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This thesis comprises of three chapters. The first essay is titled ‘Managers: Their Effects on Accruals and Firm Policies' and is joint work with Douglas V. DeJong. The second essay is titled ‘Can the Capital Market Recognize a Manager's Financial Reporting Style?' and is sole-authored. The third essay is titled ‘Executive Compensation in a Matching Model’ and is joint work with Douglas V. DeJong, Elena Pastorino and B. Ravikumar.
Chapter one investigates whether top executives have significant individual-specific effects on accruals that cannot be explained by firm characteristics. Exploiting 37 years of individual executives and firm data, we find that individual executives play a significant role in determining firms' accruals. In addition, we examine whether executives' effects on accruals are related to their personal styles in investment, financing and operating decisions. Our results show that individual executives' effects on accruals are more correlated to their operating decisions than investment and financing decisions. We also compare effects exerted by CEOs to CFOs. We find CEOs are more likely to affect accruals through firm policy decisions and CFOs are more likely to affect accruals through accounting decisions. CFOs tend to report more "solid" earnings than CEOs, i.e., CFOs are more likely to push accruals to zero.
Chapter two examines whether investors can recognize idiosyncratic differences in managers' financial reporting behavior. Specifically, I investigate whether the capital market can recognize a manager's financial reporting aggressiveness and whether investors' recognition of a manager's style follows a Bayesian learning process. I use a manager's specific effect on discretionary accruals to measure her financial reporting aggressiveness. My results show that investors find earnings forecasts issued by aggressive managers to be less credible and thus respond less strongly. I also find investors follow a Bayesian learning process to identify a manager's individual style. As a manager's financial reporting history becomes longer, there is less uncertainty about the manager's true style. Consequently, the discount on the market reaction to earnings forecast news due to the manager's aggressiveness becomes larger. In sum, these results suggest that a manager's prior financial reporting history allows her to develop a financial reporting reputation, which can be inferred by investors through rationally processing historical information.
Chapter three outlines our future research plan to revisit the relative importance of returns to firm-specific tenure and to general labor market experience in the labor market for executives. We shed light on the importance of explicitly accounting for an executive's firm-to-firm and job-to-job mobility, within and across firms, over the course of the executive's career in order to measure the magnitude of each type of returns.