Research work by Yong Zhang (張勇)
Is Conservatism Demanded by Performance Measurement in Compensation Contracts? Evidence from Earnings Measures Used in Bonus Formulas
with Ke Na, Ivy Zhang
Forthcoming at Review of Accounting Studies, 2022
Abstract
We explore the informational properties of earnings that compensation contracting requires for performance measurement. While conditional conservatism could be desirable because it can help to alleviate agency conflicts, the downside relates to the trade-off between conservatism and other important properties, such as persistence. We infer boards’ performance measurement preferences from a novel dataset of earnings realizations used to calculate executive bonus payouts (which we label compensation earnings), which can be either GAAP or non-GAAP. On average, compensation earnings do not exhibit any conditional conservatism in the full sample. The lack of conservatism holds even in subsamples with strong corporate governance and subsamples with high ex ante agency costs, suggesting optimal contract design rather than opportunism. Finally, our analyses indicate that compensation earnings are more persistent and informative than GAAP earnings. Overall, our results suggest that boards trade off conservatism for other properties in measuring performance for executive compensation.
The real effects of disclosure regulation: Evidence from mandatory CFO compensation disclosure
with Dichu Bao and Nancy Su
Forthcoming at Journal of Accounting and Public Policy, 2022
Abstract
The 2006 SEC rule, by changing the definition of Named Executive Officers, mandates CFO compensation disclosure. Using this setting and a difference-in-differences research design, we study the real effects of CFO compensation disclosure regulation on CFO job performance. We hypothesize that the disclosure of CFO compensation information, by facilitating shareholder monitoring of the board in providing appropriate incentives to CFOs, leads to better CFO job performance in providing high-quality financial reports. The analyses support our prediction: the treatment firms, which start disclosing CFO compensation information under the 2006 rule, compared to the control firms, which already disclose CFO compensation before 2006, experience an improvement in CFO performance, as exhibited in decreases in accounting misstatements and unexplained audit fees. The results are more pronounced for firms with concentrated ownership, smaller compensation committees, and CFOs subject to weaker monitoring by audit committees. Overall, we provide evidence of a real effect resulting from mandatory CFO compensation disclosure.
An Attention Model of IPO Underpricing, with Evidence on Media Coverage
with Laura Liu, Ruichang Lu, and Ann Sherman
Working paper, 2022
Abstract
Recent research indicates that attracting pre-offer investor attention yields long term benefits to an initial public offering (IPO) issuer. For investors with limited attention, we model a way in which firms may attract attention: through underpricing their IPO, and using the expected allocations of underpriced shares to induce investors to attend the road show and consider the offering. Consistent with our model, we show that our measure of attention, a simple count of news articles mentioning a company’s name in the last week pre-IPO, is significantly related to both price revision and initial return for the company’s stock. One extra piece of media coverage in the last week before the IPO is associated with a 2.2% greater initial return. Our model generates novel predictions regarding the relationship between initial returns and retention, expansion, and the benefits and opportunity costs of attention for various issuers. As predicted, the positive relationship between media coverage and underpricing is asymmetric, and is stronger when ex ante uncertainty is greater. Our model explains the relative unpopularity of grey market or when issued trading before IPOs and predicts that, even if the JOBS Act leads to more active pre-IPO trading in the US (for example, through equity crowdfunding or crowdinvesting), underpricing will still occur.
Media Freedom and the Corporate Information Environment
with Philip Berger
Working paper, 2021
Abstract
We investigate the role of media freedom in the media’s effectiveness in improving a firm’s information environment. We find that when a U.S. multinational firm’s foreign product markets have less free media, there is a higher level of uncertainty in the financial market, as indicated by higher levels of analyst forecast dispersion, analyst forecast errors, and bid-ask spreads. The impact of foreign countries’ media freedom on U.S. firms’ analyst forecast dispersion and forecast errors is mitigated by foreign countries’ local research intensity. In addition, when a U.S. firm’s foreign markets have less free media, management earnings forecasts are issued less frequently and, if issued, are less timely, suggesting that media freedom affects the information available to even corporate insiders. Finally, the relation between foreign media freedom and U.S. firms’ information environments is not driven by foreign countries’ media penetration or macro-economic environments.
This study adds to research on the role of media in financial markets. Across countries, there is large variation in the freedom of media in information dissemination and creation. Our findings suggest that media freedom enhances the effectiveness of media in improving the corporate information environment. In addition, to our knowledge, our results represent the first findings on how the role of the media interacts with the roles of sell-side analysts and firm managers in shaping firms’ information environments.
