This study examines discretionary accruals imbedded in quarterly earnings announcements that precede executive stock option grants. Prior research indicates that managers attempt to increase the value of their option pay (by depressing the option's exercise price) through a variety of strategies including timing voluntary disclosures, influencing option grant dates, or managing accruals. This study extends the research by jointly examining managerial incentives and opportunities to pursue an accruals-based strategy. We find evidence that discretionary accruals are lower when option pay is high and when concurrent firm performance is poor (incentive factors), but only when firms issue grants following earnings announcements relatively infrequently (opportunity factor). For firms that follow a predictable grant schedule, managers behave as if they believe that investors will discount earnings-based signals preceding the grant. Our results suggest that the decision to pursue an option-related strategy is influenced by economic tradeoffs. From a policy perspective, our results have relevance for the ongoing debate over option compensation practices, appropriate disclosure to investors, and the quality of corporate earnings.

We present a dynamic rational expectations model of closed-end fund discounts that incorporates feedback effects from activist arbitrage and lifeboats. Both activist arbitrage and lifeboats distort closed-end fund prices and lead to narrower discounts. Furthermore, both activist arbitrage and lifeboats effectuate an ex post wealth transfer from managers to investors but an ex ante wealth transfer from low-ability managers to high-ability managers. On average, investor wealth is unaffected by either activist arbitrage or lifeboats because their potential benefits are factored into higher fund prices. Although lifeboats can reduce takeover attempts, they do not increase expected managerial wealth.

This paper examines the relation between changes in firm value associated with public equityissue announcements and management ownership, nonmanagement large block ownership, institutional ownership, information variables, and leverage. A significant negative relationis found between the ratio of announcement period abnormal returns to changes in management ownership and the level of management ownership. This result is consistent with Stulz (1988) who predicts that firm value increases at a decreasing rate as management control of voting rights increases. This finding is also consistent with improvements in alignment of interests, where such improvements diminish as management becomes entrenched. The announcement period abnormal returns appear to be unrelated to outside blockholdings (large block ownership or institutional holdings), information variables, or leverage.

The Journal of Financial and Quantitative Analysis

Traditional planning for working capital needs is typically conducted with a relatively short time horizon. In this process, management attempts to optimize the return on existing fixed assets. The period for capital investment planning is much longer, reflecting the irreversibility of these decisions. Current research in the two areas tends to dichotomize these decision processes. The implications seem to be that working capital policies only have impact in the short run. However, it is clear that cash flows for potential capital expenditures are based on assumptions relative to expected future demand and production to meet this demand—assumptions that are necessarily tied to working capital commitments in the long run. The overall planning for credit, inventory, and liquidity should, therefore, be carried out before, or simultaneously with, the capital investment decision. It is a planning requirement that becomes an integral part of the total asset planning system. The vast majority of existing working capital models or long-term capital planning models do not allow for the explicit existence of and the simultaneous interrelationships between these two important subsystems.

The current assets and current liabilities of a firm are the stock reflections of closely interrelated operational and financial cash flows. The net effect of these combined flows must be recognized in searching for the optimal credit, inventory, or short-term borrowing policies. Yet, the vast majority of models for short-term investment and borrowing decisions do not allow for the interrelationships of this system.

Donald L. Tuttle, William L. Wilbur, A Multivariate Time-Series Investigation of Annual Returns on Highest Grade Corporate Bonds, The Journal of Financial and Quantitative Analysis, Vol. 6, No. 2 (Mar., 1971), pp. 707-721