I.

Chapter 1
1. Why may stock-based compensation for managers cause more harm than good for a
company?
Stock-based compensation for managers can cause more harm than good for a company due to
several reasons:

 Short-term focus: Managers may prioritize actions that boost the stock price in the short
term, even if they harm the company's long-term health. This can lead to risky decisions,
cutting corners, or neglecting long-term investments.

 Excessive risk-taking: Managers may take on excessive risks, such as mergers and
acquisitions, to artificially inflate the stock price. This can lead to significant financial
losses for the company if the risks don't pay off.

 Earnings management: Managers may engage in earnings management practices to

manipulate the company's financial performance, making it appear better than it actually
is. This can mislead investors and harm the company's reputation.

2. Management self-dealing: Coteccons

Nguyen Ba Duong was the chairman of the BOD of CTD, leading the company to the largest
construction company at the time.

He becomes too confident  not care about the shareholders’ profit

Nguyen Ba Duong and his associates founded a new, private company. They transferred the sales
revenue and profit from Coteccons to the company – customers, and relationships (Unicon,
Ricons). Trong khi Coteccons có kết quả kinh doanh tuột dốc, lúc đó Ricons vẫn duy trì tốc độ
tăng trưởng ấn tượng.

When the new company becomes very profitable  NBD proposes shareholders acquire Unicon
at a high price.  successful.
When proposing a new acquisition (Ricons, kept stealing customers from CTD), the shareholders
didn’t agree (Kutso) -> disagreed with the financial reports from the board of management. They
called for an extraordinary meeting of shareholders to force NBD to resign. Shareholders
attempted to take the managers to court. The managers had no choice but to resign.

3. Short-termism
'Short-termism' indicates a preference for actions that favor short-term profit but are detrimental
to long-term profitability.

Four explanations for intrafirm short-termism: that managers are influenced by capital markets
(under pressure to meet the stock market expectation, to indicate that the firm is doing well); that
managers are influenced by performance measurement systems (accounting information
measures the performance, so managers may attempt to increase the reported profit at the
expense…); that managers are short-termists because an individual dimension centering on role
ambiguity (Role ambiguity is the difference between the information a person needs to fulfill a
role and the information available. When dealing with role ambiguity, managers may seek more
certain outcomes as a coping behaviour, thus value the reduction in uncertainty that accompanies
meeting short-term requirements even where this is detrimental to long-term performance); and
that managers are short-termist because of an organizational dimension based upon norms
located within work groups and SBUs.

Practical consequences center on role ambiguity's subjective and objective elements. The
subjective component of role ambiguity implies that short-termism could be addressed through
recruitment policies, especially given that people with a high 'personal need for structure' are
vulnerable to role ambiguity, and, thereby, short-termism. The objective element refers to actual,
verifiable conditions in the work environment, which implies that formal changes at the level of
the role could change an individual's temporal reference points. These formal changes should, as
far as is feasible, focus on reducing or changing the nature of the role ambiguity confronting the
manager.

4. Staggered boards
[Link]

Unlike a unitary board, where all directors stand for reelection each year, in a staggered board
directors are typically grouped into three different classes serving staggered three-year terms,
with only one class of directors standing for reelection each year. As this requires challengers to
win at least two election cycles to replace a majority of the board and, hence, to endure a costly
delay before gaining voting control, a staggered board protects directors from market discipline.

We find no support for the entrenchment view that staggered boards encourage shirking, empire
building, or private benefits extraction, as we uncover no evidence that changes in board
structure have a strong or persistently negative association with changes in firm value. Rather,
we find that firm value increases (decreases) after firms adopt (remove) a staggered board for
certain subsets of firms, namely, those engaged in long-term projects, with important stakeholder
relationships, or that are more difficult to value.

These results are consistent with the bonding hypothesis that staggered boards can serve as an
efficient commitment device for the firm’s stakeholders. Researchers examine the bonding
hypothesis and suggest that takeover defenses such as the staggered board can lower the cost of
contracting with the firm’s stakeholders and facilitate investments in value-creating long-term
projects.

5. The Value of a Corrupt Manager

Advance the shareholder’s interest:

- Evade more taxes

- Obtain more government contracts and remove business impediments by paying bribes.
 - Maneuver around bad laws and institutions.

