We develop and test the hypothesis that private information incorporated into stock prices affects the structure of corporate boards. Stock price informativeness may be a complement to board monitoring, because the information revealed by prices can be used by directors to monitor management. But price informativeness may also be a substitute for board monitoring, because more informative prices can trigger external monitoring mechanisms, such as takeovers. We find robust evidence for the substitution effect: Stock price informativeness, as measured by the probability of informed trading (PIN), is negatively related to board independence. Consistent with the model's predictions, this relationship is particularly strong for firms exposed to external governance mechanisms and internal governance mechanisms, and firms for which firm-specific knowledge is relatively unimportant. We address endogeneity concerns in a number of different ways and conclude that our results are unlikely to be driven by omitted variables or reverse causality. The results are also robust to using different measures of price informativeness and different proxies for board monitoring JEL classification: G32, G34 Keywords: Corporate boards, Independent directors, Price informativeness * We thank Carola Frydman, Jeffrey Gordon, Itay Goldstein, Antoine Faure-Grimaud, Pedro Santa-Clara, Antoinette Schoar, and Laura Starks; seminar participants at the City University of London, EBRD, LSE, Tilburg University, and University of Texas-Austin; and participants at the Lisbon-Sloan MIT corporate finance and governance workshop for helpful comments and suggestions.
This study uses a sample of over 7000 firms in 38 countries to investigate the relation between firm valuation and earnings quality. We find a positive and significant relation between firm valuation and an aggregate earnings quality measure based on seven earnings attributes (accruals quality, persistence, predictability, smoothness, value relevance, timeliness, and conservatism). This relation is particularly strong for firms with greater investment opportunities and more need for external finance, and for firms in low investor protection countries. Thus, firms are able to compensate for a weak legal environment by adopting higher earnings quality standards, particularly when they need to gain access to global capital markets. Overall, our findings suggest that firms with higher earnings quality are valued more highly in stock markets, supporting the idea that investors require a premium for the information risk associated with lowerquality earnings.
CEO compensation can influence the kinds of strategies that firms adopt. We argue that performance-related compensation creates an incentive to look for overly ambitious, hard to implement strategies. At a cost, shareholders can curb this tendency by precommitting to a regime of CEO overcompensation in highly changeable environments. Alternatively shareholders can commit to low CEO pay, although this requires a commitment mechanism (either by the board of the individual company, or by the society as a whole) to counter the incentive to renegotiate upwards. We study the conditions under which the different policies for CEO compensation are preferred by shareholders. Copyright 2005 by The American Finance Association.
We develop and test the hypothesis that private information incorporated into stock prices affects the structure of corporate boards. Stock price informativeness may be a complement to board monitoring, because the information revealed by prices can be used by directors to monitor management. But price informativeness may also be a substitute for board monitoring, because more informative prices can trigger external monitoring mechanisms, such as takeovers. We find robust evidence for the substitution effect: Stock price informativeness, as measured by the probability of informed trading (PIN), is negatively related to board independence. Consistent with the model's predictions, this relationship is particularly strong for firms exposed to external governance mechanisms and internal governance mechanisms, and firms for which firm-specific knowledge is relatively unimportant. We address endogeneity concerns in a number of different ways and conclude that our results are unlikely to be driven by omitted variables or reverse causality. The results are also robust to using different measures of price informativeness and different proxies for board monitoring JEL classification: G32, G34 Keywords: Corporate boards, Independent directors, Price informativeness * We thank Carola Frydman, Jeffrey Gordon, Itay Goldstein, Antoine Faure-Grimaud, Pedro Santa-Clara, Antoinette Schoar, and Laura Starks; seminar participants at the City University of London, EBRD, LSE, Tilburg University, and University of Texas-Austin; and participants at the Lisbon-Sloan MIT corporate finance and governance workshop for helpful comments and suggestions.
We examine the impact of corporate taxation on entrepreneurship, using a quasi-natural experiment, which substantially reduced the corporate tax rate for start-ups located in inland municipalities in Portugal. Using a difference-in-differences approach and IV regression, we find that the tax reform increased firm entry and new firm job creation. The entrepreneurs who took advantage of this tax reform are relatively older, and are better-educated individuals. Their start-ups are relatively larger, more productive, and are more likely to survive the first 3 years. These findings suggest that corporate taxation is an imperative constraint for entrepreneurship, particularly for high-quality entrepreneurs. These better-educated individuals find it easier to overcome the hurdles of tax legislation and to make use of the opportunities created by a specific tax reform.
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