Running the Company
Silent Suffering: Using Machine Learning to Measure CEO Depression
Sung-Yuan (Mark) Cheng & Nargess Golshan
Journal of Accounting Research, May 2025, Pages 689-767
Abstract:
We introduce a novel measure of CEO depression by applying machine learning models that analyze vocal acoustic features from CEOs' conference call recordings. Our research was preregistered via the Journal of Accounting Research's registration-based editorial process. In this study, we validate this measure and examine associated factors. We find that greater firm risk is positively associated with CEO depression, whereas higher job demands are negatively associated with CEO depression. Female and older CEOs show a lower likelihood of depression. Using this novel measure, we then explore the relationship between CEO depression and career outcomes. Although we do not find any evidence that CEO depression is associated with CEO turnover, we find some evidence that turnover-performance sensitivity is higher among depressed CEOs. We also find limited evidence of higher compensation and higher pay-performance sensitivity for depressed CEOs. This study provides new insights into the relationship between CEO mental health and career outcomes.
Compensation Consultants: Whom do they serve? Evidence from Consultant Changes
Ryan Chacon, Rachel Gordon & Adam Yore
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We investigate whether compensation consultants recommend excessive pay to earn repeat business by studying consultant changes. Our results show consultants' interests are aligned with shareholders to appropriately pay the CEO. Boards dismiss consultants making large pay recommendation errors, particularly positive ones. However, powerful or poorly monitored CEOs interfere with such disciplinary turnover, weakening the relation. Peer groups are more likely to change with new consultant appointments. New consultants are less likely to include highly paid executives in the compensation peer group and CEO pay falls following the change. Directors earn higher votes in annual elections when they replace compensation advisors.
Private Equity and Workers: Modeling and Measuring Monopsony, Reallocation, and Trust
Josh Lerner et al.
Harvard Working Paper, March 2025
Abstract:
We measure the real effects of private equity buyouts on worker outcomes by building a new database that links transactions to matched employer-employee data in the United States. To guide our empirical analysis, we derive testable implications from three theories in which private equity managers alter worker outcomes: (1) exertion of monopsony power, (2) breach of trust of implicit contracts with workers, and (3) efficient reallocation of workers across plants. We do not find any evidence that private equity-backed firms vary wages and employment based on local labor market power proxies. Moreover, layoffs and wage losses are very similar across occupation and employee characteristics, suggesting a rejection of the breach of trust hypothesis. We find strong evidence that private equity managers downsize less productive plants relative to productive plants while simultaneously reallocating high-wage workers to more productive plants. We conclude that post-buyout employment and wage dynamics are consistent with professional investors providing incentives to increase productivity and monitor the companies in which they invest.
The Rise of Venture Capital and IPO Quality
Amrita Nain, Jie Ying & Joseph Arthur
Journal of Empirical Finance, forthcoming
Abstract:
We show that an increase in the supply of venture capital (VC) leads to a decline in the quality of firms going public. We argue that due to VC selectivity, private capital flows disproportionately to the most promising firms causing them to hold back from public issuance. Post-IPO abnormal returns indicate that the stock market does not fully incorporate this decline in quality at the time of the IPO. Our research adds to recent evidence on the negative impact of fast-growing private markets on Main Street investors.
Timely Cybersecurity Disclosure and Information Manipulation
Xuanpu Lin & Guoman She
Management Science, forthcoming
Abstract:
Regulators have increasingly mandated firms to promptly disclose material cybersecurity incidents upon discovering these incidents. We find suggestive evidence indicating that some firms manipulate the discovery date ("misreport") of a cybersecurity incident to postpone the disclosure of the incident, as evidenced by a pronounced spike in insider sales before the reported discovery date. We also find that misreporting is more prevalent among firms with weak internal control systems, when firms face low litigation risk, and when firms have greater pressure to meet a disclosure deadline. Further, firms suspected of misreporting tend to disclose their remedial actions and assert the restoration of business, mitigating negative market reactions upon disclosure of incidents. Collectively, our results suggest that firms might strategically misreport information about a cybersecurity incident to delay disclosure to gain additional time for remedial actions, which helps them prevent exposing vulnerabilities to malicious actors and alleviate stakeholder anxiety.
