Research Findings/Insights: Using a manually collected sample of PCODs in Korean chaebol firms, we find that larger, high-performing, less volatile firms with a larger board and higher divergence between voting rights and cash flow rights are more likely to appoint PCODs in the next year. We also report that firms with a high number of PCODs exhibit better operating performance and enjoy lower risk. On the other hand, we find evidence of weak monitoring ability by PCODs. Overall, we suggest that the number of PCODs correlates positively with firm performance, and that the value effect of PCODs increases with the importance of internal trade among group affiliates, the existence of inside directorship by controlling shareholders, and potential settlements from pending litigation. We further differentiate between PCODs and find that former government officials as PCODs drive our findings.Theoretical/Academic Implications: This study contributes to corporate governance knowledge by revealing the relationship between PCODs and firm performance via an empirical inquiry into the role of PCODs on the board. As the controlling shareholders of Korean chaebol firms obtain greater private benefits of control, and such firms may face active government involvement in curbing controlling shareholders' rent extraction, we examine the role and effects of PCODs in these situations and find evidence of the PCOD's value-enhancing effect. We also complement and extend prior studies by providing more direct mechanisms through which PCODs can add value above and beyond firms' ownership structure. Additionally, we expand the concept of political connection by analyzing outside directors' human and social capital from the resource dependence theory perspective. Our attempt complements prior research's exclusive focus on connections of large shareholders or top executives to political parties and is more comprehensive in illustrating the firm's dynamic business environment.Practitioner/Policy Implications: The results of our study are potentially useful to regulators, who will benefit from an understanding of how the presence of PCODs on boards affects firm performance. In particular, our results suggest that in countries where recent reforms aim to improve minority investor protection and market confidence, regulators should consider the composition of outside directors as well as explicit board independence. The results of our study may also be useful to investors, financial analysts, and auditors, as they highlight the importance of considering specific features of board composition when assessing firms' future operating performance and risk mechanisms.
The authors examine factors influencing the executive pay multiple (executive-employee pay disparity) and its effects on performance. using unique data from Korea, where all publicly listed firms are required to provide detailed information on average employee pay in their annual reports, they find that a substantial portion of crosssectional variation in the executive pay multiple is explained by the firm's economic and political characteristics. Results also indicate that the executive pay multiple has a statistically significant negative relation with subsequent operating and stock return performance. A two-stage approach, however, reveals that the performance effects of the executive pay multiple are likely to be influenced more by deviations from the expected executive pay multiple, estimated using the first-stage determinant model, than by the absolute pay multiple per se. The study sheds light on recent debates regarding the usefulness of executive pay multiple disclosure. P ublic outcry in response to growing social and economic inequality is now a global phenomenon. At the heart of this public fury lies extreme income inequality allegedly linked to corporate greed and excessive executive compensation (New York Times, October 8, 2011). Prior studies in *Jae yong shin is an Associate Professor of Accounting at seoul national university. sung-choon Kang is an Associate Professor of human Resources at seoul national university. Jeong-hoon hyun received his PhD in Accounting from seoul national university. Bum-Joon Kim received his PhD in Accounting from seoul national university. The authors thank hye-Jin Ahn, Do-hyung cha, Jaeryung cho, Jeh-hyun cho, Kyung-ho ha, Kyung gu lee, and Jee-eun shin for their valuable research assistance. We also thank curtis hall, lee-seok hwang, youngki Jang, Kyung-Tae lee, ella mae matsumura, Jeongil seo, Dae-hee yoon, brown-bag and workshop participants at Korea university, yonsei university and seoul national university, and conference participants at the 2012 American Accounting Association Annual meeting and the 2013 American Accounting Association management Accounting section Research conference for their helpful comments. The paper was supported by Deloitte Korea and samil Pricewaterhousecoopers for shin and by the Institute of management Research at seoul national university for Kang. Requests regarding computer programs and additional results should be sent to the corresponding author (sung-choon Kang) at sk229@snu.ac.kr. The results of separate analyses for executive and employee pay will also be available upon request.
We examine factors influencing firms' strategic disclosure of executive pay in Korea. In Korea, executive pay is disclosed through directors' pay disclosure in a firm's annual report. Because the disclosure rules in Korea do not mandate but only recommend that firms distinguish between inside executive directors and outside nonexecutive directors when reporting the average pay of directors, this regulatory policy provides a unique opportunity to examine managers' incentives to opportunistically manage the disclosed levels of average executive pay. We find that strategic disclosure for cloaking executive pay prevails when firms have weak corporate governance and high (low) political costs of disclosing high levels of executive pay (making strategic disclosures), but that such disclosure is not associated with proprietary costs. Furthermore, using the subsample of firms that can choose between different types of strategic disclosures, we examine whether firms base their choice on the political costs of making the strategic disclosures. In our data setting, there are two major ways of strategically managing the disclosed average executive pay downward: (1) deliberate aggregation of inside and outside director pay in the calculation of average director pay, and (2) inclusion of part-time inside directors who receive a minimal or substantially low level of pay (which, of the two schemes, is the less visible). Our results suggest that the higher the political costs of a firm's strategic disclosures are, the less visible the firm's cloaking of executive pay will be. Data Availability: Data are available from public sources identified in the text.
Accounting rules mandate that the cost of debt should be recorded as an expense, while the cost of equity does not appear in the income statement. Therefore, the amount of financing expense, and thus net income, in the income statements depends on how firms finance their business. Based on a clear, substantial trend of declining leverage since the 1990s, we examine how changes in capital structure might influence earnings attributes—the matching between revenues and expenses. We find that the contemporaneous relation between revenues and interest expense in US firms has decreased from 1972 to 2013, a result of both changes in leverage and the declining explanatory power of interest expense with respect to revenues. When we construct the weighted average costs of capital based on the costs of both debt and equity, we find the contemporaneous relation between revenues and the costs of capital has not significantly changed. Our results indicate that differential accounting treatment of the costs of debt and equity can affect earnings attributes through change in capital structure.
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