Stock Market Returns, Corporate Governance and Capital Market Equilibrium

This paper analyzes why corporate governance matters for stock returns if the stock market prices the underlying managerial agency problem correctly. Our theory assumes that strict corporate governance prevents managers from diverting cash flows, but reduces incentives for managerial effort. In capital market equilibrium, this trade-off has implications for the firm's earnings, stock returns, and managerial ownership, because governance impacts the firm's risk-return structure. In particular, the strictness of corporate governance is negatively related to earnings and positively to β. Various empirical tests with U.S. data using the governance index of Gompers, Ishii, and Metrick (2003) yield results consistent with these predictions

Institutional investors and corporate governance

We provide a comprehensive overview of the role of institutional investors in corporate governance with three main components. First, we establish new stylized facts documenting the evolution and importance of institutional ownership. Second, we provide a detailed characterization of key aspects of the legal and regulatory setting within which institutional investors govern portfolio firms. Third, we synthesize the evolving response of the recent theoretical and empirical academic literature in finance to the emergence of institutional investors in corporate governance. We highlight how the defining aspect of institutional investors – the fact that they are financial intermediaries – differentiates them in their governance role from standard principal blockholders. Further, not all institutional investors are identical, and we pay close attention to heterogeneity amongst institutional investors as blockholders

The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting

We review recent literature on the role of financial reporting transparency in reducing governance-related agency conflicts among managers, directors, and shareholders, as well as in reducing agency conflicts between shareholders and creditors, and offer researchers some suggested avenues for future research. Key themes include the endogenous nature of debt contracts and governance mechanisms with respect to information asymmetry between contracting parties, the heterogeneous nature of the informational demands of contracting parties, and the heterogeneous nature of the resulting governance and debt contracts. We also emphasize the role of a commitment to financial reporting transparency in facilitating informal multiperiod contracts among managers, directors, shareholders, and creditors

CEO Profile and Earnings Quality

This paper introduces the PSCORE, which aggregates nine personal characteristics of chief executive officers (CEOs), to signal the quality of earnings. The PSCORE is a composite score based on publicly available data on CEOs. The study reports strong positive relationships between the PSCORE and two different proxies for earnings quality, (i) discretionary accruals and (ii) financial statement errors, measured by deviations of the first digits of figures reported in financial statements from those expected by Benford’s Law. Further analyses indicate that the relationships between the PSCORE and the proxies for earnings quality become more pronounced when CEOs have high equity-based compensation incentives. The findings have some implications for practitioners