Board independence and CEO turnover

It is widely believed that the ideal board in corporations is composed almost entirely of independent (outside) directors. In contrast, this paper shows that some lack of board independence can be in the interest of shareholders. This follows because a lack of board independence serves as a substitute for commitment. Boards that are dependent on the incumbent CEO adopt a less aggressive CEO replacement rule than independent boards. While this behavior is inefficient ex post, it has positive ex ante incentive effects. The model suggests that independent boards (dependent boards) are most valuable to shareholders if the problem of providing appropriate incentives to the CEO is weak (severe)

Evaluation of water film by reynolds' equation in deep drawing using high-pressured water jet

The authors had proposed a deep drawing method using high-pressured jet waters as lubricant. This method aimed to suppress the usage of oil or other chemical lubricants, which might require some additional processes for lubricant removal and become a nuisance in environment. The conditions had been determined through trial and error approach without knowing water behaviors as lubricant. As a result, some scars and dimples were observed on the surface of deformed cup. In the present paper, a numerical model was composed for the evaluation of the water behaviors as lubricant. Darcy-Weisbach equation was used for evaluation of pressure drop between nozzle exit and pump, while Reynolds' equation was used for the thin film of fluid between the die and blank. The data of blank deformation in FEM was considered for the determination of the thickness distribution of the fluid film. The characteristics of the water were evaluated by the composed numerical method, and the results were used for examination of lubrication characteristics in experiments

Transparency and Corporate Governance

An objective of many proposed corporate governance reforms is increased transparency. This goal has been relatively uncontroversial, as most observers believe increased transparency to be unambiguously good. We argue that, from a corporate governance perspective, there are likely to be both costs and benefits to increased transparency, leading to an optimum level beyond which increasing transparency lowers profits. This result holds even when there is no direct cost of increasing transparency and no issue of revealing information to regulators or product-market rivals. We show that reforms that seek to increase transparency can reduce firm profits, raise executive compensation, and inefficiently increase the rate of CEO turnover. We further consider the possibility that executives will take actions to distort information. We show that executives could have incentives, due to career concerns, to increase transparency and that increases in penalties for distorting information can be profit reducing.

e-Quarterly Research Bulletin (Vol. 5, No. 1)

[Excerpt] Macro financial risk propagation and its implications on financial stability have emerged as major concerns of governments and financial institutions, particularly those with large financial asset pools. The global financial crisis in 2008–2009 was essentially centered on credit risk involving money markets, and the propagation of such risk across and among financial institutions and sovereigns is related to how connected they are. To understand the concept of connectedness, Merton provides a brief review of the concepts of credit, credit risk, and guarantees. He asserts that risk- free credit is essentially risky credit coupled with a guarantee of payment in the event of a default. That is, risky debt is nothing but risk-free debt less a guarantee of repayment. We note that in complete contingent markets, the holder of debt always has the option to purchase insurance on the debt, pretty much like the credit default swaps that are available in advanced financial markets today. The guarantee could be issued by a financial institution or a sovereign government, and effectively transfers the risk of default from the borrower to the guarantor. From the perspective of the lending institution, however, the instrument or asset it is holding is now essentially risk-free debt. Merton stresses that the guarantees attached to risky debt are in fact insurance on the risk of default, and are akin to put options on assets of borrowers, with maturities similar to those of the debt instrument being guaranteed and a strike price equivalent to the promised payment of debt

Firm performance and managerial turnover: the case of Ukraine

The paper studies whether and how CEO turnover in Ukrainian firms is related to their performance. Based on a novel dataset covering Ukrainian joint stock companies in 2002-2006, the paper finds statistically significant negative association between the past performance of firms measured by return on sales and return on assets, and the likelihood of managerial turnover. While the strength of the turnover-performance relationship does not seem to depend on factors such as managerial ownership and supervisory board size, we do find significant entrenchments effects associated with ownership by managers. Overall, our analysis suggests that corporate governance in Ukraine operates with a certain degree of efficiency, despite the well-known lacunas in the country’s institutional environment

A Framework for Assessing Corporate Governance Reform

In light of recent corporate scandals, numerous proposals have been introduced for reforming corporate governance. This paper provides a theoretical framework through which to evaluate these reforms. Unlike various ad hoc arguments, this framework recognizes that governance structures arise endogenously in response to the constrained optimization problems faced by the relevant parties. Contract theory provides a set of necessary conditions under which governance reform can be welfare-improving: 1) There is asymmetric information at the time of contracting; or 2) Governance failures impose externalities on third parties; or 3) The state has access to remedies or punishments that are not available to third parties. We provide a series of models that illustrate the importance of these conditions and what can go wrong if they are not met.

