Accounting and Finance

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Corporate Innovation Strategy and Narrative Disclosures
(University of Waterloo, 2024-07-04) Che, Yixing
In this thesis, I examine how firms with different prioritizations of innovation strategy utilize narrative disclosures in their 10-K filings to communicate information about their innovation activities. I hypothesize and find that firms with a greater focus on exploratory innovations (versus exploitative innovations) disclose less narrative innovation information based on a cost-benefit tradeoff. Conducting a content analysis of the quality of narrative innovation disclosures, I find that exploration-focused firms tend to disclose fewer details but use a more positive tone in their disclosures compared to exploitation-focused firms. The tendency for exploration-focused firms to employ a more positive tone in narrative disclosures may be due to managerial overconfidence rather than management opportunism or firm performance. I also find that product market competition and technology spillover have opposite effects on narrative innovation disclosures due to their different proprietary cost implications. The negative relation between exploration-focused firms and narrative innovation disclosures is more pronounced when product market competition intensifies, while it becomes less pronounced when technology spillover becomes more prominent. Finally, I find that narrative innovation disclosures enhance investors’ understanding of innovative activities and reduce misvaluation and future stock price crash risk for exploration-focused firms. My thesis contributes to the disclosure and innovation literature with insights into how firms’ innovation strategies affect their narrative innovation disclosure decisions, which helps investors better evaluate corporate innovation strategy.
Subjectivity in Performance Evaluation and Group Identity as Antecedents of Employee Overwork
(University of Waterloo, 2023-08-18) Mokhtar, Ala
Employees often overwork by working longer than contractual or statutory standard working time for no immediate additional monetary gain. Despite the prevalence of overwork in firms, little is understood about why employees choose to work such long hours. Firms often have high overwork levels despite management encouraging employees to make use of work-life balance policies, and employees at such firms often believe that their long work hours are self-imposed. Employees likely would not feel that way if they are given explicit management directives to work long hours, indicating that other factors in the organization lead employees to overwork. I use an experiment to investigate how two key features of a firm’s management control system – the subjectivity in performance evaluation and the strength of employees’ identity with their colleagues (hereafter, group identity) – affect employees’ level of overwork. I find that the effect of subjectivity in performance evaluation on the level of overwork is increasing in group identity strength, such that a positive effect is present only when group identity is stronger and not when it is weaker. I also find that group identity has a significant positive effect on the level of overwork at higher but not lower levels of subjectivity in performance evaluation. These results largely support my hypotheses. Finally, I employ a secondary experiment and provide evidence that subjectivity in performance evaluation impacts the level of overwork primarily through the effort heuristic mechanism. My study is important because understanding factors within firms that propagate overwork is consequential for firms that want to discourage such overwork due to its negative consequences. Understanding these factors also allows firms to have a more complete understanding of what motivates their employees.
Calibration Committees and Rating Distribution Guidance Effects on Leniency Bias in Subjective Performance Evaluations
(University of Waterloo, 2023-04-19) Patterson, Katharine
Firms use both calibration committees and rating distribution guidance to reduce leniency bias in subjective performance ratings. Leniency bias is the tendency to provide subordinates with higher ratings than deserved which can weaken the link between incentives and effort, leading to suboptimal and subordinate performance. I employ a 2x2 online experiment to assess how the presence versus absence of peer calibration committees [PCCs] and rating distribution guidance [RDG] affects leniency bias present in supervisors’ ratings of subordinates’ performance. I find support that supervisors may display more leniency in ratings prepared in anticipation of a PCC, especially among low performers. As the increased bias appears to impact low-performers, this may create additional fairness concerns for moderate and high-performers, which could demotivate these subordinates. Next, I find support that rating distribution guidance does have a main effect of reducing the leniency bias displayed among low and high performers. Further, using planned contrast testing, I find support for my predicted pattern of results for low performers. That is, the presence of a PCC has a main effect of increasing leniency bias, the presence of RDG has the main effect of reducing leniency bias, and the interactive effect such that when a PCC is present, the presence of RDG weakens the effect of PCCs on leniency bias. This finding indicates that rating distribution guidance may be helpful in settings with a PCC.
