Discretionary disclosures, Human capital, Performance evaluation, Uncertainty

Top management faces two key organizational design choices: (1) how much authority to delegate to lower-level managers, and (2) how to design incentive compensation to ensure that these managers do not misuse their discretion. Theoretical accounting literature emphasizes that top management makes these two choices jointly, but there is little empirical evidence on this assertion. Capitalizing on a unique database of branch manager practices in retail banks, this study provides some of the first evidence on the joint nature of the delegation and incentive compensation choices for lower-level managers. A simultaneous model of these two choices indicates that high-growth, volatile, and innovative banks delegate more authority to branch managers. In turn, branch managers with more authority receive more incentive-based pay. However, in contrast with principal-agent theory, I find no evidence that the extent of incentive compensation plays a significant role in explaining the extent of delegation.

[In certain circumstances, insider trades such as private transactions between executives and their firms could be disclosed after the end of the firm's fiscal year, on a Form-5 filing. We find that insider sales disclosed in such a delayed manner for large firms are predictive of negative future returns (-6 to -8 percent), as well as lower future annual earnings relative to analyst forecasts. These results stand in contrast to existing findings on the uninformativeness of quickly disclosed open-market insider sales. The Sarbanes-Oxley Act curtailed the use of Form 5 under the presumption that managers used this vehicle opportunistically. Our systematic evidence supports this presumption.]

This study uses the introduction of second-generation antitakeover legislation as a natural experimental setting to infer the value that managers place on the control rights conferred by stock ownership. We conjecture that managers will reduce their stockholdings in the post-legislation period because they can ensure their prior level of control while holding fewer risky shares. Using a variety of specifications, we find robust evidence consistent with this "revealed preference" hypothesis. Further demonstrating the key role played by control considerations in managers' stockholding decisions, the reductions in ownership are concentrated in management teams with higher levels of initial ownership and in firms without poison pills.

A major governance problem in closely held corporations is the majority shareholders’ expropriation of minority shareholders. As a solution, legal and finance research recommends that the main shareholder surrender some control to minority shareholders via ownership rights. We test this proposition on a large data set of closely held corporations. We find that shared-ownership firms report a substantially larger return on assets and lower expense-to-sales ratios. These findings are robust to institutionally motivated corrections for endogeneity of ownership structure. We provide evidence on the presence of governance problems and the effectiveness of shared ownership as a solution in settings characterized by illiquidity of ownership.

Theories of delegated monitoring predict that when public disclosure is costly, monitoring by a large investor leads management to supply more private information to that investor, and less public disclosure to other similarly aligned investors who free-ride off the monitor. We test this prediction in the setting where large shareholders contractually bind management to share private information. We find that after the execution of such contracts, firms improve their performance and reduce their public disclosures. Overall, our evidence supports the disclosure prediction of delegated monitoring theories, and is inconsistent with poor-performance and expropriation theories of disclosure.

We examine the future sales implications of product quality measures for 11 plants of a manufacturing group in a Fortune 500 firm. Our results indicate that both financial quality measures, such as external failure costs incurred due to product failures at customer sites, and nonfinancial quality measures, such as defect rates and on-time deliveries, are leading indicators of future sales. While changes in defects and on-time deliveries affect sales in the subsequent quarter, changes in external failure costs are negatively associated with sales two and three quarters hence. Corroborating popular claims about the importance of external failure costs, we find that a $1 increase in external failure costs is associated with a cumulative sales decrease of $26, or approximately $10.40 in lost profits.

Activist investors in a firm often voluntarily release information about their governance intentions to the public. Voluntary disclosure theory suggests that an activist investor will disclose when she expects other investors to respond positively and support her in upcoming corporate control contests. We find that activists’ disclosures are accompanied by positive abnormal returns, reductions in bid-ask spreads, and increases in future earnings relative to similar targets without voluntary activist disclosures. Disclosures by activists who demand a board seat (the most common demand) have the highest announcement returns, and disclosers also win proxy contests and directorships more frequently than non-disclosers. These findings suggest that the activist’s beliefs about investor response in both pricing and voting are an important driver of her disclosure choice.