Information Disclosure and Corporate Governance

In public-policy discussions about corporate disclosure, more is typically judged better than less. In particular, better disclosure is seen as a way to reduce the agency problems that plague firms. We show that this view is incomplete. In particular, our theoretical analysis shows that increased disclosure is a two-edged sword: More information permits principals to make better decisions; but it can, itself, generate additional agency problems and other costs for shareholders, including increased executive compensation. Consequently, there can exist a point beyond which additional disclosure decreases firm value. We further show that larger firms will tend to adopt stricter disclosure rules than smaller firms, ceteris paribus. Firms with better disclosure will tend, all else equal, to employ more able management. We show that governance reforms that have imposed greater disclosure could, in part, explain recent increases in both CEO compensation and CEO turnover rates.Corporate governance; Corporate disclosure

Occupy Wall Street, Distributive Justice, and Tax Scholarship: An Ideology Critique of the Consumption Tax Debate

[Excerpt] “This Article argues that the pro-consumption tax literature is wrong to claim that no legitimate fairness objections to the consumption tax exist. It argues that the persistent and widespread wariness about replacing our current hybrid consumption tax/income tax system with a pure consumption tax is, contrary to what the pro-consumption tax literature asserts, completely justified. In fact, our reservations about the consumption tax’s fairness reflect legitimate concern about the role of capitalist power in America, particularly over the past thirty years. Indeed, the more the nation continues to experience the social welfare effects of increased capitalist power, the more compelling these objections become. History proves these concerns not just legitimate, but paramount. A full account, not a dismissal, of how capitalist power might benefit from a consumption tax is what would be required to meet these fairness objections. Part II of this Article fleshes out the fairness objections more fully and addresses the counter arguments that exist in the literature. In doing so, it seeks to reestablish the legitimacy of fairness objections to a consumption tax and encourage more robust and historically aware considerations of distributive justice in tax policy. Part II goes further and shows that the consumption tax literature gets it wrong in a particularly revealing way. Part II characterizes the pro-consumption tax literature’s dismissal of serious fairness and distributive justice concerns as, essentially, ideological; the literature’s very framing of the fairness issue precludes any serious consideration of the historical reality of capitalist power. Ideology, not argument, supports the claim that capitalist power is not a concern.

CEO Turnover and Firm Performance in China’s Listed Firms (CRI 2009-012)

Manuscript Type: Empirical Research Question/Issue: This study investigates the relation between CEO turnover and firm performance in China’s listed firms. The study examines how the sensitivity of CEO turnover to firm performance is moderated by the private control of firms, the presence of a majority shareholder and the presence of independent directors on the board. Research Findings/Insights: Using a panel of about 1200 Chinese firms per year from 1999 to 2006 we find significant changes in the ownership and control of firms. The private control of firms and the fraction of independent directors on the board have increased considerably over time. The study finds a significant negative association between CEO turnover and firm performance consistent with the agency model. There is evidence that the CEO turnover sensitivity for poor performance is greater in firms that are privately controlled, or have a majority shareholder, or have a greater fraction of independent directors on the board. Theoretical/Academic Implications: This study provides empirical support for the agency model and the importance of internal corporate governance to attenuate agency costs. It provides important insights into firm governance in transition economies. Practitioner/Policy Implications: This study offers insights to policy makers interested in enhancing the design of internal corporate governance within transition economies

Board committees, CEO compensation, and earnings management

We analyze the effect of committee formation on how corporate boards perform two main functions: setting CEO pay and overseeing the financial reporting process. The use of performance-based pay schemes induces the CEO to manipulate earnings, which leads to an increased need for board oversight. If the whole board is responsible for both functions, it is inclined to provide the CEO with a compensation scheme that is relatively insensitive to performance in order to reduce the burden of subsequent monitoring. When the functions are separated through the formation of committees, the compensation committee is willing to choose a higher pay-performance sensitivity as the increased cost of oversight is borne by the audit committee. Our model generates predictions relating the board committee structure to the pay-performance sensitivity of CEO compensation, the quality of board oversight, and the level of earnings management