However, corrupt managers could also use firm resources for their private benefits and,
therefore, destroy shareholder value.

 According to Mironov (2015), firms with corrupt management significantly outperform

those without corrupt management. However, corrupt managers divert more income, and
their firms exhibit lower income transparency.

6. CEO traits and governance

a. How managers’ indiscretion affects firm value:
(1) First, personal managerial guarantees can be important to forming profitable business
relationships. Researchers focus on how takeover defenses support such personal guarantees.
Personal misconduct plausibly undermines the credibility of implicit and explicit agreements
with strategic partners, employees, suppliers, customers, and owners of financial capital. A
joint venture partner, for example, could decide to back out of a deal to co-locate a
manufacturing facility if it infers that the cheating manager is more likely to act
opportunistically. The indiscretion manager’s firm would lose business, creating a
reputational cost.
(2) Second, and related, the managerial indiscretion could increase the probability that the
manager will be replaced, putting any implicit guarantees of the manager in jeopardy.
The business relationship between two firms is bonded in part by the manager’s personal
guarantees. If the manager leaves, that bond disappears and the exposed counterparty
could be less willing to conduct business with the company.
(3) Third, the indiscretion could signal a shift in the firm’s culture to one that now implicitly
accepts opportunistic behavior. The likelihood of engaging in questionable behavior
should decline with the manager’s expected costs from being caught, costs that increase
with enforcement actions by the firm. Thus, a firm’s counterparty could infer from a
managerial indiscretion that the firm does not penalize opportunistic behavior as strictly
as previously anticipated and reevaluate its business relationship with the company.
(4) Fourth, managerial indiscretion could reveal an increased likelihood that the managers
are willing to sacrifice long-term relationships for short-term gains.
 (5) Managerial indiscretions can adversely affect firm performance as the executive
reallocates time to private life activities and away from more productive endeavors at
the firm. Also, boards often fire managers and a scandal increases the chance of
dismissal. The potential or actual dismissal of any executive following an indiscretion
can disrupt the firm’s ongoing operations.

b. How is the masculinity of CEOs related to financial misreporting?

Studies have documented that individuals with higher levels of circulating or baseline
testosterone have an enhanced motivation for competition and dominance, display reduced fear,
and are more likely to engage in extremely risky behavior such as gambling and alcohol use.

Individuals with a higher propensity to cheat are more likely to experience lower emotional costs
from misreporting. Other behaviors associated with facial masculinity, such as risk-seeking,
egocentric behavior, and a willingness to exploit others for one’s financial gain, may increase a
given executive’s propensity to engage in misreporting by affecting how executives respond to
incentives. The desire of these CEOs to maintain the social status associated with high
performance could increase incentives to engage in accounting manipulation. Consistent with
this conjecture, prior research has shown that “superstar” CEOs are more likely to engage in
misreporting after they achieve superstar status to maintain their performance record.

7. Stakeholder capitalism vs. Shareholder capitalism

In this system of stakeholder capitalism, the interests of all stakeholders in the economy and
society are taken on board, companies optimize for more than just short-term profits, and
governments are the guardians of equality of opportunity, a level-playing field in competition,
and a fair contribution of and distribution to all stakeholders with regards to the sustainability
and inclusivity of the system.

Five commitments: customers, employees, suppliers, communities, and shareholders.

 It may be too much to ask for a company because they already have paid taxes.

Prefer stakeholder capitalism because:

Private individuals and companies must be able to innovate and compete freely, as it unleashes
the creative energy and work ethic of most people in society.

A system of checks and balances exists so that no one stakeholder can become or remain overly
dominant. Both government and companies, the main players in any capitalist system, thus
optimize for a broader objective than profits: the health and wealth of societies overall, as well as
that of the planet and that of future generations.
Further knowledge (not asked)

A foundation-owned firm is a company that is owned by a non-profit foundation. These

foundations are typically established to preserve and develop the business, often with a focus on
long-term sustainability and social impact.

Here are some key characteristics of foundation-owned firms:

 Ownership: The foundation holds a controlling interest in the company, ensuring long-
term stability and independence from short-term pressures.

 Purpose: The foundation's purpose often extends beyond profit maximization,

encompassing social, environmental, or cultural goals.

 Governance: The foundation's board of directors oversees the company's operations,

ensuring alignment with its mission and values.

