In this article I examine how the performance sensitivity of CEO compensation is related to the level and turnover of outside block ownership. Separating firm performance into firm-specific (Skill) and exogenous (Luck) components, I find that pay sensitivity to Luck increases with blockholder turnover, whereas pay sensitivity to Skill increases with blockholding size. Furthermore, when blockholder turnover is higher, CEO pay increases more with positive Luck but does not decrease as much with negative Luck; also, excess CEO compensation is larger. Thus, the rent accruing to CEOs via asymmetric pay sensitivity to Luck is partly explained by short investment horizons of large shareholders.

While there is extensive research on how option incentives in executive compensation relate to risk-taking by managers, the impact of capital structure on this relationship has received little empirical attention. Extant work suggests that heightened managerial career concerns arising from financial risk and monitoring by debt holders will result in leverage dampening the relationship between managerial risk-taking and equity-linked incentives. We empirically evaluate this contention and find that firm leverage is associated with a significant weakening of the positive relationship between option incentives in flow compensation and managerial risk-taking. This result holds after accounting for the endogeneity of the firm leverage and incentive compensation decisions, and is robust across alternative measures of managerial risk-taking and to using the firm's credit ratings instead of leverage. The attenuating effect of firm leverage arises from both the long-term and short-term components of debt and is significantly stronger during the financial crisis of 2007–2009. Overall, the evidence highlights the influence of capital structure on the relationship between option incentives and managerial risk-taking.

Divergent views exist about whether boards must tradeoff advising for monitoring performance when utilizing outside versus inside directors. We suggest a dichotomous tradeoff focus underestimates outside directors׳ impact on board performance. We find outside director tenure positively associated with firm acquisition/investment policy advising performance and CEO compensation monitoring performance, suggesting that advising and monitoring do not always compete for directors׳ time. However, tenure is not a panacea – it marginally weakens financial reporting monitoring performance which is instead enhanced by outside directors׳ financial expertise. Overall, the results suggest outside director tenure and diverse expertise support both advising and monitoring performance.

We study circumstances when analysts’ forecasts diverge from managers’ forecasts after management guidance, and the consequences of this divergence for investors and analysts. Our results show that investors’ return response to earnings surprises based on analyst forecasts is significantly weaker when analyst and management forecasts diverge, and that this attenuating effect is stronger when the management forecast is more credible. When the divergent management forecast is more accurate than the analyst consensus forecast, the subsequent‐quarter analyst consensus forecast is significantly more accurate than that of the current quarter, and exhibits less serial correlation. Overall, our findings suggest that, when analyst and management forecasts diverge, investors find the two sources to contain complementary information, and analysts learn to improve their subsequent forecasts.

Prior research suggests that even for the same decision task there will be variation in decision outcomes across decision makers due to idiosyncrasies in their styles. This variation brings up a fundamental challenge in the realm of regulations, where consistency of application is of great importance. This study examines whether the idiosyncrasies of individual employees of the SEC contribute to inconsistent regulatory outcomes. Using a sample of SEC comment letters, we show that SEC reviewers' idiosyncratic style plays a significant role in explaining the cross‐sectional variation in filing review outcomes, even after holding firm and disclosure attributes constant. In addition, the likelihood of restatement during the review process varies systemically with the reviewers' review style. These findings suggest that reviewer style influences shareholders and other stakeholders via its impact on the costs in resolving comment letter issues and the quality of corporate disclosure. They also have public policy implications for the way financial reporting rules and regulations are applied.

This study examines how managers coordinate the joint use of earnings management and expectation management by estimating the relationship between these instruments and how this relationship changes as their respective constraints change. We do this by estimating structural models of the two instruments that account for the constraints on their use as well as their effects on each other. Our results suggest that managers use earnings management and expectation management complementarily when managers' ability to use earnings management is less restricted. However, as the constraints on earnings management increase, managers substitute earnings management with expectation management. Moreover, we find that the extent of expectation management influences the extent of earnings management, but not vice versa. Examining the market consequences of the use of these instruments, we find that, while there are penalties for using both earnings management and expectation management, either as complements or as substitutes, the net stock price benefit from meeting or beating earnings targets exceeds these penalties. JEL Classifications: G14; M41. Data Availability: Data are available from public sources identified in the study.

To address agents' moral hazard over effort, incentive contracts impose risk on the agents. As performance measures become noisier, the conventional agency analysis predicts that principals will reduce the incentive weights assigned to such measures. However, prior empirical results (Prendergast 2002) frequently find the opposite, i.e., incentive weights are larger (agents bear more risk) in more uncertain environments. This paper provides new evidence on the association between the extent of uncertainty and the level of risk imposed on agents. In the context of contracts between managed care organizations and physicians, we examine the effect of task characteristics and the legal liability environment on the extent of risk that physicians bear. We derive the optimal weighting of multiple performance measures in a model of a physician's choice of revenue-generating and cost-control efforts. The model predicts that physicians who face less task uncertainty bear more cost risk in their contracts, as predicted by the conventional moral hazard model. Likewise, the model predicts that as the association between task uncertainty and legal liability uncertainty becomes stronger, physicians bear less cost risk in their contracts. Our empirical results generally support these predictions. We offer an explanation for why these results tend to be consistent with the conventional moral hazard analysis, contrary to empirical results in a number of previous studies.