Cases in Financial Reporting An Integrated Approach With an Emphasis on Earnings Quality and Persistence

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CEO Incentives and Downside Risk

Abstract We examine whether CEO equity incentives are related to firm risk. Our study differs from prior research in that we distinguish between upside and downside firm risk. Our study is prompted by the simple observation that variance is a symmetric and unconditional risk measure that may not capture how CEOs judge risk. For a sample of about 2,600 firms from 1992 to 2008, we find that CEO incentives reflect both the asymmetry and the conditional nature of firm risk. In particular, CEO incentives are negatively related to downside risk but positively related to upside risk, consistent with the notion that CEOs perceive potential losses as riskier than potential gains. We also find that CEO incentives reflect upside and downside systematic risk. Our results hold after we control for other firm-specific and CEO characteristics known to affect incentives. One conclusion from our findings is that CEO equity incentives reflect risk asymmetrically, consistent with psychology research. To the extent that they are not already doing so, compensation committees might tailor contracts to reflect the differential importance of downside and upside risk. From a research perspective, failing to consider these richer risk measures could lead to false inferences about the efficacy and efficiency of CEO incentives and compensation contracts

How costly is the Sarbanes Oxley Act? Evidence on the effects of the Act on corporate profitability

The Sarbanes-Oxley Act (SOX) was intended to protect investors by improving the accuracy and reliability of corporate disclosures. However, critics have argued that the costs of SOX far outweigh its intended benefits. Prior studies based on stock-price reactions to SOX-related events document mixed evidence on the expected impact of SOX. In contrast, we provide evidence on the net realized costs of SOX by examining its impact on operating profitability. We find that average cash flows decline by 1.3% of total assets after SOX. These costs are more significant for smaller firms, for more complex firms, and for firms with lower-growth opportunities. Annually, these costs range from $6 million for smaller firms to$39 million for larger firms. Further, we document that net SOX-related costs are not limited to one-time expenses associated with internal-control design and implementation. In aggregate, for the 1428 firms in our sample, these costs amount to about $19 billion per year. Profitability is lower for up to four years post-SOX. To our knowledge, ours are the first estimates of the realized net costs imposed by SOX.Sarbanes Oxley Act Operating profitability Net realized costs Cost of compliance Small firms

The Prevalence of Salmonella and Campylobacter on Broiler Meat at Different Stages of Commercial Poultry Processing

In poultry processing, Salmonella and Campylobacter contaminations are major food safety concerns. Peracetic acid (PAA) is an antimicrobial commonly used in commercial poultry processing to reduce pathogen prevalence so as to meet the USDA-FSIS performance standards. The objective of this study was to determine the prevalence of Salmonella and Campylobacter on broiler meat in various steps of commercial poultry processing in plants that use PAA. Post-pick, pre-chill, post-chill, and drumstick chicken samples were collected from three processing plants and mechanically deboned meat (MDM) was collected from two of the three plants. Each plant was sampled thrice, and 10 samples were collected from each processing step during each visit. Among the 420 samples, 79 were contaminated with Salmonella and 155 were contaminated with Campylobacter. Salmonella and Campylobacter contamination on the post-pick samples averaged 32.2%. Significant reductions in Salmonella and Campylobacter were observed in pre-chill to post-chill samples, where the prevalence was reduced from 34% and 64.4% to nondetectable limits and 1.1%, respectively (p < 0.001). Salmonella and Campylobacter remained undetectable on the drumstick samples in all three processing plants. However, the prevalence of Salmonella and Campylobacter on MDM was similar to the post-pick prevalence, which suggests substantial cross-contamination from post-chill to MDM