 Philanthropy: The foundation may use a portion of the company's profits for charitable
giving or to support other social initiatives.

Examples of foundation-owned firms include:

 Carlsberg: Owned by the Carlsberg Foundation, this Danish brewing company is known
for its commitment to sustainability and social responsibility.

 Heineken: The Heineken family established the Heineken Foundation to own and manage
the global brewing company.

 Ikea: The Ingka Foundation owns and operates most IKEA stores worldwide, with a
focus on long-term sustainability and affordable furniture.

 Rolex: The Hans Wilsdorf Foundation owns Rolex, ensuring the brand's independence
and commitment to quality.

Foundation-owned firms are often seen as a model for responsible business practices, combining
profitability with a positive social impact.
II. Chapter 2. Financial Statement Analysis
8. Sales and leaseback (SLB) at Vietjet Air
In 2023, Gain from disposal of fixed assets and sales and operating leaseback = 327 billion
VND, EBT = 606 billion VND.

They buy planes from suppliers like Boeing or Airbus and then sell them to aircraft lease
companies at higher prices to make a profit. The payment to the suppliers is made by the lease
companies. After that, they lease back the planes they just sold to these partners.  It should be
a credit transaction, however, it is recorded as an operating lease  operating activities, avoid
the large amount of debt in BS Higher profit, better debt ratio. (They said they buy in massive
amounts (much more than their peers like VNA), their reputation, and market potential).

 This kind of transaction in fact is VJA borrows money from the lease companies for
operating, nhưng việc ghi nhận là operating lease sẽ làm cho BCTC đẹp hơn, giảm nợ.
VNA không làm vậy vì người ta nhiều tiền.

[Link]
termination-and-guidance-from-the-english-high-court-on-the-right-to-relief

9. Refer to Dechow2002 and Roychowdhury2006, describe the difference between

accrual earnings management and real earnings management.
Earnings management: the intentional, deliberate, misstatement or omission of material
facts, or accounting data, which is misleading and, when considered with all the available
information, would cause the reader to change or alter his or her judgment or decision (but
now it is broader).
- Accrual earning management: applying the accounting rules. For example, under-
provisioning for bad debt expenses, delaying asset write-offs, and delaying obsolete
inventory write-offs, backdating or forward-dating the invoices.  will be reversed in the
future.
- Real activities manipulation, departing from normal operating activities, affects cash
flows and in some cases, accruals. E.g., investment activities, such as reductions in
expenditures on research and development.
Three manipulation methods and their effects on the abnormal levels of the three
variables:
1. Sales manipulation, that is, accelerating the timing of sales and/or generating
additional unsustainable sales through increased price discounts or more lenient credit
terms.
2. Reduction of discretionary expenditures (advertising, R&D,…)
 3. Overproduction, or increasing production to report lower COGS: With higher
production levels, fixed overhead costs are spread over larger units, lowering fixed costs
per unit. As long as the reduction in fixed costs per unit is not offset by any marginal cost
per unit increase, total cost per unit declines. This implies that the reported COGS is
lower, and the firm reports better operating margins. Nevertheless, the firm incurs
production and holding costs on the over-produced items that are not recovered in the
same period through sales. As a result, cash flows from operations are lower than normal
given sales levels. Ceteris paribus, the incremental marginal costs incurred in producing
the additional inventories result in higher annual production costs relative to sales.
 a negative association between institutional ownership and real activities manipulation
 Real earning management is more harmful as it affects the firm’s cash flow and operation
(may not receive payments in the future  write allowance; may not sell all products 
write provision; left behind if not pay enough for advertisement and R&D). CEOs only
utilize real earning management when the accrual earnings management catches the
attention of auditors, regulators, and other stakeholders.

10. Lease
Lessee Accounting—IFRS

Under IFRS, there is a single accounting model for both finance and operating leases for
lessees.

■ The lease liability net of principal repayments and the ROU asset net of accumulated
amortization are reported on the balance sheet

■ Interest expense on the lease liability and the amortization expense related to the ROU
asset are reported separately on the income statement.

■ The principal repayment component of the lease payment is reported as a cash outflow
under financing activities on the statement of cash flows, and depending on the lessee’s
reporting policies, interest expense is reported under either operating or financing activities
on the statement of cash flows.