The Valuation of Economic Earnings and Income Shifting of U.S. Multinationals in Domestic and Foreign Jurisdictions
(University of Waterloo, 2022-02-15) Pinto, Karen
I study U.S. multinationals' economic earnings and income shifting across their domestic and foreign jurisdictions. This study develops the concept of economic earnings, measures economic and shifted earnings, tests their market valuation, and tests differences in valuation across investor types. I conceptualize economic earnings by distinguishing between domestic and foreign earnings reported by firms and earnings created in these jurisdictions. I then measure domestic and foreign economic earnings by estimating country-specific (i) locations and (ii) economic earnings for U.S. multinationals. I estimate country-level economic earnings using a productivity function of domestic-only firms in each country. I test the validity of the economic earnings estimation procedure using a sample of domestic-only firms across 81 countries. The income shifting measure is the difference between reported and economic earnings. I theoretically and empirically compare the income shifting measures created in this study to existing measures and test their association with tax avoidance. For the valuation tests, I develop two earnings decomposition models that decompose total earnings into (a) domestic and foreign economic earnings and (b) shifted and resident components of earnings. I find that domestic and foreign economic earnings are value-relevant and valued relatively differently than domestic and foreign reported earnings. I fail to find evidence that income shifted into and out of the U.S. are value-relevant. I find that more sophisticated investors are associated with the valuation of income shifting and find, contrary to my predictions, that less sophisticated investors recognize underlying economic earnings components.
Incomplete Incentives, Task Temporality, and Effort Spillover in a Multitask Environment
(University of Waterloo, 2022-01-07) Lane, Dorian
Incomplete incentive contracts in multitask environments present a significant control challenge of ensuring that employees expend sufficient effort towards all assigned tasks, particularly those that are not directly incentivized. Prior research finds that the severity of this agency issue depends on task temporality such that it is less problematic when the tasks are performed concurrently as opposed to sequentially. I extend the literature by examining how incentive type, task temporality, and performance feedback influence effort spillover onto a second, unincentivized task. Specifically, I predict that goal-based incentives and positive performance feedback on an incentivized task will lead to a stronger positive affective response, which will induce greater effort spillover onto an unincentivized task, under sequential multitasking relative to concurrent multitasking. To test my predictions, I employ a 2 x 2 between-subjects experimental design, where I manipulate the type of incentive contract used for the incentivized task between goal-based or piece-rate incentives and task temporality between concurrent or sequential. Participants complete two real-effort tasks where Task 1 performance is incentivized, and Task 2 performance is unincentivized. I examine the impact of my manipulations on participants’ affective responses to performance feedback on the incentivized task and their performance on the unincentivized task, which proxies for task effort, as my dependent variables of interest. I find that goal-based incentives under sequential multitasking following goal attainment does lead to greater effort spillover onto an unincentivized task under sequential multitasking compared to concurrent multitasking. Consistent with my theory, I find that positive affect from performance feedback is positively associated with effort spillover onto an unincentivized task. I further predict that goal-based incentives and negative performance feedback on an incentivized task is associated with a stronger negative affective response, which will induce lower effort spillover onto an unincentivized task under sequential multitasking relative to concurrent multitasking. However, I do not find support for the prediction. Specifically, I do not find evidence that negative affect following negative performance feedback is associated with negative effort spillover onto an unincentivized task. The findings from this study highlight the importance of examining how features of the management control system (i.e., incentive type, performance feedback, and job design) can help to address a costly agency problem in multitask environments.
