Chun‐Keung (Stan) Hoi, Ashok Robin and Daniel Tessoni
This paper aims to study the audit committee (AC) provisions of the Sarbanes‐Oxley Act with the objective of identifying implementation issues and to recommend firm and board…
Abstract
Purpose
This paper aims to study the audit committee (AC) provisions of the Sarbanes‐Oxley Act with the objective of identifying implementation issues and to recommend firm and board actions to remedy the problems that are identified.
Design/methodology/approach
Standard economic theory was used to analyze the incentives and abilities of AC members, relying on results in the financial economics literature regarding outside director behavior.
Findings
The framework predicts that the new provisions in conjunction with the new regulatory/liability environment will increase risk‐aversion in directors belonging to ACs. This, in turn, creates an incentive alignment problem between AC members and shareholders leading to sub‐optimal decisions with regard to the audit. In particular, it is noted that demand will increase for high‐quality audits irrespective of cost considerations. The analysis also indicates that director labor markets will not mitigate this sub‐optimality.
Research limitations/implications
Because Sarbanes‐Oxley places direct responsibility for the audit in the hands of the AC, interventions by managers who may have incentives more aligned with those of shareholders are not considered. In a real world setting, managers may be playing a constructive role behind the scenes.
Practical implications
Specific action items to mitigate the problems are suggested. These steps have the combined effect of: increasing compensation for AC members (to support the additional workload); decreasing their risk exposure (to facilitate incentive alignment); and providing additional resources (to ensure efficiency of oversight).
Originality/value
In studying the AC provisions of the Sarbanes‐Oxley Act, this paper has gone someway towards identifying implementation issues and recommending firm and board actions to remedy the identified problems.
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Chun‐Keung Hoi and Ashok Robin
This paper aims to examine the research questions: Do executive and non‐executive directors face similar labor market penalties upon revelation of accounting fraud? Are all…
Abstract
Purpose
This paper aims to examine the research questions: Do executive and non‐executive directors face similar labor market penalties upon revelation of accounting fraud? Are all executive directors treated by markets as a homogenous group? Or, do executive directors who are top managers face stiffer penalties than other executive directors?
Design/methodology/approach
Board membership of incumbent directors in US firms accused of accounting fraud are tracked for three years after the revelation. Two labor market consequences/penalties are considered. Probability of losing internal, own firm board seat is the likelihood that incumbent directors leave the accused firm's board upon accounting fraud revelation. The likelihood of losing at least one external board seat (outside directorship) is also examined. Both univariate tests and multivariate LOGIT regressions are used to conduct the analysis.
Findings
Compared to non‐executive directors, executive directors are more than twice as likely to lose own firm board seat and at least five times as likely to lose at least one outside directorship. Moreover, all executives, top or otherwise, appear to face similar tough penalties.
Research limitation/implications
Accounting fraud is a rare event; this may limit the generality of the findings. Results obtained from a US sample may be applicable to countries with well‐developed capital and labor markets. Results imply that the labor market for directors serves a vital function in the US‐style corporate governance environment; labor market discipline provides at least some incentives for board members, including non‐employee directors and other executive directors, to perform their fiduciary duties.
Originality/value
This is the first study that utilizes a single corporate event to analyze the operation of the labor market across different categories of directors. Also, while studies have examined penalties on top executives there is no evidence that other executives who also serve on the board of the accused firms suffer labor market penalties.
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Chun‐Keung Hoi and Ashok Robin
Today, most firms provide equity‐based incentive compensation to their non‐executive directors. We summarize viewpoints supportive and critical of this development. We argue that…
Abstract
Today, most firms provide equity‐based incentive compensation to their non‐executive directors. We summarize viewpoints supportive and critical of this development. We argue that the effectiveness of incentive compensation is related to the structure of the incentive pay contact. We discuss the use of options and shares as well as the issue of whether incentive pay should be geared towards current rewards or future incentives. We also discuss the critical issue of maintaining the ownership exposure of directors by providing sufficient levels of equity as well as placing restrictions on cashing out. Using our arguments above, we suggest guidelines for constructing an optimal contract. We compare 289 incentive plans offered by public companies in the USA during 1988‐1998 and find that plans deviate significantly from the optimum.
