This Dissertation consists of two essays. The first essay studies the causal impacts of compensation disclosure on executive compensation, turnover, and executives’ job responsibilities. We find that, after the SEC mandates the disclosure of Chief Financial Officers (CFOs)’ compensation in 2006, CFO pay increases significantly relative to CEO pay, particularly in firms most affected by the mandate. CFOs are more likely to leave their firms following poor performance. The results are absent for the CEO or other executives, suggesting they are unique outcomes of enhanced CFO compensation disclosures. The evidence is consistent with more intense monitoring following the disclosure mandate. CFOs require additional compensation for the loss of private benefits due to greater monitoring and are subject to greater internal discipline. There is also some evidence that the CFOs hide bad news and lower corporate reporting quality after the mandate, suggesting that CFOs engage in more short-term behavior to boost their performance and avoid termination.
The second essay of my dissertation focuses on the idiosyncratic volatility puzzle - the negative relation between estimated idiosyncratic volatility and the subsequent month returns documented by Ang et al (2006). We document a systematic pattern of temporary increases in the estimated idiosyncratic volatility for the quintile of stocks with the highest estimated idiosyncratic volatility in a given month. A large portion of this temporary increase in the estimated idiosyncratic volatility is reversed in the subsequent month. This temporary increase in the idiosyncratic volatility for the quintile of stocks with the highest estimated idiosyncratic volatility is associated with relatively large positive returns (positive abnormal returns) in the estimation month and relatively low returns (negative abnormal returns) in the subsequent month. Our evidence shows that these temporary increases in the estimated idiosyncratic volatility and the related positive and negative abnormal returns in the estimation and subsequent months, respectively, create a negative relation between the estimated idiosyncratic volatility and subsequent month returns documented in the prior literature (Ang et al. 2006). We find no significant relation between idiosyncratic volatility and subsequent returns for eighty percent of the stocks that do not exhibit large changes in idiosyncratic volatility despite large differences in the levels of their idiosyncratic volatility. Finally, there is no relation between the estimated idiosyncratic volatility and subsequent returns after a lag of 3 months when the abnormal returns associated with temporary changes are no longer present. Overall, our results are consistent with the notion that there is no relation between the true underlying idiosyncratic volatility and expected returns, and that the previously documented negative relation between estimated idiosyncratic volatility and subsequent month’s returns is being driven by temporary one-month increases in the estimated idiosyncratic volatility and the associated abnormal returns for a subset of stocks. / Ph. D. / The disclosure of executive compensation is an important issue because it affects the investors’ ability to monitor the firms’ compensation practices. Properly designed compensation contracts, in turn, incentivize the executives to make decisions that serve the investors’ interests. The SEC has made continuous regulatory efforts to monitor the executive compensation and has adopted several disclosure rules. However, the impacts of such enhanced compensation disclosure has not been well understood. My first essay studies the impacts of compensation disclosure on executive compensation, turnover, and executives’ job responsibilities. We find that, after the SEC mandates the disclosure of Chief Financial Officers (CFOs)’ compensation in 2006, CFO pay increases significantly relative to CEO pay, particularly in firms most affected by the mandate. CFOs are more likely to leave their firms following poor performance. There is also some evidence that the CFOs hide bad news and lower corporate reporting quality after the mandate, suggesting that CFOs engage in more short-term behavior to boost their performance and avoid termination.
Traditional asset pricing models in which investors hold well-diversified portfolios imply that there should be no relation between firm specific risk (the idiosyncratic volatility) and the expected returns. However, Ang et al (2006) document that stocks with high firm specific risks earn low subsequent returns. The significant negative relation between firm specific risk and subsequent returns has puzzled many researchers. The second essay of my dissertation provides a possible resolution to this puzzle.
| Identifer | oai:union.ndltd.org:VTETD/oai:vtechworks.lib.vt.edu:10919/83502 |
| Date | 08 June 2018 |
| Creators | Li, Hongyan |
| Contributors | Finance, Xu, Jin, Kumar, Raman, Keown, Arthur J., Easterwood, John C. |
| Publisher | Virginia Tech |
| Source Sets | Virginia Tech Theses and Dissertation |
| Detected Language | English |
| Type | Dissertation |
| Format | ETD, application/pdf |
| Rights | In Copyright, http://rightsstatements.org/vocab/InC/1.0/ |
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