I examine whether voting premiums are reduced following mandatory International Financial Reporting Standards (IFRS) adoption for firms that have a dual-class share structure. I find that mandatory adopters' voting premiums decrease, on average, by 8 percent subsequent to mandatory IFRS adoption. This effect is statistically significant relative to the corresponding effect for non-IFRS adopters. Further, I find that this effect is more pronounced in countries with strong legal enforcement and for mandatory adopters that experience an increase in the transparency and comparability of reported information under the new accounting regime. Taken together, these results support the view that mandatory IFRS adoption benefits minority shareholders by providing an effective mechanism to constrain the private benefits of control. However, one should interpret these results with caution as concurrent efforts to strengthen corporate governance regimes and the enforcement of corporate and securities laws may also contribute to the decrease in voting premiums documented in this paper. Data Availability: Data used in this study are available from the sources listed in the text.

Lenders reduce their monitoring efforts after hedging their credit risk exposure through credit default swap (CDS) contracts, which are akin to insurance against borrowers’ adverse credit events. In this study, we examine whether, upon observing the reduced lender monitoring following CDS trading, shareholders demand that borrowing firms invest in more aggressive tax planning strategies, which were previously constrained by risk-averse lenders. Using a difference-in-differences design that exploits the variation in timing of the inception of CDS trading, we document that borrowers exhibit greater tax avoidance after the inception of CDS trading. Consistent with shareholders stepping up their demands post-CDS, we find that the increase in tax avoidance is stronger for (i) firms with more powerful and influential shareholders, as measured by dedicated institutional investors, (ii) firms with stronger shareholder defenders, as measured by board independence and board size, and (iii) firms with more strategic default options. We also find that borrowers with higher levels of tax avoidance are less likely to file for bankruptcy in the future. Our findings are robust to a battery of sensitivity checks, including controlling for cost of debt and endogeneity, as well as using alternative measures of tax avoidance.

This study shows that corporate innovation efficiency (IE) as measured by patents filed or cited divided by R&D expenditures improves credit ratings, but this occurs gradually. This gradual response implies that credit rating agencies (CRAs) impose in the near term a higher borrowing cost on innovative firms than their performance and risk characteristics would justify. We predict and confirm that the gradual improvement of credit ratings in response to IE is amplified for firms with more downside risk, with more financial constraints, and with increased sales or cash flows in the years following the IE. These results suggest a predictable response of CRAs to contemporaneous IE information based on economic factors relevant to credit analysis rather than a response based on CRAs' inefficient or biased use of innovation information.

This study investigates how the use of debt covenants around the world varies with legal institutions. On the basis of syndicated loans in 36 countries, we find that debt covenants are more prevalent in countries with stronger law enforcement and weaker creditor rights, suggesting that law enforcement facilitates, and creditor rights substitute for, the use of covenants. We also find that the substitution effect between covenant use and creditor rights exists mainly in countries with strong law enforcement, and the effect of legal institutions on covenants is primarily driven by covenants that preserve seniority and capital. In addition, timely loss recognition increases with the use of debt covenants and strong creditor rights attenuate this relation. Overall, our study is the first to provide comprehensive evidence on how the use of debt covenants responds to legal institutions and how it bridges the previously documented link between legal institutions and accounting conservatism.

We examine the role of CEO social capital as an important driver of the widespread practice of real earnings management (REM). Using the number of social connections to outside executives and directors to measure CEO social capital, we first find that well-connected CEOs associate with higher levels and volatilities of REM. The positive relation between REM and CEO network size is stronger when the CEO connects with more informed and influential persons, and when a more severe misalignment of interests can occur. Second, we find a contagion of REM among well-connected CEOs in an industry. Third, the level of REM induced by a large CEO social network associates negatively with future operating performance. This result is consistent with social capital circulating REM-related information ex-ante and increasing the power and influence for the CEO to deviate from optimal operating policies ex-post. Social capital shields the well-connected executive in the takeover and labor markets despite possible suboptimal future operating performance. While the prior literature finds that CEO social capital reduces accrual earnings management, our findings suggest a dark side of CEO social capital: it induces excessive levels and volatilities of REM costly to the firm in the long run while imposing relatively low personal risk on the top executive.

This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership‐control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual‐class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers’s theory that agency costs, combined with opacity, exacerbate stock price crash risk.

Firms provide convexity in managers' compensation plans (vega) to induce risk-averse managers to pursue risky, positive net present value projects. The resulting alignment of managers' and shareholders' incentives creates conflicts with lenders, who face an increased risk of default when managers pursue risky investments. We hypothesize that lenders would respond by stepping up their monitoring and threatening foreclosure to inhibit managers from acting on their vega incentives. Strong lender monitoring should, thus, reduce the efficacy of vega incentives. We test this hypothesis in a unique setting, where lenders purchase credit insurance, reduce their exposure to downside risk, and lower their monitoring. Afterward, we find a stronger association between vega incentives and the firms' risky investments. We contribute to the literature by showing that strong lender monitoring reduces the effectiveness of vega incentives and, thus, of the compensation mechanisms that boards of directors put in place to resolve manager-shareholder conflicts.

We investigate whether a larger CEO employment network provides access to information that improves firms' earnings forecasts and find a significantly positive relation between CEO employment network size and management earnings forecast accuracy. Our results suggest that firms use information obtained from CEO contacts to increase the accuracy of their earnings forecasts. Our conclusion is further supported by evidence of positive associations between CEO employment network size and the likelihood, frequency, and precision of management earnings forecasts. We also find that CEO employment network size is positively related to analysts' reactions to the forecast news and the accuracy of management earnings forecasts relative to analyst forecasts. Overall, our results are consistent with a larger CEO employment network generating external information that increases the accuracy of firms' earnings forecasts.

This study examines the impact of mandatory IFRS adoption on IPO underpricing and the relative amount of IPO capital raised in foreign markets. Using a difference-in-differences design, we find a decrease in IPO underpricing and an increase in the relative proceeds from foreign markets following mandatory IFRS adoption. We also find that mandatory IFRS adoption has a greater impact on IPO underpricing and relative foreign proceeds for firms in countries with a larger number of accounting changes, and this relation is more pronounced among firms in countries with stronger implementation credibility. In addition, we find that the decrease in underpricing associated with mandatory IFRS adoption holds for both domestic IPOs and global IPOs, and this effect is more pronounced for global IPOs than for domestic IPOs. Overall, our study contributes to the literature by documenting the impact of changes in financial accounting standards on IPO underpricing and capital market globalization.