICD s in order to protect their private control benefits. The results of our study should be of interest to regulators who wish to identify noncompliant firms for closer supervision, investors who wish to identify ex ante red flags for poor financial disclosure quality, and researchers who wish to understand the economic forces governing cross‐listed firms' financial disclosure behavior.

Private firms face significant financial constraints that limit their investment and growth. Recognizing the fact that many private firms belong to business groups that contain at least one publicly listed firm, we hypothesize that private firms can partially relieve their financial constraints through the cash proceeds from share pledging of publicly listed firms by the common controlling shareholder. Using data from publicly listed Chinese firms, we find results consistent with this hypothesis, especially for private firms facing greater financial constraints. However, such share pledging also creates a negative spillover on shareholder value of publicly listed firms under common ownership.

This study compares samples of publicly and privately held bank holding companies to examine whether the high frequency of small earnings increases relative to small earnings decreases reported by public firms is attributable to earnings management. We expect public banks' shareholders to be more likely than private banks' shareholders to rely on simple earnings-based heuristics in evaluating firm performance, so we expect public banks to have more incentives to report steadily increasing earnings. Consistent with this expectation, we find that relative to private banks, public banks: (1) report fewer small earnings declines, (2) are more likely to use the loan loss provision and security gain realizations to eliminate small earnings decreases, and (3) report longer strings of consecutive earnings increases. These results suggest that the asymmetric pattern of more small earnings increases than decreases, first documented by Burgstahler and Dichev (1997), is attributable to earnings management and is not simply a reflection of the underlying distribution of earnings changes.

We examine the determinants and consequences of stock option compensation to directors of state-controlled Chinese firms that are incorporated outside China and listed in Hong Kong, referred to as state-controlled Red Chip firms, over the period 1990–2005. We find that state-controlled Red Chip firms granted directors a significant number of stock options in response to the demand of foreign investors. However, state-controlled Red Chip firms forced the directors to forfeit a significant percentage of their vested in-the-money stock options due to a conflict between the high-powered stock option compensation and state-controlled Red Chip firms' unique managerial labor market. We find little evidence that directors' stock option compensation changed the behavior of state-controlled Red Chip firms. Overall, our results are consistent with the media's allegation that the stock options granted to directors of many, if not all, state-controlled Red Chip firms are not genuine compensation.

Using a 2004 Chinese securities regulation that requires equity offering proposals to obtain the separate approval of voting minority shareholders, we examine whether giving minority shareholders increased control over corporate decisions helps to reduce value-decreasing corporate decisions for firms domiciled in weak investor protection countries. We find that the regulation deters management from submitting value-decreasing equity offering proposals in firms with higher mutual fund ownership. There is also weak evidence that minority shareholders are more likely to veto value-decreasing equity offering proposals in firms with higher mutual fund ownership in the post-regulation period. Overall, our evidence suggests that in weak investor protection countries, the effect of granting minority shareholders increased control over corporate decisions on the quality of corporate decisions depends on the composition of minority shareholders.

We examine the consequences of shifting the IPO offer pricing power from securities regulators to market participants in a representative weak investor protection country, China. We show IPO offer prices relative to reported earnings are less depressed when determined by market participants than by securities regulators. IPO firms are also less likely to select a low quality auditor or inflate the pre-IPO earnings when IPO offer prices are determined by market participants. However, we find no evidence that IPO offerings are more likely to be overpriced when offer prices are determined by market participants. Furthermore, IPO firms' financial reporting choices made at the time of the IPO have a long lasting impact on the firms' subsequent financial reporting quality. Overall, our results contribute to the ongoing debate on the appropriate roles of securities regulators versus market forces in protecting public investors in markets with weak institutional environments.