Albuquerque, A., Carter, M.E., and L. Lynch. “Do Shareholders Welcome Court Intervention in CEO Pay Matters?” European Accounting Review, forthcoming.

We show that shareholders in non-banking firms with high excess pay respond negatively to an unanticipated court ruling against Citigroup related to CEO pay. But we find a positive reaction in firms for which high pay is accompanying poor performance. This evidence suggests that, overall, shareholders may perceive court intervention as net costly but not when excess pay is more egregious (in poorly performing firms). We also find that firms with excess pay and whose shareholders welcome intervention reduce future pay, suggesting that the threat of court intervention may control excess pay.


Bushee, B., Carter, M.E., and J. Gerakos.  “Institutional Investor Preferences for Corporate Governance Mechanisms”, Journal of Management Accounting Research, 26 (2), 2014: 123-149.

We use revealed preferences to identify a group of “governance-sensitive” institutions that exhibit persistent associations between their ownership levels and firms’ governance mechanisms. We find that firms with a high level of ownership by institutions sensitive to shareholder rights have significant future improvements in shareholder rights, consistent with institutional activism. Further, we find that large institutions, those with large portfolios, and those with preferences for growth firms are more likely to be sensitive to corporate governance mechanisms, suggesting those mechanisms may be a means for decreasing monitoring costs. Our results suggest that common proxies for governance sensitivity by investors (e.g., legal type, blockholding) do not cleanly measure governance preferences.


Cadman, B., and M.E. Carter. “Compensation Peer Groups and the Relation to Executive Compensation”, Journal of Management Accounting Research, 26 (1), 2014: 57-82.

We examine how peer groups are selected to set executive compensation and, in contrast to other research, we find no evidence that these groups are chosen to opportunistically increase CEO pay. We document that the researcher-defined pool of potential peers significantly influences the conclusions. When the potential peers are culled to a group that might better reflect the CEO labor market, opportunism is not evident, even in settings in which we would most expect opportunism.


Cadman, B., Carter, M.E. and L. Lynch. “Executive compensation restrictions: Do they restrict firms’ willingness to participate in TARP”, Journal of Business Finance & Accounting 39 (7 & 8), 2012: 997-1027.


We find that the executive compensation restrictions associated with the Troubled Asset Relief Program (TARP) influenced participation in the program. Banks were less likely to participate in TARP when there was greater potential impact of the pay restrictions and, among banks participating, those with greater CEO incentive compensation repaid funds more quickly. We also find greater executive turnover in participating banks, consistent with concerns about talent drain. We also find evidence that some banks may have declined funds to preserve CEO pay. But those banks had no worse financial health or lower lending, suggesting that the compensation restrictions may have allowed the government to allocate funds more effectively.


Cadman, B., Carter, M.E. and S. Hillegeist. “The Incentives of Compensation Consultants on CEO Pay”, Journal of Accounting and Economics, April 2010: 263-280.

We examine whether compensation consultants’ potential cross-selling incentives explain more lucrative CEO pay packages. Critics allege that these incentives lead consultants to bias their advice to secure greater revenues from their clients. However, among firms that retain consultants, we are unable to find widespread evidence of higher levels of pay or lower pay-performance sensitivities for clients of consultants with potentially greater conflicts of interest.  Overall, we do not find evidence that potential conflicts of interest between the firm and its consultant are a primary driver of excessive CEO pay.


• Cited in Securities and Exchange Commission Release 33-9089 (2010)


Carter, M.E., Ittner, C. and S. Zechman. "Explicit Relative Performance Evaluation in Performance-Vested Equity Grants" Review of Accounting Studies 14 (2-3), 2009: 260-306.


We examine factors influencing explicit relative performance evaluation (RPE) conditions in performance-vested equity grants for FTSE 350 firms. We provide evidence that efforts to improve incentives by removing common risk are more closely related to specific relative performance conditions than to the firm-level decision to use RPE in some or all of their equity grants. We also find that greater external monitoring by institutional investors is associated with more stringent overall RPE conditions.  The relative performance conditions are binding in most RPE plans, with nearly two-thirds of the grants vesting only partially or not vesting at all.


• Best Paper at the Review of Accounting Studies Conference (2008)


Carter, M.E., Lynch, L. and S. Zechman.  "Changes in Bonus Contracts in the Post-Sarbanes-Oxley Era”, Review of Accounting Studies 14 (4), 2009:  480-506.

We examine and find support for the joint hypothesis that the implementation of Sarbanes-Oxley and related reforms led to a decrease in earnings management and that firms responded to the reduced discretion by placing more weight on earnings in bonus contracts.  We find no evidence that firms changed compensation contracts to compensate executives for assuming more risk.


