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Prior research (e.g., Dechow, Huson, and Sloan ) documents that, on average, compensation practices appear to shield CEO pay from income‐decreasing special items. In some circumstances, compensation shielding can be efficient. For example, it may encourage CEOs with earnings‐sensitive pay to take an action that reduces current earnings but nevertheless enhances value. Compensation shielding can be inefficient in other circumstances, such as when a board of directors is captured by an overly powerful CEO or the magnitude of negative special items has been overstated (e.g., by shifting core expenses into special items). This paper explores whether strong governance can explain cross‐sectional variation in compensation shielding, and whether stronger governance and auditing are associated with less shifting of expenses. We find that strong corporate governance mechanisms, as captured by board (and committee) independence, the Sarbanes‐Oxley (2002) Act (SOX) and its related governance reforms, and switches to Big 4 auditors, are all associated with less compensation shielding. While our evidence suggests that strong overall governance is associated with a reduction in manipulation of core earnings through classification shifting in the cross‐section, we find inconclusive evidence to suggest that board independence or SOX influence classification shifting.

This article investigates the prevalence of financial synergies as a motive for merger and acquisition activity in the property-liability insurance industry. Two hypotheses are developed and tested based upon theories of information asymmetries and firm financing decisions (Myers and Majluf 1984): (1) that financial synergies are a primary motive for insurance mergers in general and (2) that mergers motivated by financial synergies will be more prevalent in periods following negative industry capital shocks. The hypotheses are tested via analysis of accounting ratios of acquisitions targets in the period 1980 through 1990 in relation to those of non-acquired firms of similar characteristics, and via analysis of acquisition characteristics. The hypothesis that financial synergies are a motive for mergers following negative industry capital shocks receives strong support.