USC Marshall

We study the relationship between academic tenure, executive compensation, and future performance in non-profit U.S. universities. Universities lack the governance mechanisms found in the not-for-profit sector (e.g. shareholders). Consistent with weak governance mechanisms, not-for-profit universities have recently experienced several high-profile scandals. Theory suggests that the structure of wages in universities creates incentives for tenured faculty to engage in governance, mitigating these agency problems. Consistent with theory, we find evidence that measures of the intensity of tenured faculty are negatively related to future executive compensation. Since better monitoring and lower agency costs may result in better future performance, we examine the link between tenure and institutional performance. We find that concentration of tenured faculty are positively
related to future measures of the academic environment, including ACT Scores and acceptance rates. Further, tenured faculty are positively linked to the receipt of future contributions, suggesting donors may reward the reduced agency costs and better academic performance.

.Our study documents a “Lemons” market failure of Chinese firms listed in the US in 2011 and a subsequent rebound by 2013. Our tests reveal that there was little difference in ex ante observable characteristics of fraudulent and non-fraudulent firms when Chinese firms were listed in the US prior to 2011. Yet, entrepreneurs appear to have known their type, consistent with their ex post privatizations. We document substantial costs of dishonesty and show that there is little evidence that traditional market mechanisms such as auditor quality or underwriter reputation provided credible signals of firm quality. Importantly, we find that factors capturing ex post settling up costs such as North America sales and CEO’s US education reduced the probability of financial fraud. We also show a return of Chinese firms listed in the US in 2013 after intervention into the market by both US (SEC & PCAOB) and Chinese (MoF & CSRC) regulators. This regulatory intervention involved threats of censure and denial of the right of Chinese affiliates of global CPA firms to practice by the SEC, introduction of an MOU between the PCAOB and CSRC/MoF allowingpaving limited access to Chinese firm audit work papers, and an SEC settlement with global auditing firm affiliates. Our results provide support for the Coffee (2007) and LaPorta, Lopez-de-Silanes, and Schleifer (2006) view of the importance of legal and regulatory institutions as a necessary condition for properly functioning capital markets.