BUILDING EXPECTATION - Lundquist College of Business ...

ABSTRACTSEquity Grants to TargetCEOs in Deal NegotiationsBy Shane HeitzmanI investigate the determinants andconsequences of equity grants made totarget CEOs during deal negotiationsprior to a public merger announcement.Using a novel dataset on CEOinvolvement in deal negotiations, I findthat CEOs who negotiate for the targetare more likely to receive equity duringnegotiations than those who do not(that is, when an advisor or directornegotiates instead). This suggeststhat the board uses equity grants toincrease bargaining incentives whenthe CEO has influence over purchaseprice. These negotiation grants are alsosomewhat larger when there are moreindependent directors on the target’sboard. I also find some evidencethat negotiation grants are used tocompensate the CEO: when the boardhas fewer independent directors, aCEO that does not negotiate is morelikely to get negotiation period grantswhen the expected takeover premiumis high. My findings do not supportrecent claims that CEOs who getequity during negotiations negotiatesignificantly smaller premiums for theirshareholders.Capitalization of OperatingLeases and Future OperatingIncomeBy Roger C. Graham andRaymond D. KingOperating leases are used to acquirethe use of assets without acquiringlegal title. Accordingly, accountingprocedures require that firms valueoperating lease obligations at theright-of-use values of the leasedassets rather than the market valuesof the assets themselves. A firm’searnings are generated from the assetscontrolled by the firm, whether or notthe assets are recorded by the firm’saccounting system. In this study we testfor associations between current andfuture earnings and three estimatesof operating lease asset values. Thethree estimates of lease asset valuesare (1) the present value of disclosedfuture minimum lease payments (theestimated right-of-use asset valuefrom the firms’ disclosed minimumcontractualleaseobligations);(2) the presentvalue ofthe currentoperating leasepayment (anestimate of thevalue of theassets underfirm control);and (3) thepresent valueof the projectedfuture operatinglease paymentsextrapolatedfrom past leasecost patterns (an alternative estimateof the value of the assets under firmcontrol). We find that the right-ofuseleased asset value (measure 1)is strongly associated with currentand future earnings. However, thetwo measures of lease asset valuewhich reflect more information aboutthe values of the underlying assets(measures 2 and 3) are even morestrongly associated with current andfuture earnings than are the rightof-useleased asset values. Thatis, capitalized values that reflectinformation about the total value ofthe asset to the firm have marginalexplanatory power beyond that ofcontractual lease payments alone.Dale Morse, Annie Flatz, and Colin Slade at the 2009 Accounting Circle fallmeeting. The Accounting Circle helps provide funding for accounting facultyresearch.The Role of Technical Expertisein Firm Governance Structure:Evidence from Chief FinancialOfficer Contractual IncentivesBy Angela Gore, Steve Matsunaga,and Eric YeungWe provide evidence that thepresence of technical expertise infirm governance structure reducesreliance on contractual incentives tocontrol the potential agency problemfor executives whose responsibilitiesrequire specialized knowledge.Specifically, we find that firms withfinancial expertise in the form of aboard finance committee, or a chiefexecutive officer (CEO) with a financialbackground, tend to use lower levelsof incentive-based compensation fortheir chief financial officers (CFOs).Our findings suggest financial expertsprovide stronger oversight and directionwith regard to firm financial policiesand strategies, thereby allowingfirms to reduce reliance on incentivecompensation. Our study providesinsight into the role of technicalexpertise and board committees in firmgovernance, and into the benefits ofcommon functional expertise within topmanagement teams.Accounting Complexity andMeeting ExpectationsBy Josh Filzen and Kyle PetersonWe examine whether firms withcomplex accounting are more likely tomeet or beat analysts’ expectations. Wemeasure accounting complexity usingthe residuals from a regression thatexplains accounting policy measurelength. Our results suggest that firmswith complex accounting are morelikely to just beat expectations thanjust miss expectations (i.e., they canmeet expectations at the margin).However, in general, complex firmsare more likely to have extremeabsolute forecast errors. Additionaltests reveal that the increasedpropensity to meet expectations is atleast partially driven by expectationsmanagement. However, theexpectations management is onesided;complex firms appear to walkdown expectations, but not prevent thewalk up of expectations. These resultssuggest managers take advantage ofaccounting complexity to meet analystexpectations in limited circumstances.9