Creditor control rights and executive bonus plans

Review of Accounting Studies · 2025-02-19 · 3 citations

Abstract We study the extent to which creditors shape the executive bonus plans of their financially distressed borrowers. Financial distress can exacerbate agency conflicts between creditors and borrowers as concerns with underinvestment become more acute due to managerial myopia and debt overhang. Consequently, we expect creditors to exert their influence to ensure that these managers’ incentive-compensation plans encourage longer-term investments and directly reward outcomes that benefit creditors without exposing managers to unnecessary risk. We argue that bonus plans are an especially important way to provide these incentives because their flexibility allows creditors to more precisely target specific investment objectives. We find that borrowers’ bonus plans tend to have longer horizons and more convex payouts following covenant violations, especially when bonus plans can be a particularly effective way to address distress-related agency conflicts. Our evidence suggests that creditors protect their interests by exercising their control rights to shape their borrowers’ incentive-compensation plans.

The Screening Role of Covenant Heterogeneity

The Accounting Review · 2025-05-30 · 10 citations

ABSTRACT We investigate whether differences in the mix of financial covenants in debt contracts (i.e., covenant heterogeneity) reflect—and provide a way for lenders to elicit, or screen—borrowers’ pre-contractual private information about their future risk profile. Consistent with adverse selection theories, we predict and find that borrowers with higher future risk negotiate loans with covenants that are less sensitive to performance, compared to borrowers with lower future risk. We differentiate between screening and incentive explanations for this finding and provide evidence that screening accounts for a substantial portion of this overall relation. Our study highlights how, in addition to shaping borrowers’ incentives through monitoring, covenant heterogeneity reflects borrowers’ future risk profiles and can help lenders screen accordingly. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G21; G32; G34.

Digital Traffic, Financial Performance, and Stock Valuation

The Accounting Review · 2025-09-03 · 2 citations

ABSTRACT We examine the economic implications of digital traffic on firms’ financial performance, stock valuation, and financial surprises. Our analysis shows that timely flows of digital traffic are contemporaneous and leading indicators of firms’ revenue and profitability—both gross and operating. Moreover, we show that digital traffic contains novel information about firms’ future performance that is not entirely reflected in stock prices, analyst forecasts, or historical (i.e., time series) financial metrics. Notably, digital-traffic-based investment strategies are lucrative and generate substantial abnormal returns. Importantly, we also adduce evidence that corroborates our conjecture about the underlying economic mechanism that explains the valuation implications of digital traffic: These are driven by firms with consumer-oriented websites that facilitate sale transactions. Data Availability: Data are available from the sources cited in the text. JEL Classifications: E32; G32; O33.

Rank-and-file accounting employee compensation and financial reporting quality

Journal of Accounting and Economics · 2024-01-07 · 22 citations

Financial information and diverging beliefs

Review of Accounting Studies · 2024-06-25 · 4 citations

Abstract Standard Bayesians’ beliefs converge when they receive the same piece of new information. However, when agents initially disagree and have uncertainty about the precision of a signal, their disagreement might instead increase, despite receiving the same information. We demonstrate that this divergence of beliefs leads to a unimodal effect of the absolute surprise in the signal on trading volume. We show that this prediction is consistent with the empirical evidence using trading volume around earnings announcements of U.S. firms. We find evidence of elevated volume following moderate surprises and depressed volume following more extreme surprises, a pattern that is more pronounced when investors hold more distant prior beliefs and are more uncertain about earnings’ precision. The evidence is consistent with the model where investors disagree about stocks’ expected returns and do not know the precision of earnings as a signal about the firm’s value.

Unemployment Risk and Debt Contract Design

The Accounting Review · 2023-05-11 · 9 citations

ABSTRACT We examine how firms’ contractual relationships with their employees affect the design of their debt contracts, and the use of financial covenants in particular. Viewing the firm as the nexus of both explicit and implicit contractual relationships, we argue that managers cater to their employees’ preferences when negotiating contractual terms with creditors. We argue that an increase in unemployment-insurance benefits reduces employees’ cost of job loss, which, in turn, allows managers to take more risk. First, we show that more generous benefits are associated with a higher operating leverage, operating cash flow volatility, and product-development frequency. We then find that loans initiated following an increase in unemployment-insurance benefits include a higher proportion of performance, rather than capital covenants. Overall, our study demonstrates how the design of debt contracts changes in response to arguably exogenous changes in employees’ collective tolerance—and, in turn, managers’ preferences—for risk. JEL Classifications: M41; G32; J60.

Measurement of <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML"><mml:mrow><mml:mi>R</mml:mi><mml:mo>=</mml:mo><mml:msub><mml:mi>σ</mml:mi><mml:mi>L</mml:mi></mml:msub><mml:mo>/</mml:mo><mml:msub><mml:mi>σ</mml:mi><mml:mi>T</mml:mi></mml:msub></mml:mrow></mml:math> and the separated longitudinal and transverse structure functions in the nucleon-resonance region

Physical review. C · 2022 · 12 citations

• Machine Learning
• Physics
• Particle physics

We report on a detailed study of longitudinal strength in the nucleon resonance region, presenting new results from inclusive electron-proton cross sections measured at Jefferson Lab Hall C in the four-momentum transfer range $0.2&lt;{Q}^{2}&lt;5.5\phantom{\rule{4pt}{0ex}}{\mathrm{GeV}}^{2}$. The data have been used to accurately perform 167 Rosenbluth-type longitudinal/transverse separations. The precision $R={\ensuremath{\sigma}}_{L}/{\ensuremath{\sigma}}_{T}$ data are presented here, along with the first separate values of the inelastic structure functions ${F}_{1}$ and ${F}_{L}$ in this regime. The resonance longitudinal component is found to be significant, both in magnitude and in the existence of defined mass peaks. Additionally, quark-hadron duality is here observed above ${Q}^{2}=1\phantom{\rule{4pt}{0ex}}{\mathrm{GeV}}^{2}$ in the separated structure functions independently.

Causality redux: The evolution of empirical methods in accounting research and the growth of quasi-experiments

Journal of Accounting and Economics · 2022 · 220 citations

• Computer Science
• Econometrics
• Economics

Executive stock options and systemic risk

Journal of Financial Economics · 2021 · 40 citations

• Business
• Monetary economics
• Economics

Are CEOs’ purchases more profitable than they appear?

Journal of Accounting and Economics · 2020-11-18 · 18 citations