Fair Value Accounting and Informational Efficiency: A Look at the Confirmatory Role of Financial Reports
(University of Waterloo, 2021-11-02) Hong, Min Jeong
Prior analytical research suggests that independently verified financial reports can enhance informational efficiency by serving a confirmatory role, where they discipline managers’ unverified, but more timely, voluntary disclosures. I study the confirmatory role of financial reports by examining how fair value accounting affects two aspects of informational efficiency: the credibility of voluntary disclosures and the timeliness of price discovery. I argue that greater measurement uncertainty associated with fair values can make the accounting numbers less verifiable and potentially less reliable. This, in turn, can hinder the extent to which financial reports can serve a confirmatory role. Thus, I hypothesize that fair value accounting can reduce the credibility of voluntary disclosures and the timeliness of price discovery. To examine these hypotheses, I exploit SFAS 133 (FASB 1998), which increases fair value accounting exposure for derivative users by mandating all derivatives to be reported at fair value. I compare the credibility of voluntary disclosures and the timeliness of price discovery of derivative users to those of derivative non-users, pre- versus post-SFAS 133, using a difference-in-differences research design. I identify derivative users using a combination of an engine-based keyword search and manual tracing to the 10-k filings on the SEC’s EDGAR database. Using management forecasts as a key voluntary disclosure, I find results suggesting that an increase in exposure to fair value accounting impairs the credibility of good news management forecasts, but not of bad news forecasts. A potential explanation for this asymmetric result is that bad news from management is inherently more credible and, thus, less susceptible to credibility concerns. In contrast, I find results suggesting that fair value accounting does not impede timely price discovery, but rather, can enhance timely price discovery in negative return periods. I also identify potential alternative explanations for these results. In examining the impact of fair value accounting on the timeliness of price discovery, I find that the firm-level intraperiod timeliness metric, used in prior literature, has some limitations. Specifically, large return reversals during the period can lead to values that cannot be clearly interpreted as the timeliness of price discovery. I create a proxy to capture the extent of return reversals and find that the portfolio-level intraperiod timeliness metric mitigates such issues through averaging firm-level returns. In particular, using simulation analysis, I explore portfolio sizes that will mitigate these issues and use this to inform my analysis. These results suggest that fair value accounting can have unintended adverse consequences for informational efficiency, by weakening the credibility of managers’ voluntary disclosures. My findings are relevant to standard setters and regulators, given a continual transition towards greater fair value accounting. This thesis highlights the importance of considering the system of public financial reporting and disclosure, where the financial report is only one of many sources of information, when assessing the impact of accounting.
Tax Incentives in Corporate Acquisitions
(University of Waterloo, 2021-09-30) Warraich, Hamza
In this dissertation, I examine tax incentives in corporate acquisitions. Reported tax losses or net operating losses (NOLs) under the United States (U.S.) income tax law have grown considerably in recent years. Yet, there is limited empirical evidence on whether target firms’ NOL carry-forward (NOLC), which is a potential tax asset, affects merger and acquisition (M&A) activity. I re-examine two open empirical questions in the literature for which there is limited or no empirical evidence. First, does the acquirer compensate the target’s shareholders for the target’s NOLC? I predict and find that the association between the target’s NOLC and acquisition premium is increasing in the acquirer’s marginal tax rate. Second, does the target’s NOLC affect how the acquisition is financed? Consistent with capital structure theory on the substitutability of debt and non-debt tax shields, I find that the probability of debt financing is relatively lower in deals in which the target has an NOLC. In accordance with the Scholes-Wolfson framework, of “all taxes, all parties, and all costs”, a key insight in this dissertation is that the tax and non-tax attributes of the target and acquirer firm interact to determine the available tax incentive and thus the optimal level of tax-planning. This dissertation also provides new insight into the distortionary effect of tax policy. NOLC-related tax incentives in corporate acquisitions are governed by Section 382 of the Internal Revenue Code. §382 imposes a loss limitation on firms’ tax attributes following an ownership change, effectively reducing the net present value (NPV) of the tax assets. Empirically, I document that the uncertainty inherent in the applicability of §382 rules increases the likelihood that a deal is cancelled. In addition, I find that §382 is an important determinant in the medium of exchange and that the applicability of loss limitation rules is a plausible explanation for the well-documented aggregate trend in the decline in the propensity of all-stock deals. My findings suggest that §382 creates serious and unintended distortions in the merger decision, the effects of which are economically large.
