https://fdp.hse.ru/data/086/482/1225/Sept%2016%20Higher%20market%20valuation%20of%20companies%20with%20a%20small%20board%20of%20directors.pdf

Higher market valuation of companies with a small board of directors

. This study investigates firms subject to accounting enforcement actions by the Securities and Exchange Commission for alleged violations of Generally Accepted Accounting Principles. We investigate: (i) the extent to which the alleged earnings manipulations can be explained by extant earnings management hypotheses; (ii) the relation between earnings manipulations and weaknesses in firms' internal governance structures; and (iii) the capital market consequences experienced by firms when the alleged earnings manipulations are made public. We find that an important motivation for earnings manipulation is the desire to attract external financing at low cost. We show that this motivation remains significant after controlling for contracting motives proposed in the academic literature. We also find that firms manipulating earnings are: (i) more likely to have boards of directors dominated by management; (ii) more likely to have a Chief Executive Officer who simultaneously serves as Chairman of the Board; (iii) more likely to have a Chief Executive Officer who is also the firm's founder, (iv) less likely to have an audit committee; and (v) less likely to have an outside blockholder. Finally, we document that firms manipulating earnings experience significant increases in their costs of capital when the manipulations are made public.

Resume. Les auteurs analysent les entreprises assujetties aux mesures d'execution prises par la Securities and Exchange Commission dans les cas de presomption de transgression des principes comptables generalement reconnus. Ils s'interessent aux aspects suivants de la question: i) la mesure dans laquelle les presomptions de manipulations des benefices peuvent etre expliquees par les hypotheses existantes de gestion des benefices; ii) la relation entre les manipulations de benefices et les faiblesses des structures de regie interne des entreprises; et iii) la reaction du marche financier a l'endroit des entreprises au sujet desquelles les presomptions de manipulation des benefices sont rendues publiques. Les auteurs constatent qu'un incitatif majeur a la manipulation des benefices est le desir d'obtenir du financement externe a moindre cout. Ils demontrent que cet incitatif demeure important meme apres le controle des motifs contractuels que mettent de l'avant les travaux theoriques. Ils constatent egalement que les entreprises qui manipulent les benefices sont: i) davantage susceptibles d'avoir des conseils d'administration domines par la direction; ii) davantage susceptibles d'avoir un chef de la direction qui joue simultanement le role de president du conseil; iii) davantage susceptibles d'avoir un chef de la direction qui est egalement le fondateur de l'entreprise; iv) moins susceptibles d'avoir un comite de verification; et v) moins susceptibles d'avoir un bloc de titres detenus par un actionnaire exterieur. Enfin, les auteurs etablissent le fait que le cout du capital, pour les entreprises qui manipulent les benefices, enregistre des hausses appreciables lorsque ces manipulations sont rendues publiques.

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Causes and Consequences of Earnings Manipulation: An Analysis of Firms Subject to Enforcement Actions by the SEC*

This study empirically tests the prediction that the inclusion of larger proportions of outside members on the board of directors significantly reduces the likelihood of financial statement fraud. Results from logit regression analysis of 75 fraud and 75 no-fraud firms indicate that no- fraud firms have boards with significantly higher percentages of outside members than fraud firms. Results are not sensitive to the definition of outside directors used, given that no-fraud firms have significantly higher percentages of both "grey" and "independent" directors than fraud firms. Interestingly, the presence of an audit committee does not significantly affect the likelihood of financial statement fraud. Additionally, as outside director ownership in the firm and outside director tenure on the board increase and as the number of outside directorships in other firms held by outside directors decreases, the likelihood of financial statement fraud decreases.

An Empirical Analysis of the Relation between Board of Director Composition and Financial Statement Fraud

Corporate governance, chief executive officer compensation, and firm performance

This paper surveys the economic literature on boards of directors. Although a legal requirement for many organizations, boards are also an endogenously determined governance mechanism for addressing agency problems inherent to many organizations. Formal theory on boards of directors has been quite limited to this point. Most empirical work on boards has been aimed at answering one of three questions: 1) How are board characteristics such as composition or size related to profitability? 2) How do board characteristics affect the observable actions of the board? 3) What factors affect the makeup of boards and how they evolve over time? The primary findings from the empirical literature on boards are: Board composition is not related to corporate performance, while board size has a negative relation to corporate performance. Both board composition and size are correlated with the board's decisions regarding CEO replacement, acquisitions, poison pills, and executive compensation. Finally, boards appear to evolve over time as a function of the bargaining power of the CEO relative to the existing directors. Firm performance, CEO turnover, and changes in ownership structure appear to be important factors affecting changes to boards.

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

Outside directors, board independence, and shareholder wealth☆

A corporation may acquire minority ownership in another corporation and then attempt to exert control, either by monitoring management or by coopting management and transferring wealth to itself. A sample of fifty-one corporations that have had a corporate partial owner for at least five years is matched against a nonpartially owned control group. Risk-adjusted monthly stock returns of partially owned firms are significantly lower than those of control group firms, supporting the wealth transfer hypothesis. Firms with Victor Posner-controlled partial owners perform worse than other partially owned firms.

The stock return performance of corporations that are partially owned by other corporations

An alternative approach to determining present and future value interest factors for annuities due

Corporate control is assumed to rest in management's hands in firms with widely dispersed share ownership, but ownership of a relatively small block of shares may be sufficient to give the blockholder at least some measure of control or influence Although the influence of individuals or institutions holding large minority positions is generally believed to benefit all shareholders through improved monitoring of management, one corporation may be motivated to acquire a sizeable minority position in another to achieve the benefits of merger without incurring the costs of a complete takeover Given this motivation, the interests of the corporate minority shareholder may differ considerably from the interests of other shareholders

Stuart Rosenstein

Papers

Outside directors, board independence, and shareholder wealth☆

The stock return performance of corporations that are partially owned by other corporations

An alternative approach to determining present and future value interest factors for annuities due

Corporate combinations or failed acquisition attempts: partial acquisitions by posner and non‐posner firms.