Big Business
In search of responsible CEOs: The case of CEOs with non-profit experience
Stanley Peterburgsky
Journal of Business Research, forthcoming
Abstract:
We advance, and test, two competing hypotheses that relate prior non-profit experience to mismanagement and/or negligence against the null of no relationship. The evidence supports the hypothesis that the bureaucratic and chaotic culture of many non-profits often attracts and/or molds individuals with subpar managerial habits. We find that firms headed by CEOs with non-profit experience are more likely to restate financial statements than other firms, even after controlling for variables that have been shown to affect restatements, and that the returns around announcements of class action securities litigation are more negative for firms with "non-profit" CEOs.
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Analyzing Speech to Detect Financial Misreporting
Jessen Hobson, William Mayew & Mohan Venkatachalam
Journal of Accounting Research, forthcoming
Abstract:
We examine whether vocal markers of cognitive dissonance are useful for detecting financial misreporting. We use speech samples of CEOs during earnings conference calls and generate vocal dissonance markers using automated vocal emotion analysis software. We begin by assessing construct validity for the software-generated dissonance markers by correlating them with four dissonance-from-misreporting proxies obtained in a laboratory setting. We find a positive association between these proxies and vocal dissonance markers generated by the software, suggesting the software's dissonance markers have construct validity. Applying the software to CEO speech, we find that vocal dissonance markers are positively associated with the likelihood of irregularity restatements. The diagnostic accuracy levels are 11% better than chance and of similar magnitude to models based solely on financial accounting information. Moreover, the association between vocal dissonance markers and irregularity restatements holds even after controlling for financial accounting and linguistic based predictors. Our results provide new evidence on the role of vocal cues in detecting financial misreporting.
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Earnings conference calls and stock returns: The incremental informativeness of textual tone
McKay Price et al.
Journal of Banking & Finance, forthcoming
Abstract:
Quarterly earnings conference calls are becoming a more pervasive tool for corporate disclosure. However, the extent to which the market embeds information contained in the tone (i.e. sentiment) of conference call wording is unknown. Using computer aided content analysis, we examine the incremental informativeness of quarterly earnings conference calls and the corresponding market reaction. We find that conference call linguistic tone is a significant predictor of abnormal returns and trading volume. Furthermore, conference call tone dominates earnings surprises over the sixty trading days following the call. The question and answer portion of the call has incremental explanatory power for the post-earnings-announcement drift and this significance is primarily concentrated in firms that do not pay dividends, illustrating differences in investor behavior based on the level of cash flow uncertainty. Additionally, we find that a context specific linguistic dictionary is more powerful than a more widely used general dictionary (Harvard IV-4 Psychosocial).
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Board connections and M&A transactions
Ye Cai & Merih Sevilir
Journal of Financial Economics, forthcoming
Abstract:
We examine M&A transactions between firms with current board connections and find that acquirers obtain higher announcement returns in transactions with a first-degree connection where the acquirer and the target share a common director. Acquirer returns are also higher in transactions with a second-degree connection where one acquirer director and one target director serve on the same third board. Our results suggest that first-degree connections benefit acquirers with lower takeover premiums while second-degree connections benefit acquirers with greater value creation. Overall, we provide new evidence that board connectedness plays important roles in corporate investments and leads to greater value creation.
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Is mandated independence necessary for audit quality?
Karim Jamal & Shyam Sunder
Accounting, Organizations and Society, May-July 2011, Pages 284-292
Abstract:
Independence (in fact as well as in appearance) is widely thought to be necessary for the quality of audits, and audit quality is often equated with independence. Private incentives to demand (and supply) independent certification of financial statements are thought to be insufficient, thus the need to mandate independence through regulation. This study presents data from a field experiment on the unregulated market for certification of baseball cards to assess the role of independence vis-à-vis other auditor attributes such as competence, price, and service on audit quality. In our field experiment, we examine prices of baseball cards sold on eBay with or without third party certification. In addition, the certifier was either independent or deeply immersed in providing other services to market participants. We find that market participants pay a significant premium for certified cards. Certifiers who are deeply immersed (and therefore apparently less independent) also provide higher quality service in the form of being stricter graders, command larger price premiums, and dominate in market share. Implications for independence and audit quality are discussed.
