| This dissertation analyzes restatements of financial statements and the use of cross-listed stock by foreign firms in acquisitions of U.S. firms. The first essay, presented in Chapter 2, examines the Chief Executive Officer's (CEO's) incentives for using aggressive accounting that might result in a restatement. Specifically, it examines how the composition of the CEO's compensation affects these incentives. Using a logistic regression to explain misreporting in a given firm-year, this essay shows that CEO's whose compensation depends more on options are more likely to use aggressive accounting that results in a restatement. Further, when the CEO's option compensation deviates from its optimal level, misreporting is more likely. An increase in the equity and restricted stock component of compensation has no impact on incentives to engage in such risky accounting. The use of long-term incentive plans and restricted stock do not extend a manager's horizon relative to the short-term focus induced by options. Finally, we examine the market reaction to the announcement of a restatement. It is more negative for those restating firms in which the exercise of options was greater during the misreported period, providing support for the idea that options provide a 'camouflage' for insider trading.; The second essay, presented in Chapter 3, examines the role of cross-listed stock in foreign acquisitions of U.S. firms. Recent research states that there are important disclosure and legal implications for foreign firms that cross-list on a U.S. exchange. By cross-listing, a foreign firm reduces its cost of an acquisition made with equity by enhancing the rights of its minority investors and by decreasing barriers to ownership of its shares by U.S. investors. Cross-listed firms using equity to finance an acquisition pay, on average, 10% less than noncross-listed firms paying with cash, as measured by the target's premium around the announcement of the acquisition. Despite this benefit, cross-listed firms use equity less often than U.S. firms because of factors affecting foreign firms but not U.S. firms, e.g., home bias and investor protection. Using a sample of forty-four cross-listed bidders acquiring U.S. targets with equity, the essay shows that cross-listed firms from countries with poorer investor protection use equity less often than those from countries with greater investor protection. Moreover, they pay a higher premium when using equity. Thus, even after bonding to the U.S. legal regimes via its cross-listing, investors are still wary of the firm's home country legal protections. We test Hansen's (1987) hypothesis that equity financed acquisitions enable the bidder to share the risk with the target that the bidder overpaid. We find that acquirers are more likely to use equity in acquisitions involving targets with greater growth opportunities that are more difficult to value, supporting Hansen's hypothesis. Finally, we find that while non-cross-listed firms use favorable exchange rate movements to bid more aggressively, cross-listed firms do not. |
