From Capital to Labor
Anti-market sentiment and corporate social responsibility: Evidence from anti-Jewish pogroms
Xianda Liu, Wenxuan Hou & Brian Main
Journal of Corporate Finance, forthcoming
Abstract:
This paper examines the impact of anti-market culture on a firm's environmental and social (E&S) outcomes. We use the varying degree of intensity of historical anti-Jewish pogroms in 20 European countries as a quasi-exogenous measure of anti-market sentiment. We show that the historical occurrence of anti-Jewish pogroms in Eastern Europe during the period 1800-1927 generated an enduring anti-market sentiment that continues to influence the E&S performance of present-day firms. This relationship is more pronounced for firms with better corporate governance, which rejects the bad governance view on corporate social responsibilities. Taken together, our results add new evidence in support of the view that corporate social responsibility is responsive to institutional differences and may reflect the presence of an anti-market ideology that has historical roots.
Precarious situations: A prelude to hiring more hubristic chief executive officers
Aaron Hill, Tessa Recendes & Yuting Yang
Strategic Management Journal, forthcoming
Abstract:
We build upon evidence suggesting the precariousness of the situation organizations face when trying to fill chief executive officer (CEO) openings affects both which executives seek and accept such positions and which executives are sought and endorsed by those tasked with hiring. We argue that while more precarious situations likely deter some executives from pursuing and/or accepting such opportunities, more hubristic executives' tendencies make them likely to do so despite the associated challenges. Concordantly, those tasked with filling CEO openings likely view more hubristic executives as particularly important for combatting the challenges of more precarious situations, leading them to seek and endorse such executives. Using multiple conceptualizations of precarious situations, we find support for our arguments in a sample of CEO changes in S&P 500 firms.
Financial disclosure transparency and employee wages
John (Jianqiu) Bai, Matthew Serfling & Sarah Shaikh
Financial Review, forthcoming
Abstract:
We test the hypothesis that less transparent financial disclosures are an undesirable firm attribute that increase the amount of information and unemployment risk that employees bear, resulting in a wage premium. Using establishment-level wage data from the U.S. Census Bureau, we document that firms with less transparent disclosures pay their employees more, especially when employees bear greater information acquisition costs, have more influence in the wage-setting process, and own more stock. Our results hold after utilizing instrumental variables and exploiting two quasi-natural experiments. Overall, our results suggest that disclosure choices can generate externalities on an important group of stakeholders.
The Distribution of Voting Rights to Shareholders
Vyacheslav Fos & Clifford Holderness
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
This is the first comprehensive study of the distribution of voting rights to shareholders. Only individuals owning stock on a record date may vote. Firms, however, reveal record dates after the fact 91% of the time. With controversial votes, firms are more likely to do the opposite, and this tendency is associated with a lower passage rate for shareholder-initiated proposals . The New York Stock Exchange sells non-public record-date information to select investors. When stocks go ex vote, prices decline and trading volume surges, suggesting that activist investors are buying marginal votes. These trends are most pronounced with controversial votes.
(Black)Rock the vote: Index funds and opposition to management
Joseph Farizo
Journal of Corporate Finance, forthcoming
Abstract:
I show index funds are more likely to oppose management on contentious management sponsored proposals at firms held only by their family's index funds than on proposals at firms co-held by their family's active funds. Additionally, shareholder proposals garner a greater level of support by index funds when the firm's shares are not simultaneously held by a fund's same-family active funds. Consistent with "locked-in" motives to monitor, these results imply index funds participate as more engaged voters when same-family active funds avoid holding positions in a firm.
Invention Value, Inventive Capability and the Large Firm Advantage
Ashish Arora et al.
NBER Working Paper, August 2022
Abstract:
Do large firms produce more valuable inventions, and if so, why? After confirming that large firms indeed produce more valuable inventions, we consider two possible sources: a superior ability to invent, or a superior ability to extract value from their inventions. We develop a simple model that discriminates between the two explanations. Using a sample of 2,786 public corporations, and measures of both patent quality and patent value, we find that, while average invention value rises with size, average invention quality declines, suggesting, per our model, that the large firm advantage is not due to superior inventive capability, but due to the superior ability to extract value. We provide evidence suggesting that this superior ability to extract value is due to greater commercialization capabilities of larger firms.
EDGAR Implementation, Unionization, and Strategic Disclosure
Daniel Aobdia et al.
Pennsylvania State University Working Paper, July 2022
Abstract:
Answering the call by Blankespoor et al. (2020) to study the effect of disclosure processing frictions on other stakeholders and decision contexts, this study examines how firms facing strong organized labor strategically respond to the implementation of the EDGAR system, which substantially reduced labor unions' information processing costs. We find that these firms reduce the disaggregation in their financial statements, the likelihood and frequency of their voluntary management forecasts, and the proportion of forecasts that convey good news, consistent with incentives to maintain an information advantage and bargaining position with labor unions. These reductions are more pronounced for a subsample of firms with greater distance to the SEC reference rooms where paper-based filings were stored for public review before the implementation of EDGAR, firms with less educated employees, and firms with higher labor-related proprietary cost of disclosures. Our study is the first to investigate the implications of information processing costs to labor markets and to examine firms' strategic disclosure responses to EDGAR implementation caused by concerns from other markets. It improves our understanding on the dynamic effects and real outcomes of shocks to disclosure processing costs beyond equity markets.