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Hugh Grove et al.
Corporate Governance, September 2011, Pages 418-436
Research Question/Issue: Does corporate governance explain US bank performance during the period leading up to the financial crisis? We adopt the factor structure by Larcker, Richardson, and Tuna (2007) to measure multiple dimensions of corporate governance for 236 public commercial banks.
Research Findings/Insights: Findings reveal corporate governance factors explain financial performance better than loan quality. We find strong support for a negative association between leverage and both financial performance and loan quality. CEO duality is negatively associated with financial performance. The extent of executive incentive pay is positively associated with financial performance but exhibits a negative association with loan quality in the long-run. We find a concave relationship between financial performance and both board size and average director age. We provide weak evidence of an association of anti-takeover devices, board meeting frequency, and affiliated nature of committees with financial performance.
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The Real Effects of Hedge Fund Activism: Productivity, Risk, and Product Market Competition
Alon Brav, Wei Jiang & Hyunseob Kim
NBER Working Paper, October 2011
Abstract:
This paper studies the long-term effect of hedge fund activism on the productivity of target firms using plant-level information from the U.S. Census Bureau. A typical target firm improves its production efficiency within two years after activism, and this improvement is concentrated in industries with a high degree of product market competition. By following plants that were sold post-intervention we also find that efficient capital redeployment is an important channel via which activists create value. Furthermore, our analyses demonstrate that measuring performance using the Compustat data is likely to lead to a downward bias because target firms experiencing greater improvement post-intervention are also more likely to disappear from the Compustat database. Finally, consistent with recent work in asset-pricing linking firm investment decisions and expected returns, we show how changes to target firms' productivity are associated with a decline in systemic risk, particularly in competitive industries.
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Yes, dividends are disappearing: Worldwide evidence
Ali Fatemi & Recep Bildik
Journal of Banking & Finance, forthcoming
Abstract:
This study examines the patterns in payout policies worldwide. Utilizing data from a sample of more than 17,000 companies from 33 different countries, we find evidence in support of a significant worldwide decline in the propensity to pay dividends. Most of the decline is due to the payout policies of smaller and less profitable firms with comparatively more investment opportunities. We find that larger firms, those with higher profitability, and firms with low growth opportunities have a greater propensity to pay dividends. The proportion of dividend payers varies substantially across industries as well. However, the proportion of firms paying dividends has declined over time, even after firms' characteristics have been controlled for. Moreover, aggregate dividends are highly concentrated in that they are paid only by a small group of firms. Our findings indicate that there has been a significant decline in the average dividend payout ratios over the years. The decline in the mean dividend payout ratios as well as the proportion of payers is much more pronounced in civil law countries.
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The Price Effects of a Large Merger of Manufacturers: A Case Study of Maytag-Whirlpool
Orley Ashenfelter, Daniel Hosken & Matthew Weinberg
NBER Working Paper, October 2011
Abstract:
Many experts speculate that U.S. antitrust policy towards horizontal mergers has been too lenient. We estimate the price effects of Whirlpool's acquisition of Maytag to provide new evidence on this debate. We compare price changes in appliance markets most affected by the merger to markets where concentration changed much less or not at all. We estimate price increases for dishwashers and relatively large price increases for clothes dryers, but no price effects for refrigerators or clothes washers. The combined firm's market share fell across all four affected categories and the number of distinct appliance products fell.
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Corporate Governance and the Information Content of Insider Trades
Alan Jagolinzer, David Larcker & Daniel Taylor
Journal of Accounting Research, December 2011, Pages 1249-1274
Abstract:
Most corporate governance research focuses on the behavior of chief executive officers, board members, institutional shareholders, and other similar parties. Little research focuses on the impact of executives whose primary responsibility is to enforce and shape corporate governance inside the firm. This study examines the role of the general counsel (GC) in mitigating informed trading by corporate insiders. We find that insider trading profits and the predictive ability of insider trades for future operating performance are generally higher when insiders trade within firm-imposed restricted trade windows. However, when GC approval is required to execute a trade, insiders' trading profits and the predictive ability of insider trades for future operating performance are substantively lower. Thus, when given the authority, it appears the GC can effectively limit the extent to which corporate insiders use their private information to extract rents from shareholders.
