ABSTRACT:We analyze the board of directors' equilibrium strategies for setting CEO incentive pay and overseeing financial reporting and their effects on the level of earnings management. We show that an increase in CEO equity incentives does not necessarily increase earnings management because directors adjust their oversight effort in response to a change in CEO incentives. If the board's responsibilities for setting CEO pay and monitoring are separated through the formation of committees, then the compensation committee will increase the use of stock-based CEO pay, as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management.

ABSTRACT We study how disclosures affect banks’ leverage and risk. Banks screen borrowers and originate loans, partially financed using insured deposits. The possibility to sell loans before they mature incentivizes banks to lever up using uninsured short-term debt to dilute insured deposits. If markets are opaque, good loans trade at a discount, which limits banks’ use of short-term debt. If markets are transparent, prices compound information contained in disclosures, which leads banks to issue more short-term debt to further dilute insured deposits. We identify conditions under which the increase in leverage caused by disclosures reduces banks’ screening incentives. Our analysis has important implications for prudential regulation, including minimum regulatory capital requirements and leverage-based deposit insurance premiums. JEL Classifications: D80; G21; G14.