Mandatory Disclosure and Learning from External Market Participants: Evidence from the JOBS Act
Jedson Pinto
Journal of Accounting and Economics, forthcoming
Abstract:
This paper examines whether mandatory disclosure affects the extent to which firms learn from external market participants. Conventional wisdom suggests that mandatory disclosure should increase the total amount of information in financial markets. However, disclosure can also reduce investors' incentives to acquire and produce information. Using the JOBS Act to identify variations in disclosure requirements, this paper finds that firms with reduced disclosure requirements attract more informed investors and learn more from financial markets than those with stricter disclosure requirements. This learning is concentrated among firms that attract sophisticated investors, particularly those with industry expertise, and weakens once firms are forced to disclose more information. Overall, the results suggest that one benefit from regulators' recent efforts to reduce U.S. firm disclosure requirements is an increase in firm learning.
Did the Dodd-Frank Whistleblower Provision Deter Accounting Fraud?
Philip Berger & Heemin Lee
Journal of Accounting Research, September 2022, Pages 1337-1378
Abstract:
We examine the deterrence effect of the Dodd-Frank whistleblower provision on accounting fraud. To facilitate causal inference, we use state False Claims Acts (FCAs), under which whistleblowing about accounting fraud at a firm invested in by a state's pension fund can result in monetary rewards from that state's government. We divide our sample into firms exposed and not exposed to whistleblowing risk from a state FCA during the 2008-2010 period that preceded the 2011 SEC implementation of the Dodd-Frank whistleblowing provision. We hypothesize that firms already exposed to a state FCA whistleblower law are less affected by the Dodd-Frank whistleblower provision. Using the companies exposed to a state FCA as control firms in our Dodd-Frank tests, the remaining firms constitute the treatment sample. We find that exposure to Dodd-Frank reduces the likelihood of accounting fraud of treatment firms by 12%-22% relative to control firms, but do not find that it affects audit fees.
Nowhere to hide: Response of corporate restructuring activities to mandatory segment disclosure
Trinh Hue Le, Barry Oliver & Kelvin Jui Keng Tan
Journal of Corporate Finance, forthcoming
Abstract:
We examine the effect of mandatory financial disclosures, specifically SFAS 131, on corporate restructuring activities by using difference-in-differences (DiD) and regression discontinuity design (RDD) settings. After the adoption of SFAS 131, firms are less likely to engage in acquisitions than are the control firms. Furthermore, conditional on firms' engagement in acquisition activities, acquirers are less likely to complete their initiated acquisition deals, especially for those value-destroying deals. After the implementation of SFAS 131, we find that the equity market reacts positively to large and diversifying deals that are subject to mandatory segment disclosures. Overall, our results suggest that the segment disclosure standard helped prevent managers from undertaking new, value-destroying M&As post-SFAS 131. Finally, these SFAS 131-induced corporate restructuring activities are shown to help reduce the risk of a stock price crash.
Did the Siebel Systems Case Limit the SEC's Ability to Enforce Regulation Fair Disclosure?
Kristian Allee et al.
Journal of Accounting Research, September 2022, Pages 1235-1291
Abstract:
We examine whether a shock to the enforceability of Regulation Fair Disclosure (Reg FD) limited its ability to restrict the flow of private information between managers and investors. Although prior work provides evidence that Reg FD reduced managers' selective disclosure of material information immediately following its promulgation, we posit that private information flows returned as a result of the Securities and Exchange Commission's (SEC's) public enforcement failure in SEC v. Siebel Systems, Inc. Using multiple settings, we find consistent evidence suggesting that Siebel changed the cost-benefit tradeoff for Reg FD compliance and effectively reversed the initial effects of the regulation. We also find that Siebel disrupted the equilibrium of selective disclosure activity, resulting in an unleveling effect among investors with respect to private information advantages. Finally, we find that Siebel also had real effects by altering managers' capital structure decisions. Our findings run counter to the prevailing "mosaic theory" and gradual learning explanations for private information advantages in the extended post-Reg FD period and highlight the importance of enforcement in achieving intended regulatory outcomes.
How do stronger creditor rights impact corporate acquisition activity and quality?
Megan Rainville, Emre Unlu & Juan Julie Wu
Journal of Banking & Finance, forthcoming
Abstract:
We exploit a quasi-natural experiment (the adoption of state anti-recharacterization laws) to study the effect of strengthened creditor rights on corporate mergers and acquisitions. We find that, following the passage of anti-recharacterization laws, firms decrease overall acquisition activities. This effect is stronger for firms with worse agency problems. Announcement returns to shareholders are larger and post-merger operating cash flows are better for acquirers with weaker governance. Furthermore, returns to bondholders of these firms are also higher, indicating no wealth transfers. Taken together, our evidence suggests that ex-ante strengthened creditor rights can discipline firm managers to reduce value-destroying acquisitions and conduct higher quality deals.