La configuración de la universidad moderna

I control for various economic determinants in both the first and second stage regressions. The economic determinants include leverage (LEV), book-to-market ratio

56 (BM), free cash flows (FCF), natural log of market capitalization (LnMarketCap), return on assets (ROA)47, standard deviation of ROA over prior three years (StdROA), operating cash flows scaled by lagged total assets (CFO), standard deviation of operating cash flows over prior three years (StdCFO), current stock returns (RET),48 standard deviation of stock returns over prior three years (StdRET), and natural log of sales (LnSALE).

LEV is calculated as total debt (long term debt + current portion of long term debt) divided by total assets. Firms have incentives to exercise discretion either to avoid covenant violations or to prevent adverse effects on debt ratings. DeFond & Jiambalvo (1994) find that managers in highly leveraged firms have incentives to make income increasing discretionary accruals to avoid debt covenant violation.

I use BM to proxy for growth opportunities. It is computed as the total common equity divided by the market value of equity, which is equal to market price multiplied by common shares outstanding. To maintain access to capital, growth firms have relatively strong incentives to meet earnings benchmarks to avoid increases in the cost of capital. A growth firm also tends to smooth earnings, because earnings volatility increases perceived firm risk. McNichols (2000, 2002) shows large accruals in growth firms.

Frequent access to capital markets provides incentives for earnings management. A firm’s ex ante demand for financing is measured as free cash flows (FCF) scaled by current assets. FCF is computed as operating net cash flow minus cash dividends minus capital expenditures.

47 _{ROA is measured as income before extraordinary items scaled by lagged total assets.} 48

57 Large firms are likely to face more political costs and have incentives to manipulate earnings downward. I use LnMarketCap (in the first stage) and LnSALE (in the second stage) to control for size.

I use StdCFO, StdROA, and StdRET as proxies for risk, and use ROA, CFO, and RET to control for current operating and stock performance in the different models (see model 14 - 16 in section 5.7).

Additionally, I use two-digit SIC dummies to account for any unobserved variation across industries (see section 5.5 - 5.7).

58 Table 2: Variables definitions

Panel A: Earnings management variables

Categories Variables Description Model

AEM

AbAcc Abnormal accruals (scaled by lagged total assets) are the residuals from the modified Jones (1991) model, proxy for income-increasing accruals management. Higher values of AbAcc indicate higher level of accruals

manipulation to inflate earnings. Dechow et al. (2003)

|AbAcc| It is the absolute value of AbAcc. Higher values of |AbAcc| indicate higher level of accruals manipulation. Dechow et al. (2003)

REM

AbRD Abnormal R&D expenses (scaled by lagged total assets) are the residuals from normal R&D model. I multiply the residuals by negative one, such that higher values of AbXRD indicate higher level of R&D manipulation.

Roychowdhury (2006); Zang (2012); Gunny (2010)

AbSGA Abnormal SG&A expenses (scaled by lagged total assets) are the residuals from normal SG&A model. I multiply the residuals by negative one, such that higher values of AbSGA indicate higher level of SG&A manipulation.

Anderson et al. (2003); Zang (2012); Gunny (2010)

59 Table 2 (Continued)

Panel B: Corporate governance variables

Categories Variables Description _Source

CEO variables

LnCEOAge The natural log of the age of CEO. TCL

CEOTenure Number of years of service of CEO. TCL

CEOOwnership It is the percentage of outstanding shares held by the CEO, computed as CEO shares held divided by common share _outstanding. TCL CEORstock It is the percentage of dollar value of restricted stock awards to CEO all total compensation. TCL CEOExOp It is computed as total exercisable options of CEO divided by common share outstanding. TCL CEOUnExOp It is computed as total unexercisable options of CEO divided by common share outstanding TCL CEOBonus It is computed as CEO annual bonus divided by CEO all total compensation. TCL LnCEOTotComp The natural log of CEO all total compensation, which is the sum of total annual compensation, plus all long-term payment, _{including restricted stock, the value realized from stock options, and all other compensation.} TCL

Board Composition

ActiveCEODir Percentage of directors who are active CEOs of other firms. TCL OutsideDir Percentage of fully independent directors on a given board. TCL Over15YrsDir Percentage of directors with tenure exceeding 15 years on a given board. TCL Over4BoardsDir Percentage of directors with more than 4 corporate directorships on a given board. TCL OverAge70Dir Percentage of directors over the age of 70 on a given board. TCL

WomenDir Percentage of female directors on a given board. TCL

60 Table 2 (Continued)

Categories Variables Description Source

Ownership Structure

Insiders Estimated percentage of outstanding shares held by top management and directors as reported in the company's most _{recent proxy statement.} TCL

Block Estimated percentage of outstanding shares held by any 5% or greater shareholders, as reported in the company's most _{recent proxy statement.} TCL

Institution Percentage of outstanding shares held by institutions. TCL

Other Corporate Governance

variables

LnDirBasePay The natural logarithm of the dollar amount of reported director base payment. TCL AuditFees Total audit and audit-related fees paid to the independent audit firm, as a percentage of total fees paid. TCL

Anti- Takeover

An aggregate measure of 10 takeover defences indicators, including TDEffectiveClassifiedBoard, TDDualClassStock, TDCumulativeVoting, TDPoisonPill, TDBusinessCombinationProvison, TDFairPriceProvision, TDConstituencyProvision, TDAdvanceNoticeRequired, TDSHFillVacancies, and TDDirectorRemovalForCauseOnly. TCL

61 Table 2 (Continued)

Panel C: Economic determinants

Categories Variables Description

Source

Economic determinants

LEV Leverage, computed as long-term debt (data A9) divided by total assets (data A6). COMPUSTAT BM Book-to-market ratio, a proxy for growth and investment opportunities, computed as total common equity (data A60) divided by market value of equity, which equals to close price (data A24) times common shares outstanding

(data A25). COMPUSTAT

FCF Free cash flows scaled by current assets (data A4), proxy for access to capital market, free cash flow is computed as _{operating net cash flow (data A308) minus cash dividends (data A127) minus capital expenditures (data A128).} COMPUSTAT LnMarketCap The natural log of market capitalization, proxy for size, where market capitalization is computed as close price (data _{A24) multiplied by common shares outstanding (data A25).} COMPUSTAT ROA Return on assets, proxy for profitability, it is computed as income before extraordinary items (data A237) divided by _{lagged total assets (data A6), then multiplied by 100.} COMPUSTAT

StdROA Standard deviation of ROA over prior 3 years. COMPUSTAT

CFO Operating cash flows (data A308) scaled by lagged total assets (data A6). COMPUSTAT StdCFO Standard deviation of operating cash flows (data A308) over prior 3 years, proxy for operating risk. COMPUSTAT RET One year total stock return, which is the annualized rate of return reflecting price appreciation plus reinvestment of _{monthly dividends and the compounding effect of dividends paid on reinvested dividends.} COMPUSTAT

StdRET Standard deviation of stock return over prior 3 years. COMPUSTAT

62 Table 2 (Continued)

Panel D: Future performance measures

Categories Variables Description _Source

Future performance

FutCFO Average operating cash flows (data A308) scaled by lagged total assets (data A6) for subsequent 3 years. COMPUSTAT

FutROA Average ROA for subsequent 3 years. COMPUSTAT

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