• Winner of the Glenn McLaughlin Prize for Research in Accounting Ethics (8th Annual) under prior title, “The Relation between Executive Compensation and Earnings Management:  Changes in the Post-Sarbanes-Oxley Era” (2006)


Carter, M.E., Lynch, L. and I. Tuna. “The Role of Accounting in the Design of CEO Equity Compensation”, The Accounting Review, March 2007:  327-358.


We find that proxies for financial reporting concerns are positively associated with the use of options and negatively associated with the use of restricted stock in CEO pay packages. These finding suggest that the accounting under SFAS 123 led to greater use of options and lower use of restricted stock than would have been the case absent accounting considerations. We corroborate our results by examining firms that begin to expense options in 2002 and 2003 and find they reduce the use of options and increase the use of restricted stock after expensing options. These firms, however, do not reduce overall CEO compensation, suggesting that they find it difficult to downsize hefty pay packages that may have resulted from the favorable accounting for options. 


Carter, M.E. and L. Lynch. “The Effect of Stock Option Repricing on Employee Turnover”, Journal of Accounting and Economics, February 2004: 91-112.


Using a sample of firms that reprice stock options in 1998 and a sample of firms with underwater stock options that choose not to reprice, we find little evidence that repricing affects executive turnover. However, using forfeited stock options to proxy for overall employee turnover, we find that subsequent employee turnover is negatively related to the repricing, suggesting that repricing helps prevent lower level employee turnover due to underwater options.


• Featured in MIT Sloan Management Review, “Does Repricing Stock Options Work?”, Winter 2004


Balachandran, S., Carter, M.E. and L. Lynch, “Sink or Swim:  Firms’ Responses to Underwater Options”, Journal of Management Accounting Research, 2004: 1-18.


Using a sample of firms with underwater options in 2000, we estimate that 81 percent of firms take action to respond to them. Opponents argue that addressing underwater options rewards poor performance and transfers wealth unjustifiably from shareholders to executives. We find some support for this argument in that firms with weaker governance structures are more likely to reprice underwater options. However, we also find evidence that restoring incentives, retaining executives, and insulating executives from marketwide or industrywide factors beyond their control are the primary drivers of firms' responses.


Carter, M.E. and L. Lynch. “The Consequences of the FASB’s 1998 Proposal on Accounting for Stock Option Repricing, Journal of Accounting and Economics, April 2003: 51-72.


We examine repricing activity surrounding the FASB’s 1998 announcement regarding accounting for repriced options. We find that repricing increases during, and decreases after, the 12-day window between the announcement and proposed effective dates, consistent with firms timing repricings to avoid recording an expense. Firm with increasing earnings patterns, firms with earnings around zero, and growth firms are more likely to reprice in the window, but having repriced recently decreases the likelihood of doing so. Our evidence suggests that firms trade off financial reporting benefits against reputation costs in decisions to time repricings to get favorable accounting treatment.



• Featured in Financial Times, “Taking Stock of Sinking Options”, March 31/April 1, 2001.


Carter, M.E. and L. Lynch. “An Examination of Executive Stock Option Repricing, Journal of Financial Economics, August, 2001:  207-225.


Comparing a sample of firms that reprice executive stock options in 1998 to a control sample of firms with out-of-the-money options in 1998 that do not reprice, we find that the likelihood of repricing increases for young, high technology firms and firms whose options are more out-of-the-money. Further, we find that firms reprice in response to poor firm-specific, not poor industry, performance. However, we find no evidence that repricing is related to agency problems. Our results are consistent with firms repricing options to restore incentive effects and to deter managers in competitive labor markets from going to work for other firms.


Carter, M.E. and B. Soo. “The Relevance of Form 8-K Reports”, Journal of Accounting Research, Spring 1999: 119-132.


We investigate the timeliness and information content of a sample of Form 8-K reports filed in 1993 with the Securities and Exchange Commission (SEC).  We find that 26% of our sample filed beyond the statutory due date, with negative news filings having noncompliance rates over 30%. Voluntary disclosures of significant events, despite having no deadline, were among the fastest to be filed. We find limited evidence of a market response to 8-K filings, suggesting other more timely sources of information. Our evidence provides support for SEC proposals to accelerate filing periods for all 8-K events.


Carter, M.E. and G. Manzon, Jr. “Evidence on the Role of Taxes on Financing Choices:  Consideration of Mandatorily Redeemable Preferred Stock”, Journal of Financial Research, Spring 1995: 103-114.


Debt and mandatorily redeemable preferred stock are similar in cash flows and in holders’ claims. However, they differ significantly in tax treatment, allowing firms that cannot make full use of debt tax shields to finance more efficiently with MRPS.  Our findings support this contention; firms with low marginal tax rates rely more heavily on MRPS than debt.