We ask nearly 400 CFOs about the definition and drivers of earnings quality, with a special emphasis on the prevalence and detection of earnings misrepresentation. CFOs believe that the hallmarks of earnings quality are sustainability, absence of one-time items, and backing by actual cash flows. Earnings quality is determined in about equal measure by controllable factors like internal controls and corporate governance, and non-controllable factors like industry membership and macroeconomic conditions.
We combine unique administrative and survey data to study the match between firms and managers. The data include manager characteristics, firm characteristics, detailed measures of managerial practices, and outcomes for the firm and the manager. A parsimonious model of matching and incentives generates implications that we test with our data. We use the model to illustrate how risk aversion and talent determine how firms select and motivate managers.
This paper finds statistically and economically significant out-of-sample portfolio benefits for an investor who uses models of return predictability when forming optimal portfolios. The key is that investors must incorporate an ensemble of important features into their optimal portfolio problem, including time-varying volatility, and time-varying expected returns driven by improved predictors such as measures of yield that include share repurchase and issuance in addition to cash payouts. Moreover, investors need to account for estimation risk when forming optimal portfolios.
We examine (1) whether the accounting, governance, and investing practices of Berkshire Hathaway investees are consistent with Warren Buffett's public statements on what constitutes good accounting, governance, and investing practices and (2) whether these practices are associated with Berkshire's initial "selection" or Buffett's subsequent "influence." Compared to control firms, we find that Berkshire investees are highly likely to follow Buffett's investment philosophy, somewhat likely to follow his preferred accounting, disclosure, and compensation policies, but unlikely to follow the bo
We study the optimal composition of corporate boards. Directors can be either monitoring or advisory types. Monitoring constrains the empire-building tendency of chief executive officers (CEOs). If shareholders control the board nomination process, a non-monotonic relation ensues between agency problems and board composition. To preempt CEO entrenchment, shareholders may assemble an adviser-heavy board. If a powerful CEO influences the nomination process, this may result in a more monitor-heavy board.
A growing literature investigates the association between stock return variation and several aspects of information and governance structures, both in cross-country settings and cross-firm settings within the U.S. Several papers in this literature use idiosyncratic stock return volatility (s_e^2) as the measure of firm-specific return variation whereas others use return synchronicity, or R2.
What is the role of leaders in large organizations? We propose a model in which a leader helps to overcome a misalignment of followers' incentives that inhibits coordination while adapting the organization to a changing environment. Good leadership requires vision and special personality traits such as conviction or resoluteness to enhance the credibility of mission statements and to effectively rally agents around them.