Lessee Accounting—US GAAP

Under US GAAP, there are two accounting models for lessees: one for finance leases and
another for operating leases. The finance lease accounting model is identical to the lessee
accounting model for IFRS. The operating lease accounting model is different. The following
list shows how the transaction appears on the financial statements:

■ The lease liability net of principal repayments and the ROU asset net of accumulated
amortization are reported on the balance sheet.

■ Interest expense on the lease liability and the amortization expense related to the ROU
asset are reported as a single line titled “lease expense” as an operating expense on the
income statement. The interest and amortization components are not reported separately, nor
are they grouped with other types of interest and amortization expense (e.g., interest on a
bond, amortization of an intangible asset).

■ The entire lease payment is reported as a cash outflow under operating activities on the
statement of cash flows. The interest and principal repayment components are not reported
separately.

Lessor Accounting

Finance lease.

■ Lease receivable net of principal proceeds is reported on the balance sheet, de-recognizes
the leased asset, simultaneously recognizing any difference as a gain or loss

■ Interest income is reported on the income statement. If leasing is a primary business

activity for the entity, as it commonly is for financial institutions and independent leasing
companies, it is reported as revenue.

■ The entire cash receipt is reported under operating activities on the statement of cash flows.

Operating lease:

■ The balance sheet is not affected. The lessor continues to recognize the leased asset at cost
net of accumulated depreciation.
 ■ Lease revenue is recognized on a straight-line basis on the income statement. Depreciation
expense continues to be recognized.

■ The entire cash receipt is reported under operating activities on the statement of cash flows.
This is the same as a finance lease.

11. Refer to [Link], predict the management behavior when the company’s
EPS is:
- Slightly negative.  managed upward
- Slightly lower than last year.  managed upward
- Largely negative  managed downward further, saving the earnings for next year so that
the future earnings are better.
- Largely positive  reined in, managed downward, making the threshold more attainable
in the future.
Three thresholds: positive profit > profit at least equal to profit of the previous 4 quarters
> meet analysts' expectation.

12. Earnings Management around Corporate Events

c. The firm is about to issue new shares. (Teoh1998)
Discretionary current accruals - earnings grow before the offering, peak in the offering year, and
decline thereafter. This accruals pattern causes net income to grow before, peak in, and decline
after the offering year, despite low pre-issue and improved post-issue cash flow from operations.

(Current accruals are adjustments involving short-term assets and liabilities that support the day-
to-day operations of the firm. For example, managers can alter current accruals by advancing
recognition of revenues with credit sales (before cash is received), by delaying recognition of
expenses after cash is advanced to suppliers, and by assuming a low provision for bad debts.)

d. The firm is about to repurchase its own shares (Gong2008).

They will downward earning management (negative abnormal accruals around open-market
repurchase announcements). Negative abnormal accruals increase with the percentage of the
company that the managers repurchase and CEO ownership, which is consistent with the notion
that managers have greater incentives to deflate earnings when the potential benefits from
downward earnings management are greater.  buy it chepaer, sau đó cổ phiếu sẽ perform tốt
hơn (do reverse effect)  thu lợi.

e. Out-going, In-coming, retiring, and new CEO (Wells2002, Kalyta2009, Ali2015).

In the early years of their service, when the market is more uncertain about their ability, they
have greater incentives to overstate earnings to favorably influence the market's perception.

Increasing accounting income in the pre-retirement period because their retirement plan is
contingent on performance of firm in this period.

Outgoing CEOs: inflate earnings, afraid of the losing position.

Incoming CEOs: minimize reported earnings (accounting income being largely irrelevant to
managerial welfare during the first financial year of tenure; not held responsible for past
performance).  Income can be deferred to subsequent periods when it will more likely have a
positive impact on compensation either through explicit contracts or implicit ‘rewards’.  the
result is stronger in a non-routine change where the new CEO is an external candidate and the
outgoing CEO’s relationship with the firm is ended.

f. CEO with stock-based compensation (Berstresser2006).

More ‘‘incentivized’’ CEOs—those whose overall compensation is more sensitive to company
share prices—lead companies with higher levels of earnings management. Periods of high
accruals (inflate earnings) coincide with unusually significant option exercises by CEOs and
unloading of shares by CEOs and other top executives.