KPI Information Acquisition by Analysts: Evidence from Conference Calls
(University of Waterloo, 2021-09-10) Tang, Qi (Rachel)
As performance measures based on generally accepted accounting principles (GAAP) deteriorate in usefulness, information users are placing more reliance on alternative performance measures. Key performance indicators (KPIs) are a subset of these alternative performance measures illustrating industry-specific firm financial and operational performance. In this study, I investigate analysts’ demand for KPI-related information in earnings conference calls and whether managers adjust their decisions about voluntary KPI disclosure in subsequent earnings calls. Using 51 KPIs for six industries, I find that after analysts request KPI-related information, managers increase both the likelihood and the intensity of their KPI disclosure in subsequent earnings conference calls. This effect is more pronounced when the firm’s earnings are less relevant, consistent with the supplemental role of KPIs to GAAP financial performance measures. I also find that the proprietary costs faced by the firm and the relationship between analysts and management (as proxied by whether the analysts are invited to ask the first questions during past earnings calls) matter when managers make KPI disclosure decisions following analyst demand. As the findings suggest a well-functioning demand-supply mechanism of KPI disclosure, I further explore whether financial analysts use KPI-related information to improve the quality of their work. I find a significantly positive association between KPI disclosure and the accuracy of analysts’ earnings forecasts. This effect is more pronounced when the KPI disclosure is driven by analyst demand. Collectively, my study highlights the role that analysts play in voluntary KPI disclosure when there is an absence of mandatory integrated reporting.
Accounting Conservatism and Risk Disclosures
(University of Waterloo, 2021-07-22) Wang, Xiaoqi
This thesis adopts a broad view of conservative financial reporting—managers can use two ways to communicate business uncertainties to outsiders, namely, conservative accounting via timely loss recognition and narrative risk disclosures about a firm’s downside risk. I posit that managers trade off conservative accounting and risk disclosures because they both can alleviate information asymmetry about downside risk and reduce shareholder litigation, and they both impose significant costs on firms. Using a sample of U.S. industrial firms from 1995 to 2018, I find support for this substitutive (trade-off) relation when narrative risk disclosures were voluntary but not when they were mandatory in annual reports. Moreover, I hypothesize and find evidence that firms have stronger incentives to make such trade-offs in order to reduce overall reporting cost, when they are planning seasoned equity offerings, are closer to debt covenant violations, face higher proprietary costs, or have greater needs for debt financing. Additional tests show that external monitoring, by financial analysts or by shareholders through litigation threats, constrains firms’ flexibility in making such trade-offs. For the period after 2005 when the U.S. Securities and Exchange Commission (SEC) has mandated risk factor disclosures in annual reports, I find firms with lower analyst following or lower litigation risk exhibit a significant substitutive relation between these two accounting choices. Stock return tests show that, while investors fully anticipated managers to make such trade-offs when risk disclosures were voluntary, they reacted negatively to firms that appear to have made trade-offs between these two choices in the period after the SEC has mandated risk disclosures. Collectively, my research suggests that firms trade off conservative accounting recognition and risk disclosures, especially in the period when qualitative risk disclosures were voluntary, even though investors appear to prefer consistent information between quantitative accounting numbers and qualitative risk disclosures.
Tax-Planning vs. Coordination: The Dual Role of Internal Capital Allocation
(University of Waterloo, 2020-12-03) Xing, Bin (Betty)
In this thesis, I examine how a multinational corporation (MNC) allocates capital among its international subsidiaries. This capital allocation has both a managerial and tax-planning objective. On the managerial side, it serves to coordinate collaboration between two subsidiaries on an innovative opportunity. Because subsidiaries in different jurisdictions have different tax rates, this capital allocation also plays a role in international tax-planning. An analytical model reveals that the MNC trades off the benefits of collaboration on the innovative opportunity against the tax cost associated with doing do. I further examine the implication of this tradeoff on how an MNC changes its capital allocation in response to a tax cut. The model provides a counter-intuitive result that an MNC does not always increase the amount of capital allocated to the country giving a tax cut. This thesis contributes to our understanding of the interaction between the managerial and tax decisions of MNCs. It does so by studying the interaction in the context of the flow of subsidiary-specific intangible resources rather than the flow of physical goods. This thesis has implications for both managerial practices and tax policies. While the tax-rate differential between subsidiaries provides tax-planning opportunities, it also creates a coordination cost that is external to the organization. Finally, the results from this model highlight the importance of considering the interconnectedness of an MNC in assessing the effect of a tax policy.
