We analyze the effect of committee formation on how corporate boards perform two main functions: setting CEO pay and overseeing the financial reporting process. The use of stock-based pay schemes induces the CEO to manipulate earnings, which leads to an increased need for board oversight. If the...

This paper shows that permitting executives to use inside information to time their option exercises can be part of an optimal pay arrangement. This is the case even though timing discretion enables executives to avoid losses by cashing out options on bad news, weakening the link between pay and...

This paper analyzes how board independence affects the CEO's ability to extract rents from the firm. The CEO is assumed to possess private information about his ability, which the board needs in order to decide whether to replace him. If the board is more active in removing low quality CEOs, the...

When performance measures are used for evaluation purposes, agents have some incentives to learn how their actions affect these measures. We show that the use of imperfect performance measures can cause an agent to devote too many resources (too much effort) to acquiring information. Doing so...

This paper shows that a capital budgeting process in which the division manager is required to engage in personally costly influence activities prior to a project approval has beneficial incentive effects: It provides the manager with incentives to acquire costly information about project...

This paper analyzes how board independence affects the CEO's ability to extract rents from the firm. The CEO is assumed to possess private information about his ability, which the board needs in order to decide whether to replace him. If the board is more active in removing low quality CEOs, the...

When performance measures are used for evaluation purposes, agents have some incentives to learn how their actions affect these measures. We show that the use of imperfect performance measures can cause an agent to devote too many resources (too much effort) to acquiring information. Doing so...

This paper shows that a capital budgeting process in which the division manager is required to engage in personally costly influence activities prior to a project approval has beneficial incentive effects: It provides the manager with incentives to acquire costly information about project...

Various commentators have praised the WorldCom and Enron settlements for holding outside directors personally liable, arguing that heightened director liability will induce greater board oversight. This paper shows that the connection between director liability and board behavior is more subtle,...

The accounting profession has raised concerns that excessive liability exposure renders audit firms unwilling to provide audit services to risky clients, limiting the prospective clients' ability to raise external capital. In this paper we address this concern in a model where the auditor...