Monday, January 1, 2007


David Larcker and Brian Tayan, MBA '03, have written Corporate Governance Matters, an up-to-date reference book on corporate governance issues for board members, officers, and other stakeholders of companies. Larcker, the James Irvin Miller Professor of Accounting, directs Stanford's Corporate Governance Research Program. Pledge (and Hedge) Allegiance to the Company (PDF) Many executives accumulate substantial dollar ownership in the firm they manage as part of their compensation package. They may want to limit their exposure by hedging a portion of the position through financial instruments or pledging shares as collateral for a loan. Can boards explain why they do or do not allow executive hedging? asks Professor David Larcker. If an executive has hedged the equity position, why does the board continue to grant new equity and not cash? Sensitivity of CEO Wealth to Stock Price: A New Tool For Assessing Pay for Performance In recent years, there has been considerable debate as to whether CEO compensation is actually correlated with performance in U.S. companies. Why don’t shareholders and stakeholders examine the relation between CEO wealth and stock price to measure pay for performance and detect the potential for “excessive” risk taking, asks Professor David Larcker. Is That CEO Telling the Truth? How do you tell if CEOs are not being truthful during quarterly earnings conference calls? Stanford Graduate School of Business researchers have developed a model to analyze the words and phrases used during these calls and found some specific speech patterns that give clues. CEO Succession Planning Lags Badly Research Finds More than half of companies today cannot immediately name a successor to their CEO should the need arise, according to new research conducted by Heidrick & Struggles and Rock Center for Corporate Governance at Stanford University. The survey of more than 140 CEOs and board directors of North American public and private companies reveals critical lapses in CEO succession planning. Professor Charles Lee: Beating the Crowd at Picking Stocks His portfolio management style accounts for human biases to nudge prices closer to their real value. Incentives for Employees in Just-in-Time Settings In some manufacturing environments, having workers engage in just-in-time production can actually cause motivational problems and increase costs. The answer is to make sure employees' pay is tied to their actual productivity—and that means allowing for bad days and, consequently, some inventory build-up. Cost of Reducing CO2 Emissions Could Plunge The financial impact of regulating coal-fired power plants that produce carbon dioxide emissions under a cap-and-trade system will be much less than previously projected according to research by Stanford Business School Professor Stefan Reichelstein and doctoral student Ozge Islegen. Stanford Business School Research Underpins SEC Scrutiny of Scheduled Insider Trades In the wake of alleged misconduct by executives at Countrywide Savings, Novatel, and Qwest, research by Stanford accounting professor Alan Jagolinzer may be prompting the Securities and Exchange Commission to rethink rules that permit scheduled trading by insiders.  How Good Are Commercial Corporate Governance Ratings? A study by Stanford law and business faculty members casts strong doubt upon the value and validity of the ratings of governance advisory firms that compile indexes to evaluate the effectiveness of a publicly held company’s governance practices. “Everyone would agree  that corporate governance is a good thing,” said Business School Professor David Larcker, “but can you measure it without even talking to the companies being rated?”

Do CEOs Make the Best Board Members?

A new survey from Stanford's Rock Center and Heidrick and Struggles examines the pros and cons of CEOs serving as board members. Active CEOs might be "too busy" to be effective and, say the researchers, CEOs may be more tainted by ethics lapses than board directors.

7 Myths of Executive Compensation

Corporate governance experts from Stanford Graduate School of Business say criticism of CEO pay might be off the mark.

Tunneling Through Intercorporate Loans Damages Company Value

Majority shareholders who divert assets from one company to another for personal benefit can be found in some developing nations, robbing companies of value and even forcing them to be delisted from stock exchanges. Business school professor Charles M.C. Lee and his coauthors documented the damage in a study of Chinese companies.

Firms in Corrupt Countries Pay a Price in Market Value

Virtue seems to pay according to Professor Charles M.C. Lee whose research shows that publicly-held firms in countries perceived as less corrupt trade at bigger market premiums than those in places deemed more corrupt.

Why Does Corporate Governance Really Matter?

Understanding the Linkage Between ROI and the Economic Rate of Return What does return on investment really mean? A new tool gives investors and managers help decoding the true economic profitability of a business based on reported accounting metrics. (January 2007)

Despite Uproar, European Investors Favor Global Accounting Standards International accounting standards, designed to globally align corporate accounting practices, raised quite a stir when the European Union ordered publicly-traded firms to adopt them. Now researchers say European investors generally responded positively to the idea of replacing country-specific accounting rules with these new standards. (October 2006)

Excessive Executive Pay Makes Headlines, But So What? The business press loves to expose stories of excessive executive compensation. Professor David Larcker says the media may single out egregious cases, but the unflattering publicity doesn't seem to make any difference in how firms pay those top executives. (April 2008 )

Financial Statements Are Still Valuable Tools for Predicting Bankruptcy Despite growing public skepticism over how useful financial statements are in providing information to investors, researchers at Stanford's Graduate School of Business have found that the value of financial ratios for predicting bankruptcy has not declined significantly over time. (November 2005)

Nonfinancial Data Can Predict Future Profitability Looking at customer relationship metrics in conjunction with other financial measurements can forecast a financial profitability number for the coming year 15 percent closer to the actual figure, says accounting Professor Madhav Rajan. (November 2005)

The Bond-Rating System Isn't Broken, Say Researchers Just days before WorldCom went bankrupt, Moody's rated the firm's stock "investment grade." This does not mean the current bond-rating system isn't working, say researchers. The rating was appropriate for Moody's specialized institutional clientele. (April 2005)

Smart Startups Don't Wait to Set Up Accounting Systems A new study finds that young companies that acted quickly to institute formal accounting systems, such as operation budgets, cash budgets, and financial monitoring systems, had higher growth rates in terms of revenues and head count than their peers. (February 2005)

Use Weighted Averages to Determine Transfer Pricing Transfer pricing, determining how to price goods shipped between related companies often in different countries, has long been debated by accountants and managers. Researchers now say that using weighted averages to determine prices can solve the dilemma. (October 2004)

Measuring Executive Accountability Shareholders are demanding incentives to force executives to focus on creating corporate value. This trend may mean that managers are less willing to engage in projects that increase value way down the line, value that isn't measured—and therefore rewarded—now. (May 2002)

Following Analysts Advice Can Pay off A study of accuracy and bias among securities analysts finds they are good at identifying mispriced stocks. Where they really add value is in analyzing small and medium sized companies where the market is slow to digest information. (March 1999)

Safe Harbor Law Boosts Corporate Disclosure The so-called Safe Harbor Law, designed to protected executives who provide projections about their firm's behavior, has increase both the frequency of forecasts and the average number of forecasts issued. (May 1998)

The Trouble with Good News The securities research analysts who advise your broker on the best stock market picks may not be trying to mislead you deliberately, but beware of their rosy attitudes. Research has turned up evidence that equity analysts' earnings forecasts are persistently overoptimistic. (June 1997)

Accounting for Toxic Cleanup Corporations have long argued about how their books should reflect liabilities for Superfund Site cleanups. Two researchers say that investors are already discounting stocks known to have these liabilities. Providing more factual information could ultimately benefit stock prices. (February 1996)