13. Goodwill
If the purchase price is greater than the fair value of the identifiable assets and liabilities
acquired, the excess amount is recognized as an asset, goodwill.

Reasons:

(1) Certain items not recognized in the acquiree’s financial statements (e.g., its reputation,
established distribution system, trained employees) have value.
 (2) A target company’s expenditures in research and development may not have resulted in a
separately identifiable asset that meets the criteria for recognition but nonetheless may
have created some value.
(3) Part of the value of an acquisition may arise from improved strategic positioning versus a
competitor or from perceived synergies such as operating cost saving opportunities after
the acquisition.

Measurements:

Under both IFRS and US GAAP, accounting goodwill arising from acquisitions is capitalized.
Goodwill is not amortized but is tested for impairment annually. If goodwill is deemed to be
impaired, an impairment loss is charged against income in the current period, reducing earnings.
An impairment loss also reduces total assets, so some performance measures, such as return on
assets (net income divided by average total assets), may increase in future periods.

III. Chap 3
14. Read Weisbach1995 and explain why investment changes when CEO is changed.
The results of acquisition (where performance is assessed both by gain or loss on sale and by
press reports) rise following the departure of the CEO during whose tenure the acquisition was
made. This result is consistent with a variety of managerial models of investment, including
models in which managers make acquisitions that are not in the shareholders’ interest, models in
which managers are resistant to selling investments that prove to be mistakes, and models in
which successor managers desire to sell assets solely to create losses that can be blamed on their
predecessors.

15. Read Harris1996 and explain how intrafirm resource allocation for investments can
be inefficient.
The essential features of the environment that give rise to the type of capital budgeting processes
observed in practice are managerial incentive problems and asymmetric information. In
particular, we show that in an optimal process, headquarters specifies an initial capital spending
limit. Managers may request additional capital, and when audit costs are not too high, this may
result in either an audit and fulfillment of the request or a compromise increase in the allocation.
This procedure deviates from the NPV rule and can result in underinvestment for high-
productivity projects and overinvestment for low-productivity projects. We also establish a
number of empirical implications relating to the initial spending limit, compromise allocations,
approval probabilities, salary, and the rigidity of the system to each other and to audit costs, the
scale of investment opportunities, the prior distribution of capital productivities, and the size of
divisional requests for spending increases.

Explain: The model consists of headquarters and a single division. The division manager must
obtain capital from headquarters. The reason for decentralization in our model is that the division
manager is assumed to have information, that is not freely available to headquarters, about his
division’s production technology. Even if information is decentralized, however, decisions can
still be centralized if managers have no incentive to withhold or misrepresent their information.
Consequently, we must include a divergence of preferences between headquarters and the
division manager. The specific agency problem we postulate is that headquarters allocates capital
so as to maximize the value of the firm, but the division manager prefers larger capital
allocations to smaller ones, other things equal. This preference could reflect managerial utility
for being in charge of larger enterprises (i.e., a preference for a larger “empire”) or the fact that
larger capital allocations result in greater managerial perquisite consumption. Headquarters can
discover the manager’s information precisely at some cost through a detailed audit. Headquarters
seeks to design an incentive-compatible capital allocation scheme and managerial salary to
minimize the distortion due to decentralized information and managerial preference for the
empire. In particular, headquarters chooses an audit strategy, capital allocations, and salary as
functions of the manager’s request for capital to maximize the value of the residual claim, given
the constraints implied by private information and the manager’s preference for empire.

Therefore, when audit costs are not “too high,” it is efficient for headquarters to allow managers
to request larger allocations. Headquarters employs several devices to “keep the manager
honest.” First, it audits the division manager’s capital request and penalizes him if his request is
unjustified. Auditing occurs with a probability that increases with the manager’s capital request,
but, to save audit costs, the probability is always less than one. Second, the initial spending limit
is “generous” relative to the first-best level of investment for the least productive technology.
This encourages the manager not to request more capital when in fact the technology is the least
productive. Thus, when the least productive technology is obtained, the optimal capital
budgeting procedure results in Overinvestment. Third, the compromise allocation for an
unaudited request of capital in excess of the initial spending limit is “stingy” relative to first-best.
Thus, in the absence of an audit, the optimal procedure results in underinvestment for high
productivity.