Although recent research documents a positive relation between corporate transparency and the proportion of independent directors, the direction of causality is unclear. We examine a regulatory shock that substantially increased board independence for some firms, and find that information asymmetry, and to some extent management disclosure and financial intermediation, changed at firms affected by this shock. We also examine whether these effects vary as a function of management entrenchment, information processing costs, and required changes to audit committee independence. Our results suggest that firms can alter their corporate transparency to suit the informational demands of a particular board structure.

We compute and compare risk-adjusted CEO pay in the United States and United Kingdom, where the risk adjustment is based on estimated risk premiums stemming from the equity incentives borne by CEOs. Controlling for firm and industry characteristics, we find that U.S. CEOs have higher pay, but also bear much higher stock and option incentives than U.K. CEOs. Using reasonable estimates of risk premiums, we find that risk-adjusted U.S. CEO pay does not appear to be large compared to that of U.K. CEOs. We also examine differences in pay and equity incentives between a sample of non-U.K. European CEOs and a matched sample of U.S. CEOs, and find that risk-adjusting pay may explain about half of the apparent higher pay for U.S. CEOs. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

Employee stock options (ESO’s) are a ubiquitous form of compensation in corporate America. By the late 1990’s, ESO’s outstanding at large corporations averaged 7 percent of total outstanding shares, with top executives holding approximately one-third of total ESO’s (John Core and Guay, 2001). Empirical evidence suggests that firms use ESO’s to align employees’ and shareholders’ interests, attract and retain employees, and compensate employees for their labor while simultaneously raising capital from employees (Core and Guay, 1999, 2001; Kevin J. Murphy, 1999). There is currently an intense debate nationally and internationally among standard-setters, politicians, investors, corporate executives, and academics about whether to require corporations to deduct the estimated value of ESO grants as a business expense in reported income. Existing accounting standards require firms to expense most forms of pay, such as salaries, cash bonuses, and the value of stock grants, but allow firms to choose whether to expense the value of ESO grants. Until very recently, nearly all firms chose not to expense ESO’s. However, firms that do not expense ESO’s must publicly disclose in the financial statement footnotes what reported income would have been if the ESO’s were expensed. In a recent sample of large growth firms, Christine Botosan and Marlene Plumlee (2001) find that mandatory expensing of ESO’s would have resulted in a 14-percent median reduction in firms’ earnings per share. Firms are also required to disclose details of top-executive ESO compensation in the annual proxy statement. Underlying the ESO debate is the concern that the choice among alternative financialaccounting treatments have real economic consequences. A large literature beginning with Ross Watts and Jerold Zimmerman (1978) provides evidence that accounting choice can impose economic costs on firms when contracts (e.g., debt and executive compensation contracts) or influential external parties (e.g., tax authorities) rely on reported accounting numbers (see Thomas Fields et al. [2001] for a survey of this literature). Accounting choice can also have economic consequences if investors fixate on particular numbers, such as reported earnings, resulting in security mispricing and misallocation of capital. Proponents of mandatory expensing argue that ESO’s reflect a cost of acquiring employee labor, and that expensing ESO’s conveys this information to outsiders consistently with other labor costs. Some argue that the absence of ESO expense results in stock mispricings, because investors fixate on reported earnings and fail to understand or utilize supplemental footnote disclosures about the true economic cost of ESO grants. Others argue that, when investors and boards of directors fixate on accounting earnings, the absence of ESO expense exacerbates ineffective corporate governance and allows management to use ESO’s to extract excessive compensation. Proponents of this view argue that expensing ESO’s will reign in management compensation by putting it under a brighter light. Opponents of expensing ESO’s argue that deducting the cost of ESO’s from earnings conveys an impression of weaker financial results to investors and, under the assumption that investors fixate on reported earnings, could raise the firms’ cost of financing and stifle corporate investment and innovation. There is also a concern that external parties, such as taxing authorities, might use changes in financial-accounting treatment as a cue to alter regulatory and tax policy.

We investigate Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholder rights exhibit significant stock market underperformance. If the relation between poor governance and poor returns is causal, we expect that the market is negatively surprised by the poor operating performance of weak governance firms. We find that firms with weak shareholder rights exhibit significant operating underperformance. However, analysts' forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market. Our results are robust to controls for takeover activity. Overall, our results do not support the hypothesis that weak governance causes poor stock returns.

Given CEOs’ substantial equity portfolios, much recent literature on CEO incentives regards cash-based bonus plans as largely irrelevant, begging the question of why nearly all CEO compensation plans include such bonuses. We develop a new measure of bonus plan incentives and show that performance sensitivities are much greater than prior estimates. We also test hypotheses regarding the role of bonuses in providing executives with individualized and team incentives. We find little evidence supporting the individualized incentives hypotheses but find consistent evidence that bonus plans appear to be used to encourage mutual monitoring and to facilitate coordination across the top management team as a whole.

This paper investigates whether the business press serves as an information intermediary. The press potentially shapes firms' information environments by packaging and disseminating information, as well as by creating new information through journalism activities. We find that greater press coverage reduces information asymmetry (i.e., lower spreads and greater depth) around earnings announcements, with broad dissemination of information having a bigger impact than the quantity or quality of press‐generated information. These results are robust to controlling for firm‐initiated disclosures, market reactions to the announcement, and other information intermediaries. Our findings suggest that the press helps reduce information problems around earnings announcements.

We investigate whether aggressive tax planning firms have a less transparent information environment. Although tax planning provides expected tax savings, it can simultaneously increase the financial complexity of the organization. And to the extent that this greater financial complexity cannot be adequately clarified through communications with outside parties, such as investors and analysts, transparency problems can arise. Our investigation of the association between tax aggressiveness and information asymmetry, analysts' forecast errors, and earnings quality suggests that aggressive tax planning is associated with lower corporate transparency. We also find evidence that managers at tax-aggressive firms attempt to mitigate these transparency problems by increasing various tax-related disclosures. Overall, our results suggest that firms face a trade-off between tax benefits and financial transparency when choosing the aggressiveness of their tax planning.