What Happens to Partners Who Issue Adverse Internal Control Opinions?
Ashleigh Bakke et al.
Journal of Accounting Research, May 2025, Pages 649-688
Abstract:
We investigate how audit firms balance the tension between professional responsibility and client service by examining changes in partner assignments following adverse internal control opinions (ICOs). We find that partners are significantly more likely to be reassigned when they issued an adverse ICO to any of their clients in the previous year. Further, partners issuing adverse ICOs experience unfavorable changes in their client portfolios in the form of lower fees and less prestigious assignments. We find that consequences are more negative when adverse ICOs are issued to clients that are more important to the local office and that there are no consequences when partners issue continuing adverse opinions to clients they have "inherited" from an original adverse ICO partner. We also find that the consequences are stronger for partners of non-Big 4 audit firms that are likely to be more sensitive to client service considerations. The negative portfolio effects we observe persist for at least three years, and our findings are robust to restrictions involving mandatory partner rotation and adverse ICOs that lead to client loss. Overall, our results are consistent with adverse ICO partners experiencing negative consequences as audit firms respond to client service incentives in the area of internal controls over financial reporting.
Do Managers Successfully Shop for Auditors Who Allow Them to Opportunistically Report Positive News? Evidence from Accounting Estimates
Mark DeFond, Jieying Zhang & Yuping Zhao
Management Science, forthcoming
Abstract:
Prior auditor shopping literature examines managers' attempts to opportunistically underreport negative news by finding auditors who will allow them to avoid negative audit opinions or underreport goodwill impairments or financial misstatements. We advance this literature by examining management attempts to opportunistically report positive news, as captured by income-increasing changes in accounting estimates. Adapting a previous framework, we find that, ex ante, managers are more (less) likely to dismiss their auditor if it increases (decreases) the expected likelihood of reporting income-increasing changes in accounting estimates (POSCHGs). We also find that, ex post, following auditor dismissals, the frequency and magnitude of POSCHGs increase, and companies reporting POSCHGs are more likely to restate earnings, receive Securities and Exchange Commission comment letters related to estimates, meet or beat earnings targets, and less likely to receive going concern opinions or violate debt covenants. Placebo tests show that none of the above results hold for income-decreasing changes in estimates. Finally, we identify several institutional factors that constrain managers' ability to shop for lenient auditors, including the quality of the successor auditor and strong corporate governance. Collectively, our findings are consistent with managers successfully shopping for auditors who allow them to opportunistically report positive news following auditor dismissals.
Redaction as Cross-Regulatory Disclosure Avoidance
Ioannis Floros, Shane Johnson & Wanjia Zhao
Journal of Accounting Research, May 2025, Pages 807-855
Abstract:
We introduce the idea of cross-regulatory disclosure avoidance, whereby firms attempt to counteract expansions of disclosure under one regulation through actions that reduce disclosure under a different one. We study whether firms redact information from material contracts when they face new rules to disclose segment information. Using SFAS No. 131 as a plausibly exogenous shock to segment disclosure, we find that firms increasing the number of reported segments after the rule change exhibit a greater increase in redaction than firms maintaining the same number of segments. Consistent with proprietary cost motives, the increases are concentrated among firms with greater divergence in profitability across segments, higher abnormal segment profitability, and more negative abnormal stock returns in response to the finalization of the rule. Also, treated firms that redact after the rule change have abnormally profitable segments that they previously did not disclose. Firms that observables predict would increase redaction but did not experience declines in sales growth and profit margin. We find no evidence that agency cost motives drive the increases in redaction or, more generally, nondisclosure of segment performance before SFAS No. 131.