The Treatment of Accounting Changes in Covenants and Debt Contracting Efficiency
(University of Waterloo, 2020-08-04) Zhu, Chunmei
Debt contracts contain accounting-based covenants that could be affected by changes in generally accepted accounting principles (GAAP). There are three types of contractual treatment of GAAP changes: excluding GAAP changes (frozen GAAP); incorporating GAAP changes (floating GAAP); and incorporating changes unless either the borrower or the lenders request a freeze (frozen-on-request GAAP). Motivated by the recent increase and current prevalence of frozen-on-request GAAP, I examine whether this type is more useful in promoting debt contracting efficiency than the other two by collecting a large sample of private debt contracts. I use false positives and false negatives as proxies for debt contracting efficiency and find significantly lower false positives and false negatives under frozen-on-request GAAP than under frozen and floating GAAP after controlling for self-selection bias. The reductions in false positives and false negatives under frozen-on-request GAAP could be attributable to its advantages in incorporating and excluding GAAP changes and in reducing renegotiation costs and facilitating renegotiations. I also find that the reductions become weak during financial crisis and when borrowers and lenders have conflicting preferences towards GAAP changes. My dissertation provides new evidence on the role of accounting standards and GAAP provision designs in improving debt contracting efficiency.
Variable pay: Is it for the worker or the firm?
(Elsevier, 2019-10) Allen, Jason; Thompson, James R.
Why do firms pay their workers with variable pay? The standard explanation appeals to a problem that the worker faces, e.g., agency. We develop a model of variable pay endogenously driven by the capital structure problem of the firm, and not a worker related problem. If workers face a low probability of job termination, firms use more variable pay, and more leverage. This can have important implications for understanding compensation practices in organizations. We provide empirical evidence consistent with firms using variable pay to increase leverage.
Equity financing restrictions and the asset growth effect: International vs. Asian evidence
(Elsevier, 2019-10) Huang, Alan Guoming; Sun, Kevin Jialin
This paper investigates the driver of asset growth to explain the cross-country variation of the asset growth effect. We find that institutional restrictions on equity financing constrain firms' abilities to grow assets, and the degree of such restrictions is associated with the observed cross-country variations of the asset growth effect. Specifically, the asset growth effect is weaker in countries with more restrictions on stock issuance and buyback. In horserace tests, equity financing restrictions supersede legal system, stock market development, and information transparency in explaining the cross-country differences of the effect. We highlight our results through a comparison of two Asian countries—Korea and China—with the United States. Our results provide evidence that country financial regulations dampen certain sources of risks in asset prices.
