Yonca Ertimur

Assistant Professor of Accounting
Ph.D. New York University, 2003

Working Papers

“Shareholder Activism and CEO Pay ” with Fabrizio Ferri and Volkan Muslu

Abstract: CEO pay has become a major governance concern among investors in recent years, raising the question of whether monitoring mechanisms currently available to shareholders are sufficient. We study a sample of 134 vote-no campaigns and 1,198 non-binding shareholder
proposals related to executive pay between 1997 and 2007. We find that shareholders are sophisticated enough to identify firms with excess CEO pay both when targeting firms and when casting their votes. Proposals that try to micromanage level or structure of CEO pay receive little or no voting support. Instead, shareholders favor proposals related to the pay setting process (e.g., subject certain compensation items to shareholder approval). These proposals are also more likely to be implemented. In some cases, compensation-related activism has a moderating effect on CEO pay levels. Firms with excess CEO pay targeted by vote-no campaigns experience a 7.3 million reduction in total CEO pay. The reduction in CEO pay is $2.3 million in firms targeted by proposals sponsored by institutional proponents and calling for greater link between pay and performance. Our findings contribute to the current debate on the proposed adoption of a “say on pay” shareholder vote on executive pay.

“Why are Recommendations Optimistic? Evidence from Analysts' Coverage Initiations ” with Volkan Muslu and Frank Zhang

Abstract: We examine the long-term stock performance of analyst recommendations and the properties of accompanied earnings forecasts for initiations and non-initiations to evaluate the reporting, selection, and processing explanations for analyst optimism. We find that Strong Buy initiation recommendations under-perform their non-initiation counterparts after controlling for analyst, brokerage and firm characteristics associated with the initiation decision and expected long-term stock returns. Yet, earnings forecasts accompanying Strong Buy initiation recommendations are less optimistic and more accurate than those accompanying Strong Buy non-initiation recommendations. Our findings suggest that conflicts of interest (i.e., the reporting explanation) are the dominant source for favorable recommendations.

“Voluntary Disclosure Strategy around Lockup Expirations ” with Ewa Sletten and Jayanthi Sunder

Abstract: We examine the impact of insider selling incentives on strategic voluntary disclosure behavior by firms. In order to identify the ex ante selling incentives, we use a sample of IPO firms and examine management forecasts of these firms from the date of going public through the four quarters following the lockup expiration date. Lockup expirations represent the first time that insider shareholders can sell their stock since the IPO and are characterized by a significant increase in trading volume. We contrast the voluntary disclosure behavior of firms during the lockup period, when they are prohibited from selling, with the period post lockup expiration when selling incentives are high. We provide evidence on the propensity to issue forecasts, the bias in these forecasts, and the market reaction to the forecasts. We find that firms delay bad news disclosures until the earnings announcement in the lockup expiration quarter. Firms also bias their forecasts more optimistically when trading incentives are present. We conjecture that the low litigation risk that persists after lockup expiration enables these strategic forecasts. The market does not appear to fully comprehend these incentives.

“SEC Comment Letters for IPO Firms ” with Maria Nondorf

Abstract: This paper develops unique measures for disclosure quality using comment letters issued by the Securities and Exchange Commission to public company filers for a sample of firms completing an initial public offering. We use these measures to examine the determinants of disclosure quality, with particular emphasis on managerial expertise, third-party advisory expertise, and competitive costs. Our results indicate that managerial expertise, particularly at the CFO level, is associated with higher quality disclosure. When the CEO is a firm founder, disclosure quality is significantly lower and the SEC must make additional effort to become satisfied with these firms' pre-IPO disclosures. Additionally, the presence of competitive forces adversely affects the quality of disclosure for IPO firms. Finally, firms with lower quality of disclosure experience higher average direct costs of going public. We contribute to the literature by providing insights into the determinants of disclosure quality for IPO firms. Further, we discern the role of the regulator in defining disclosure quality, and we gain an appreciation for a significant part of the IPO registration process, particularly in terms of financial reporting and disclosure interactions, that hasn't previously been studied.