This research links together disparate literature on family and nonfamily firms, large and small firms, and risk for small firms. The literature is not coherent in one theme: whether family firms operate with greater risk relative to nonfamily firms. Yet the literature finds performance advantage to family firms without an explanation of why family firms on average generate better accounting returns and values relative to nonfamily firms other than for reduced agency costs translated into value. The first essay examines two measures of risk--debt ratio and idiosyncratic risk--of small publicly held family firms relative to nonfamily firms to investigate differences in financial risk between them. Using a unique hand-collected data set of small family and nonfamily firms, I analyze certain firm characteristics (family ownership, family member on the board, size, and dual class status) and find that family and nonfamily firms do not differ in their book-based debt ratios but do differ in their market-based debt ratios. Specifically, I find that family firms that tightly control voting rights through dual class status have higher debt ratios and hence have higher risk than nonfamily firms. Furthermore, I find a positive relation between idiosyncratic risk and family ownership, and I find as the percentage of family ownership increases idiosyncratic risk increases. The second essay utilizes the likelihood of incentive compensation presence and incentive compensation ratio of small publicly held family firms relative to nonfamily firms to investigate differences in CEO dividends and incentive compensation. The tools available for boards of directors to incentivize CEOs to act in accordance with diverse shareholder wishes, including risk-taking, investment selection, and the on-the-job consumption of resources, are stock options, stock grants, and cash bonuses. I argue that agency theory in practice is imperfect in incentive contracting. Specifically, CEO dividends and family ownership reduce the likelihood of the existence of an incentive compensation plan. I find in the presence of CEO dividends that family and nonfamily firms differ in their incentive compensation ratios and the likelihood of incentive compensation. In my sample, I find a significant negative relation between the CEO dividend income ratio and the incentive compensation ratio and between family ownership percentage and the incentive compensation ratio. Lastly, consistent with current literature, I find that growth opportunities positively influence both family and nonfamily firms' incentive compensation ratios.

The ability of auditors to detect fraud, including intentional material misstatements in earnings, remains key to the credibility of audit firms and confidence in capital markets. The PCAOB concludes from its most recent inspections of public company audits that auditors often fail to assess and respond to risks of material misreporting by management. In a behavioral experiment, this study concludes that auditors can increase sensitivity to management motivation to misreport by actively seeking to transform identified risk factors focused on the organization, into factors focused on top managers, and to evaluate whether these manager-focused risk factors represent incentives for personal gain or pressures to avoid a personal loss on the managers. Currently, auditing standards use incentive and pressure as interchangeable constructs, but auditors in this study assess pressure on managers to avoid a loss as a greater risk than an incentive to managers to attain a gain. Results also demonstrate that auditors will be made more sensitive to fraudulent financial reporting risk when focusing on pressure on top managers, than they will be by engaging in a traditional process of assessing total fraud risk based on the three fraud triangle elements. This study is the first to propose a theoretical explanation for why prior studies reflect auditor insensitivity to organizational level fraud risk factors. This study is also the first to enhance knowledge about auditor risk assessment and decision-making through the application of prospect theory and through disaggregation of one of the three elements of the fraud triangle model, by differentiating between incentive and pressure for misreporting earnings.

Cette thèse est composée de 3 essais. Le 1er essai traite de la problématique du risque de pertes extrêmes dans le secteur bancaire dans un contexte du problème d'agence entre les actionnaires et les top managers des banques. Pour pouvoir inciter les banques à ne pas prendre le risque de pertes extrêmes, il est proposé d'appliquer la régulation des fonds propres sous forme d'une politique de recapitalisations obligatoires, dont les paramètres sont choisis pour inciter les actionnaires à rémunérer leurs managers de la manière à les détourner des stratégies au risque de pertes extrêmes.Le 2ème essai développe le design de la supervision bancaire qui vise à éliminer le problème d'aléa moral au sein d'une banque, tout en assurant un coût minimum de supervisions. Les banques, dont la situation financière commence à se dégrader, doivent être soumises à des audits aléatoires. Les banques, dont la valeur de l'actif s'est dégradée considérablement, doivent être mises sous tutelle pour un redressement financier. Les auditeurs externes peuvent être impliqués dans le processus de supervision, mais ne doivent pas complètement remplacer les régulateurs. Le 3ème essai étudie comment la capacité d'emprunt de l'entreprise non-financière affecte sa politique d'investissement en présence des coûts d'émission de la dette. Il est montré que les entreprises, dont la capacité d'emprunt est moyenne, ont intérêt à réaliser un investissement plus important par rapport aux entreprises dont la capacité d'emprunt est relativement faible/forte. Cela est entièrement dû à l'effet des coûts fixes d'émission de la dette, qui émerge dans le contexte dynamique d'investissement. / This dissertation consists of 3 self-contained theoretical essays.Essay 1 brings into focus the problem of "manufacturing" tail risk in the banking sector. This work shows that, in order to prevent banks from engaging in tail risk, bank capital regulation should account for the internal agency problem between bank shareholders and bank top managers. It is proposed to design bank capital requirements in the form of incentive-based recapitalization mechanism which would induce bank shareholders to shape executive compensation in such a way as to prevent top managers from engaging in tail-risk.Essay 2 deals with the problem of moral hazard in bank asset management. It proposes the concept of incentive-based bank supervision aimed at preventing moral hazard at a minimum cost to the regulator. It is shown that the intensity of supervision efforts should be gradually adjusted to the bank's financial health: banks in the mild form of distress should be subject to random audits, whereas deeply distressed banks should be placed under temporary regulatory control. To prevent double moral hazard, external auditors involved in supervision should be offered the optimal incentive contract.Essay 3 examines the impact of credit rationing (debt capacity) on corporate investment in the setting with costly debt financing. It is shown that, when credit constraints are binding, the firms with intermediate levels of debt capacity will establish larger investment projects than the firms with relatively low or high debt capacity. This non-monotonicity of investment on debt capacity arises due to the effect of the lump-sum debt issuance costs in the dynamic context of investment.