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Khondkar E. Karim, Robert Pinsker and Ashok Robin
The specific purpose of this study is to understand how firm size and public/private affiliation (employment status) affect voluntary disclosure decisions concerning…
Abstract
Purpose
The specific purpose of this study is to understand how firm size and public/private affiliation (employment status) affect voluntary disclosure decisions concerning quantitatively immaterial nonfinancial information. Although the prior disclosure literature is large and has considered a variety of factors including size and to a lesser degree employment status, this study offers a new perspective by considering both factors in the context of qualitative materiality.
Design/methodology/approach
This paper presents 136 manager participants with 24 cues representing nonfinancial, realistic business events and solicits their disclosure judgments. The cues are adapted from Pinsker et al. and contain information that does not meet widely-accepted quantitative thresholds for disclosure (e.g. 5 percent of net income), yet were identified by the Securities and Exchange Commission (SEC) as more likely to be material. This paper uses a median split of total assets and total revenues to determine “large” and “small” firms. Managers' judgments are measured in an own-firm setting (The context is their current employer, which can be public or private.).
Findings
This paper finds that disclosure is positively linked to firm size, but this paper do not find an employer status effect. Additional testing reveals that private firm managers are sensitive to SEC oversight and other external, competitive pressures, suggesting that they face mimetic pressures to behave like their public firm counterparts. In sum, their findings contribute significantly to the disclosure, strategic management, institutional theory and judgment-and-decision-making (JDM) literatures.
Originality/value
Although there is a vast literature on public firm managers' voluntary disclosure behavior (mostly involving large firms), there is little research regarding the voluntary disclosure behavior of small or large private firm managers involving nonfinancial information.
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Steven Graham and Wendy L. Pirie
The fact that stocks going ex‐dividend decline in price by less than the dividend amount is theoretically attributed to the differential taxation of dividend and capital gains or…
Abstract
The fact that stocks going ex‐dividend decline in price by less than the dividend amount is theoretically attributed to the differential taxation of dividend and capital gains or the differential taxation of investor groups. NYSE, Amex and Toronto Stock Exchange listed stocks, and stocks interlisted on these three exchanges, are examined to infer the tax jurisdiction of the marginal investor. The stock price changes relative to the dividends are consistent with a tax clientele effect. Further, the stock price changes are plausible given the tax rates. Ex‐dividend day behavior is different for non‐interlisted stocks on all three exchanges, suggesting each exchange has a different tax clientele. Canadian firms interlisted on US exchanges exhibit ex‐dividend day behavior consistent with the appropriate US exchange’s non‐interlisted stocks, suggesting that the marginal investors in these stocks are American.
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This paper uses a multifactor logit model to analyze the aftermarket performance of randomly chosen IPO's in hot and cold markets. The theories of risk aversion and utility…
Abstract
This paper uses a multifactor logit model to analyze the aftermarket performance of randomly chosen IPO's in hot and cold markets. The theories of risk aversion and utility maximization, in conjunction with the paper's empirical results, suggest that cold market investors are more risk averse than are hot market investors.
Shafeeq Ahmed Ali, Mohammad H. Allaymoun, Ahmad Yahia Mustafa Al Astal and Rehab Saleh
This chapter focuses on a case study of Kareem Exchange Company and its use of big data analysis to detect and prevent fraud and suspicious financial transactions. The chapter…
Abstract
This chapter focuses on a case study of Kareem Exchange Company and its use of big data analysis to detect and prevent fraud and suspicious financial transactions. The chapter describes the various phases of the big data analysis cycle, including discovery, data preparation, model planning, model building, operationalization, and communicating results, and how the Kareem Exchange Company team implemented each phase. This chapter emphasizes the importance of identifying the business problem, understanding the resources and stakeholders involved, and developing an initial hypothesis to guide the analysis. The case study results demonstrate the potential of big data analysis to improve fraud detection capabilities in financial institutions, leading to informed decision making and action.