The Effects of Narcissism and Perspective-taking on Managers’ Escalation of Commitment
(University of Waterloo, 2020-02-19) Stapleton, Andrea
Companies often have the opportunity to invest in capital assets. Unfortunately, the benefits of such investments are not always realized and managers are challenged with deciding whether they should withdraw their support for a failing endeavour. Termed “escalation of commitment”, this phenomenon describes situations in which managers continue to fund a failing course of action despite having an opportunity to withdraw (Staw 1976). While management accounting research has largely focused on designing controls to influence the behavior of employees, more recently, researchers have begun exploring how managers’ personalities impacts their decision-making and their response to management control systems (for a brief review, see Young et al. 2016). In this dissertation, I examine the effect of an individual difference, specifically narcissism, on managers’ escalation of commitment. I also investigate the effect of prompting individuals to consider the perspective of an outside manager to reduce individuals’ support for an underperforming project and whether this prompt interacts with managers’ narcissism. Based on prior research, I predict that narcissistic managers are less likely to reinvest in an underperforming project when they can withdraw and invest in an alternative project that offers the potential for higher returns. I also predict that managers who view negative investment feedback from the perspective of an outside manager will be less likely to reinvest. Based on my expectation that narcissistic managers exhibit reduced escalation tendencies, I predict that perspective-taking will be less effective in mitigating their commitment to an underperforming project relative to managers with low narcissism. Results of an experiment completed by 228 managers do not provide support for an effect of either narcissism or perspective-taking on managers’ support for an underperforming project. Interestingly, results indicate that perspective-taking increases the escalation tendencies of narcissistic managers while having no statistically significant effect on less narcissistic managers. Given these results, I propose a theory-based explanation for narcissistic managers’ response and suggest future research opportunities. Overall, this dissertation contributes to the growing literature examining how manager’s narcissism influences decision-making in organizations and is a first step in understanding how individual differences may influence the success of management control systems.
Unprofitable Affiliates and Income Shifting Behavior
(American Accounting Association, 2017-05) De Simone, Lisa; Klassen, Kenneth; Seidman, Jeri K.
Income shifting from high-tax to low-tax jurisdictions is considered a primary method of reducing worldwide tax burdens of multinational firms. Current losses also affect income shifting incentives. We extend prior approaches by explicitly considering unprofitable affiliates and test whether the association between losses and tax incentives for unprofitable affiliates deviates from the negative association observed in profitable affiliates. Results suggest that multinational firms alter the distribution of reported profits to take advantage of losses. Our point estimate for profitable affiliates implies that an increase of one standard deviation in the tax incentive, C, of an affiliate with an average return on assets of 13.3 is associated with a lower return on assets of 0.5 percentage points. The same change in tax incentive of an unprofitable affiliate is associated with an increase in its return on assets of approximately 0.7 percentage points, holding assets, labor, productivity, and other factors constant. We further document a larger responsiveness to tax incentives between profitable and unprofitable affiliates in high-tax jurisdictions, consistent with predictions.
Improving Perceptions of Fairness and Performance through Explanation and Perspective Taking
(University of Waterloo, 2019-08-02) Wong, Christopher
Employee performance can be negatively impacted due to the occurrence of unforeseen negative events. To filter out the influence of these negative exogenous shocks on employee compensation, management can commit ex-ante to consider performing ex-post adjustments to objectively determined compensation. However, due to compensation interdependence between subordinates common to these types of incentive schemes, management may be reluctant to perform such ex-post adjustments. Employees not receiving ex-post adjustments may feel unfairly treated, suggesting the need to examine how management’s selective exercise of ex-post adjustments impact employee fairness perceptions and subsequent performance. Employees’ reaction to management’s apparent non-helping behaviour may stem in part from a lack of sensitivity to the difficulty management faces in making such adjustments. I therefore examine two interventions, perspective taking and explanation, aimed at improving employee fairness perceptions and performance. To test my predictions, I conduct an experiment with undergraduate business student participants. I find that the announcement of an ex post adjustment policy does not significantly impact participant perceptions of fairness but significantly improves performance when they encounter their first negative shock. In addition, I find that although both explanation and perspective taking significantly improve perceptions of fairness, only perspective taking improves performance after not receiving an ex-post adjustment. The current study contributes to the growing management accounting literature examining how management subjectivity in compensation contracts influence subordinate performance. This study further contributes to organizational justice literature by examining the link between fairness perceptions and task performance. Finally, my results show that perspective taking can be an effective intervention to improve employee perceptions of fairness and performance in response to receiving unfavourable outcomes, which is relevant to practitioners in designing compensation contracts for employees.
