Essays examining the impact of government clientele on firm behavior




Xu, Qiao

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My dissertation consists of two essays that explore the impact of U.S. government's contracting arrangements and their associated monitoring mechanisms on government contractors' behavior. While executive compensation and systems of internal control of firms continue to receive attention and oversight from the public and regulators, U.S. government imposes additional layer of monitoring and audit over government contractors. In Essay I, I investigate whether the role of U.S. government as a consumer of products and services motivates the firms to adjust their CEO compensation practices. I find that CEO compensation tied to government contract is significantly lower than CEO compensation tied to non-government operations. The rationale is that government contractors are faced with strict constraints and monitoring over the amount of executive compensation they can reimburse; meanwhile the contractors must compensate their executives with competitive level of compensation to retain or attract talents. In addition, compensation elements that change with the price of corporate securities (e.g., stock options) receive particular restrictions and scrutiny from the government. As expected, I find the portion of such compensation elements is negatively associated with government contractors. Essay II focuses on the presence and frequency of internal control problems among government contractors and the extent to which having U.S. government as a customer is associated with the effectiveness of their internal controls over financial reporting. Consistent with my prediction, the main results indicate that having the U.S. government as a customer will be negatively associated with the presence and frequency of internal control issues, on the premise that active government oversight or audit of the contractors' operations will create stronger incentives for the contractors to establish and maintain more effective accounting controls. Altogether, both essays will provide insight into the effects of government contracting and its additional oversight on executive compensation and systems of internal control.


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