Researchers have used various measures as indications of "earnings quality" including persistence, accruals, smoothness, timeliness, loss avoidance, investor responsiveness, and external indicators such as restatements and SEC enforcement releases. For each measure, we discuss causes of variation in the measure as well as consequences. We reach no single conclusion on what earnings quality is because "quality" is contingent on the decision context. We also point out that the "quality" of earnings is a function of the firm's fundamental performance. The contribution of a firm's fundamental performance to its earnings quality is suggested as one area for future work.

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Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences

Earnings Management and Investor Protection: An International Comparison

https://sites.temple.edu/lnaveen/files/2014/05/JFE_risktaking_2006.pdf

Managerial incentives and risk-taking ☆

1. INTRODUCTION Most organizations are governed by a board of directors. In fact, having a board is one of the legal requirements for incorporation. Many nonincorporated entities also have a governing board of some sort, such as a state university's board of regents. Given the myriad boards in place today, it is reasonable to ask, Why do they exist? What do they do? Can they be "improved"? These questions are at the heart of governance and, to a certain extent, management. As such, they have motivated much of the research on this topic. This paper surveys the research on boards of directors in the economics and finance literature. Boards of directors are an economic institution that, in theory, helps to solve the agency problems inherent in managing an organization. Although boards satisfy numerous regulatory requirements, their economic function is determined by the organizational problems they help to address. Yet formal economic theory on boards has been quite limited. For example, the characteristics of agency problems that could lead to boards being the equilibrium solution have not yet been specified. Similarly, the conditions under which regulation of boards will lead to improvements are unknown. Despite the absence of formal theory, we have a strong intuitive sense of the problems facing boards. A major conflict within the boardroom is between the CEO and the directors. The CEO has incentives to "capture" the board, so as to ensure that he can keep his job and increase the other benefits he derives from being CEO. Directors have incentives to maintain their independence, to monitor the CEO, and to replace the CEO if his performance is poor. To some extent, the vacuum in formal theory has been filled by empirical work on boards. The "cost" associated with this approach, however, is that little of the empirical work on boards has been motivated by formal theory. Rather, it has sought to answer one of three questions: 1. How do board characteristics such as composition or size affect profitability? 2. How do board characteristics affect the observable actions of the board? 3. What factors affect the makeup of boards and how do they evolve over time? A key issue in this empirical work is how to proxy for the board's degree of independence from the CEO. Much of this work starts from the sometimes implicit assumption that observable board characteristics such as size or composition are related to the level of board independence. (1) Research thus far has established a number of empirical regularities. First, board composition, as measured by the insider-outsider ratio, (2) is not correlated with firm performance. (3) However, the number of directors on a firm's board is negatively related to the firm's financial performance. Second, board actions do appear to be related to board characteristics. Firms with higher proportions of outside directors and smaller boards tend to make arguably better--or at least different--decisions concerning acquisitions, poison pills, executive compensation, and CEO replacement, ceteris paribus. Finally, boards appear to evolve over time depending on the bargaining position of the CEO relative to that of the existing directors. Firm performance, CEO turnover, and changes in ownership structure appear to be important factors affecting changes to boards. Two important issues complicate empirical work on boards of directors, as well as most other empirical work on governance. First, almost all the variables of interest are endogenous. The usual problems of joint endogeneity therefore plague these studies. For instance, firm performance is both a result of the actions of previous directors and itself a factor that potentially influences the choice of subsequent directors. Studies of boards often neglect this issue and thus obtain results that are hard to interpret. Second, many empirical results on governance can be interpreted as either equilibrium or out-of-equilibrium phenomena. …

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Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature

We examine a potential benefit associated with the initiation of voluntary disclosure of corporate social responsibility (CSR) activities: a reduction in firms’ cost of equity capital. We find that firms with a high cost of equity capital in the previous year tend to initiate disclosure of CSR activities in the current year and that initiating firms with superior social responsibility performance enjoy a subsequent reduction in the cost of equity capital. Further, initiating firms with superior social responsibility performance attract dedicated institutional investors and analyst coverage. Moreover, these analysts achieve lower absolute forecast errors and dispersion. Finally, we find that firms exploit the benefit of a lower cost of equity capital associated with the initiation of CSR disclosure. Initiating firms are more likely than non-initiating firms to raise equity capital following the initiations and among firms raising equity capital, initiating firms raise a significantly larger amount than do non-initiating firms.

Voluntary Nonfinancial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting

Corporate governance, chief executive officer compensation, and firm performance

The costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives, accounting choice, financing decisions, and the valuation of equity. We present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock-return volatility that is easily implemented using data from only the current year’s proxy statement or annual report. This method can be applied to either executive stock option portfolios or to firm-wide option plans. In broad samples of actual and simulated CEO option portfolios, we show that these proxies capture more than 99% of the variation in option portfolio value and sensitivities. Sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics, and is most severe in samples of CEOs with a large proportion of out-of-the-money options. However, the proxies’ explanatory power remains above 95% in all subsamples.

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Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility

We predict and find that firms use annual grants of options and restricted stock to CEOs to manage the optimal level of equity incentives. We model optimal equity incentive levels for CEOs, and use the residuals from this model to measure deviations between CEOs’ holdings of equity incentives and optimal levels. We find that grants of new incentives from options and restricted stock are negatively related to these deviations. Overall, our evidence suggests that firms set optimal equity incentive levels and grant new equity incentives in a manner that is consistent with economic theory.

The Use of Equity Grants to Manage Optimal Equity Incentive Levels

https://www.uts.edu.au/sites/default/files/ADG_Cons2015_Core%20Guay%20JAE%201999.pdf

The use of equity grants to manage optimal equity incentive levels

https://repository.upenn.edu/cgi/viewcontent.cgi?article=1088&context=accounting_papers

John E. Core

Papers

Corporate governance, chief executive officer compensation, and firm performance

Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility

The Use of Equity Grants to Manage Optimal Equity Incentive Levels

The use of equity grants to manage optimal equity incentive levels

A review of the empirical disclosure literature: discussion ☆