John Core

• Massachusetts Institute of Technology

We study how short-term changes in institutional owner attention affect managers' disclosure choices. Holding institutional ownership constant and controlling for industry-quarter effects, we find that managers respond to attention by increasing the number of forecasts and 8-K filings. Rather than alter the decision of whether to forecast or to pro...

We measure a manager’s risk-taking incentives as the total sensitivity of the manager’s debt, stock, and option holdings to firm volatility. We compare this measure with the option vega and with the relative measures used by the prior literature. Vega does not capture risk-taking incentives from managers’ stock and debt holdings and does not reflec...

en In this discussion, I briefly summarize the key features of Bertomeu, Darrough, and Xue's (hereafter BDX) model. I then examine the four key assumptions that BDX employ to arrive at their results: (i) firms contract only on earnings; (ii) conservative earnings are better for contracting; (iii) conservatism motivates upward earnings manipulation;...

This paper examines whether and how inside ownership mediates the relation between disclosure quality and the cost of capital. Both ownership and more transparent reporting have the potential to align incentives between managers and investors thereby reducing systematic risk. Employing a large global sample across 35 countries over the 1990 to 2004...

This paper examines performance vesting provisions in long-term incentive compensation for CEOs and other executives, and the increased use of these plans following FAS 123R. We examine the agency prediction that incentives provided by price-based measures relative to incentives provided by accounting or other non-price-based measures are negativel...

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 fina...

We measure a manager’s risk-taking incentives as the total sensitivity of the manager’s debt, stock, and option holdings to firm volatility. We compare this measure to the option vega and to relative measures used by the prior literature. Vega does not capture risk incentives from managers’ stock and debt holdings, and does not reflect the fact tha...

We use changes in the value of a firm’s real estate assets as an exogenous change in a firm’s financing capacity to examine (i) the relation between reporting quality and financing and investment conditional on this change, and (ii) firms’ reporting quality responses to the change in financing capacity. We find that financing and investment by firm...

Recent research finds that firms characterized by high corporate transparency have a greater proportion of independent directors. The causality of this relation, however, is unclear. One branch of the governance literature takes corporate transparency as fixed and shows that the effective level of board independence is dictated by exogenous variati...

Blacconiere, Frederickson, Johnson, and Lewis identify an interesting disclosure and add to our understanding of firm disclosure of option expense. The disclosure is more nuanced than is suggested by the term “disavowal”. Some disclosures are weak, almost tautological “not necessarily … reliable” statements, whereas others are straightforward state...

This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Con...

We examine how and why donors divide gifts between people in the present (across distance) and between the present and future (across time). US donors tend to give less to charities that benefit the poor and more to charities that benefit the non-poor (such as museums, universities, and arts organizations). Many of these wealthier charities have cr...

We re-examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields. We show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions. We develop improved estimates of marginal tax rates using a non-parametric procedure that produces more a...

ABSTRACT 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., low...

In the wake of the recent financial crisis, US executive compensation has, once again, come under fire from regulators, politicians, the financial press, the general public, and some academics. Although the critiques are varied, many identify the level of pay and performance-based incentives as two key areas of concern. And, as is often the case in...

Since at least as early as the 1950s, the press, general public, politicians, and academic researchers have remarked on the high levels of US CEO pay and questioned whether these levels are fair and appropriate, as well as whether executive compensation provides proper incentives. Undoubtedly, executive compensation and incentives will continue to...

We compute and compare risk-adjusted pay for US and UK CEOs, where the adjustment is based on estimated risk premiums stemming from the equity incentives borne by CEOs. Controlling for firm and industry characteristics, we find that US CEOs have higher pay, but also bear much higher stock and option incentives than UK CEOs. Using reasonable estimat...

In a recent and influential empirical paper, Francis, LaFond, Olsson, and Schipper (FLOS) [2005. The market pricing of accruals quality. Journal of Accounting and Economics 39, 295–327] conclude that accruals quality (AQ) is a priced risk factor. We explain that FLOS’ regressions examining a contemporaneous relation between excess returns and facto...

We examine the press’ role in monitoring and influencing executive compensation practice using more than 11,000 press articles about CEO compensation from 1994 to 2002. Negative press coverage is more strongly related to excess annual pay than to raw annual pay, suggesting a sophisticated approach by the media in selecting CEOs to cover. However, n...

We examine the press’ role in monitoring and influencing executive compensation practice using more than 11,000 press articles about CEO compensation from 1994 to 2002. Negative press coverage is more strongly related to excess annual pay than to raw annual pay, suggesting a sophisticated approach by the media in selecting CEOs to cover. However, n...

In a recent and influential empirical paper, Francis, LaFond, Olsson, and Schipper (FLOS) [2005. The market pricing of accruals quality. Journal of Accounting and Economics 39, 295-327] conclude that accruals quality (AQ) is a priced risk factor. We explain that FLOS' regressions examining a contemporaneous relation between excess returns and facto...

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 wi...

We examine whether managers’ trading decisions (both at a firm and personal level) are correlated with trading strategies suggested by the operating accruals and the post-earnings announcement drift (SUE) anomalies. We discuss advantages and disadvantages of the use of managerial trading activity to infer managers’ private valuation about their own...

We examine three alternative explanations for excess endowments in not-for-profit firms: (1) growth opportunities, (2) monitoring, or (3) agency problems. Inconsistent with growth opportunities, we find that most excess endowments are persistent over time, and that firms with persistent excess endowments do not exhibit higher growth in program expe...