Insider Trading Restrictions and Insiders’ Supply of Information: Evidence from Reporting Quality
with Ivy Zhang
Contemporary Accounting Research, 2018
Abstract
We exploit the setting of first-time enforcement of insider trading laws to investigate the relationship between insider trading opportunities and insiders’ supply of information. Insider trading opportunities can curtail the informational efficiency of financial markets by motivating insiders to reduce financial reporting quality for the purpose of increasing their informational advantage over outsiders and extracting trading profits. Using data from 40 countries over the 1988-2004 period, we find that the quality of financial reporting increases significantly after the initial enforcement of insider trading laws in countries with a strong legal infrastructure. The increase is more pronounced for countries with more stringent insider trading laws. Further analyses show that the increase is concentrated in firms that are not closely held and in high growth firms. In addition to uncovering a channel through which insider trading restrictions affect the information environment, our evidence highlights the importance of country- and firm-level governance structures in determining the consequences of insider trading restrictions.
Accounting Discretion and Purchase Price Allocation after Acquisitions
with Ivy Zhang
Journal of Accounting, Auditing & Finance, 2017
Abstract
The recent movement in standards setting toward fair-value-based accounting beyond financial assets and liabilities calls for more empirical evidence on fair-value measurement, especially that of intangible assets. This article studies the initial valuation of goodwill and identifiable intangible assets after acquisitions. We find that the allocation of purchase price to goodwill and identifiable intangible assets is related to the economic determinants of the valuation. However, it is also significantly affected by managerial incentives arising from the differential treatments of goodwill and identifiable intangible assets under Statement of Financial Accounting Standards (SFAS) 142. The same managerial discretions are not exhibited in the purchase price allocation prior to SFAS 142, when goodwill and other intangibles are both amortized. These findings suggest that unverifiable fair value measures are associated with the underlying economics but also deviate from the true values in the presence of management reporting incentives. Further analysis suggests that external appraisers constrain managerial discretion in intangible asset valuation to an extent but do not completely eliminate it.
The Long-Run Role of the Media: Evidence from Initial Public Offerings
with Laura Liu and Ann Sherman
Management Science, 2014
Abstract
The unique characteristics of the U.S. initial public offer (IPO) process, particularly the strict quiet period regulations, allow us to explore the effects of media coverage when the coverage does not contain genuine news (i.e., hard information that was previously unknown). We show that a simple, objective measure of pre-IPO media coverage is positively related to the stock’s long term value, liquidity, analyst coverage, and institutional investor ownership. Our results are robust to additional controls for size, to using abnormal or excess media, and to an instrumental variable approach. We also find that pre-IPO media coverage is negatively related to future expected returns, measured by the implied cost of capital. In all, we find a long term role for media coverage, consistent with Merton’s (1987) attention or investor recognition hypothesis.
CEO Compensation and Fair Value Accounting: Evidence from Purchase Price Allocation
with Ron Shalev and Ivy Zhang
Journal of Accounting Research, 2013
Abstract
This study investigates the impact of CEO compensation structure on post-acquisition purchase price allocation, an accounting procedure that involves fair value estimation of various assets and liabilities. We find that CEOs whose compensation packages rely more on earnings-based bonuses are more likely to overallocate the purchase price to goodwill, the largest asset recorded post-acquisition. Because goodwill is not amortized, the overallocation likely in-creases post-acquisition earnings and bonuses. We also find that, when the acquirer’s CEO bonus plan includes performance measures that are not affected, or are less affected, by the overstatement of goodwill, such as cash flows, sales, or earnings growth, the overallocation to goodwill motivated by bonus plans diminishes.
Reg-FD and the competitiveness of all-star analysts
with Mark Bagnoli and Susan Watts
Journal of Accounting and Public Policy, 2008
Abstract
We examine the impact of Regulation Fair Disclosure on the competitive advantage of All-Star analysts as measured by turnover in the rankings. Institutional Investor All-Americans, chosen by votes of institutional investors based on overall helpfulness, experienced a significant increase in turnover as Reg-FD was implemented. Non-US analysts and US analysts ranked solely on the basis of public stock recommendations did not. Within a few years, however, All-American turnover returned to pre-Reg-FD levels, suggesting that the new All-Americans built a competitive advantage stressing aspects of performance less dependent on privileged communication.
Other papers can be downloaded here