Working Smarter and Working Harder: Combining Learning and Performance Goals to Improve Performance in a High-Complexity Task Environment
(University of Waterloo, 2018-12-20) Richins, Greg
In a high-complexity task environment individual productivity can be improved through exerting more effort (i.e., working harder) as well as by learning improved task strategies. I examine the productivity effects of both learning goals and performance goals in such an environment. I argue that in a high-complexity task environment learning can often be an important predictor of task performance. As such, focusing on learning may be at least as important as working harder. Using an experiment with graduate and undergraduate accounting student participants, I predict and find that learning goals alone lead to increased learning relative to performance goals alone and that directing effort away from conventional performance toward learning does not impair task performance. I further predict that productivity can be enhanced by combining learning and performance goals. I predict that when assigning both goal types simultaneously, the presence of a performance goal will impair learning. However, I find that combining the two goal types simultaneously does not harm learning and improves performance. I further predict and find that assigning both goal types sequentially such that performance goals are assigned only after learning goals have induced learning leads to better performance than using learning goals in isolation. My results provide an understanding of the relationships among goal type, learning, and performance. This understanding contributes to the extant academic literature on goal setting and will be relevant to managers when designing and implementing management control systems.
Does the Financial Reporting Transparency of Securitization Affect Bank Lending Decisions?
(University of Waterloo, 2018-11-06) Mamo, Kaleab
This thesis examines the effect of financial reporting transparency for securitization on banks' mortgage lending decisions. Prior research (e.g., Mian & Sufi 2009, Keys, Mukherjee, Seru, & Vig 2010} shows that securitization reduces banks' incentives to screen and monitor borrowers. I posit that transparency plays a significant role by affecting bank stakeholders' ability to monitor and discipline bank lending decisions. I identify three specific channels for monitoring and discipline, namely corporate governance, regulatory oversight, and market discipline by uninsured depositors. I hypothesize that transparency affects bank risk-taking in mortgage lending, and that monitoring and discipline from external stakeholders moderates this effect. I test my hypotheses using difference-in-differences tests around five FASB pronouncements relating to securitization, issued since 1996, of which one decreases and the others increase transparency. I obtain loan-level data to construct new measures of bank risk-taking in mortgage lending based on the borrower income, loan amount and property location. I validate the proposed measures using bank-level future mortgage delinquencies and charge-offs. The main results generally do not support my hypotheses. I find that, in most cases, the effect of transparency on risk-taking is either insignificant or in the opposite direction of the prediction. These findings are robust to multiple sensitivity tests. However, I find some evidence supporting my hypotheses when comparing bank lending decisions during the least transparent period to those during the most transparent period within my sample. As a whole, my findings support the null hypothesis that transparency does not affect banks' risk-taking in their mortgage lending decisions. This conclusion is counter-intuitive and contrary to the commonly held view that transparency promotes better stakeholder monitoring of bank risk-taking. I identify alternative explanations for the null results, including: (i) whether the accounting pronouncements affect transparency as expected, (ii) the complexity of the setting, and (iii) potential noise in the data sources and the development of my measures. This thesis contributes to the literature in multiple ways. The proposed risk-measures might prove useful to future researchers examining risk-taking in mortgage lending. My findings are also relevant to the branches of literature examining the effect of securitization on bank lending decisions, the effect of transparency on bank risk-taking, and the real effects of accounting standards. This thesis might also be useful to standard setters and regulators in their attempt to improve financial reporting quality and to promote better decision making.
Disciplinary directors: Evidence from the appointments of outside directors who have fired CEOs
(Elsevier, 2018-11-01) Cai, Jay; Nguyen, Tu
By examining board appointments of outside directors who have previously fired a CEO, we study how directors’ willingness to take disciplinary actions is related to a firm's performance and risk-taking. Such directors (‘disciplinary directors’) appear to benefit firms with weak monitoring, but hurt firms in innovative industries. Firms appointing a disciplinary director subsequently exhibit lower idiosyncratic risk, leverage, and R&D expense, make fewer acquisitions, and are more likely to replace poorly performing CEOs. Overall, disciplinary directors appear to influence managerial behavior and shareholder wealth.

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