This article addresses four major concerns about the pay of U.S. CEOs: (1) failure to pay for performance; (2) excessive levels of pay; (3) failure to index options and other equity-based pay, resulting in windfalls; and (4) too much unwinding of incentives. The authors' main message is that most if not all of these concerns are exaggerated by the...

In this paper, we review Pay Without Performance by Professors Lucian Bebchuk and Jesse Fried. The book develops and summarizes the leading critiques of current executive compensation practices in the U.S., and offers a negative, if mainstream, assessment of the state of U.S. executive compensation: U.S. executive compensation practices are failing...

We examine whether managers’ trading decisions (both at a firm and personal level) are correlated with trading strategies suggested by the operating accruals and the post-earnings announcement drift (SUE) anomalies. We discuss advantages and disadvantages of the use of managerial trading activity to infer managers’ private valuation about their own...

We empirically examine standard agency predictions about how performance measures are optimally weighted to provide CEO incentives. Consistent with prior empirical research, we document that the relative weight on price and non-price performance measures in CEO cash pay is a decreasing function of the relative variances. Agency theory speaks to the...

A growing body of literature suggests that because risk-averse executives are undiversified, they value equity compensation at significantly less (over 30%) than market value. This valuation discount is driven by the assumptions that the firm ignores existing incentives when it grants equity, and does not allow executives to buy or sell firm stock...

We empirically examine standard agency predictions about how performance measures are optimally weighted to provide CEO incentives. Consistent with prior empirical research, we document that the relative weight on price and non-price performance measures in CEO cash pay is a decreasing function of the relative variances. Agency theory speaks to the...

We find mixed support for the hypothesis that a “New Economy” subperiod occurred in the late 1990s in which the relation between equity value and traditional financial variables differs from previous periods. We examine a regression model of equity value on financial variables over 25 years for a broad firm sample and for firm subsamples thought to...

Stock and option compensation and the level of managerial equity incentives are aspects of corporate governance that are especially controversial to shareholders, institutional activists, and government regulators. Similar to much of the corporate finance and corporate governance literature, research on stock-based compensation and incentives has n...

In contrast to a body of research starting with Demsetz and Lehn (1985) that predict and find a strong positive association between firm percent return variance and incentives, Aggarwal and Samwick (1999) predict and find a strong negative association between firm dollar return variance and incentives. A key assumption of Aggarwal and Samwick's ana...

The costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives, accounting choice, financing decisions, and the valuation of equity. We present an accurate method of estimating option portfolio value and the sensitivities of option portfoli...

We examine a sample of firms that adopt "target ownership plans", under which managers are required to own a minimum amount of stock. We find that prior to plan adoption, such firms exhibit low managerial equity ownership and low stock price performance. Managerial equity ownership increases significantly in the two years following plan adoption. W...

In this paper, we derive a measure of diluted EPS that incorporates the economic implications of the dilutive effects of employee stock options. We show that the existing FASB treasury-stock method of accounting for the dilutive effects of outstanding options systematically understates the options' dilutive effect, and thus overstates reported EPS....

A growing body of literature suggests that because an executive is risk-averse and undiversified, he values equity compensation and incentives at less than market value. This discount on valuation is driven by the assumption that the executive is constrained from rebalancing his portfolio following an equity grant, and as such, the payment of equit...

Healy and Palepu, J. Account. Econ. (2001), this issue, provide a broad review of the empirical disclosure literature. This discussion focuses on the empirical voluntary disclosure literature, and assumes firms’ disclosure policies are endogenously determined by the same forces that shape firms’ governance structures and management incentives. This...

We examine determinants of non-executive employee stock option holdings, grants, and exercises for 756 firms during 1994–1997. We find that firms use greater stock option compensation when facing capital requirements and financing constraints. Our results are also consistent with firms using options to attract and retain certain types of employees...

We examine whether publicly available performance measures other than stock price are economically significant in explaining changes in CEOs' firm-specific wealth. Similar to Antle and Smith [1986], we measure a CEO's firm-specific wealth changes as the sum of total annual pay and changes in the value of the CEO's portfolio of stock and option hold...

We examine a sample of firms that adopt “target ownership plans”, under which managers are required to own a minimum amount of stock. We find that prior to plan adoption, such firms exhibit low managerial equity ownership and low stock price performance. Managerial equity ownership increases significantly in the two years following plan adoption. W...

Using a sample of directors' and officers' (D&O) premiums gathered from the proxy statements of Canadian companies, this article examines the D&O premium as a measure of ex ante litigation risk. I find a significant association between D&O premiums and variables that proxy for the quality of firms' governance structures. The association between the...

We predict and find that firms use annual grants of options and restricted stock to CEOs to manage the optimal level of equity incentives. We model optimal equity incentive levels for CEOs, and use the residuals from this model to measure deviations between CEOs’ holdings of equity incentives and optimal levels. We find that grants of new incentive...

We find that measures of board and ownership structure explain a significant amount of cross-sectional variation in CEO compensation, after controlling for standard economic determinants of pay. Moreover, the signs of the coefficients on the board and ownership structure variables suggest that CEOs earn greater compensation when governance structur...

We appreciate the helpful comments of Robert Holthausen, Christopher Ittner, and Rebecca Tsui and thank Howard Yeh and Christine Phillips for research assistance. The help of John Moyer of Ernst & Young LLP, and the financial support of Ernst & Young LLP and the Wharton School is gratefully acknowledged.

We examine whether board and ownership structure variables explain the level of chief executive officer (CEO) compensation. After controlling for standard economic determinants (i.e., the firm's demand for a high-quality CEO, firm performance, and risk), we find that board and ownership structure variables explain a significant amount of cross-sect...