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Sheltering Corporate Assets from Political Extraction
Lorenzo Caprio, Mara Faccio & John McConnell
Journal of Law, Economics, & Organization, forthcoming
Abstract:
We hypothesize that firms structure their asset holdings so as to shelter assets from extraction by politicians and bureaucrats. In countries where the threat of political extraction is higher, we hypothesize that firms hold a lower fraction of their assets in liquid form. Consistent with this conjecture, using data representing over 30,000 firms across 109 countries, we find that corporate holdings of liquid assets are negatively correlated with measures of political corruption. Further, annual investment in property, plant, equipment, and inventory plus dividends is positively correlated with measures of political corruption suggesting that owners channel their cash into harder to extract assets. To the extent that the threat of political extraction moves firms away from their otherwise optimal levels of liquid assets, our findings suggest that the threat of political extraction may reduce economic development not only through the direct costs of political payoffs but also because the potential for asset extraction moves firms away from their otherwise optimal asset holdings.
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The "Wal-Mart Effect" in Central and Eastern Europe
Deniz Igan
Journal of Comparative Economics, forthcoming
Abstract:
Prior to the recent global financial crisis altering the price dynamics, inflation in central and eastern European countries was characterized by a sharp drop pattern. Several factors contributed to this decline such as benign global economic conditions and growing credibility of domestic macroeconomic policies, yet factors related to industrial organization and market competition have been somewhat overlooked. Using measures of retail competition intensity reflecting the prevalence of high-productivity, modern-format retailers, we find that the decline in retail goods price inflation, and particularly food price inflation, was associated with increased retail competition. This may be linked to improved living conditions as households allocate more to health and education.
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Supplier Responses to Wal-Mart's Invasion of Mexico
Leonardo Iacovone et al.
NBER Working Paper, July 2011
Abstract:
This paper examines the effect of Wal-Mart's entry into Mexico on Mexican manufacturers of consumer goods. Guided by firm interviews that suggested substantial heterogeneity across firms in how they responded to Wal-Mart's entry, we develop a dynamic industry model in which firms decide whether to sell their products through Walmex (short for Wal-Mart de Mexico), or use traditional retailers. Walmex provides access to a larger market, but it puts continuous pressure on its suppliers to improve their product's appeal, and it forces them to accept relatively low prices relative to product appeal. Simulations of the model show that the arrival of Walmex separates potential suppliers into two groups. Those with relatively high-appeal products choose Walmex as their retailer, whereas those with lower appeal products do not. For the industry as a whole, the model predicts that the associated market share reallocations, adjustments in innovative effort, and exit patterns increase productivity and the rate of innovation. These predictions accord well with the results from our firm interviews. The model's predictions are also supported by establishment-level panel data that characterize Mexican producers' domestic sales, investments, and productivity gains in regions with differing levels of Walmex presence during the years 1994 to 2002.
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To get the best new CEO, must the old CEO go? Power distribution in external CEO successions
John Perry, Xin Yao & Gaylen Chandler
Managerial and Decision Economics, forthcoming
Abstract:
When chief executive officers (CEOs) are replaced by external successors, they frequently retain high levels of power. We found that outgoing CEOs' announced post-succession involvement is negatively related to their successors' power. Additionally, we found that the magnitude of the stock market reaction to succession announcements is greater when the outgoing CEOs are allowed to continue to retain significant influence, and diminished when the new CEOs are awarded significant position power when they become CEO. These results suggest that to improve long-term performance, companies should keep outgoing CEOs around and not grant new CEOs too much power.
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Jan-Benedict Steenkamp & Eric Fang
Marketing Science, July 2011, Pages 628-645
Abstract:
The critical role of research and development (R&D) and advertising in the marketing strategy of the firm is well established. This paper conceptually and empirically examines why and how much the effectiveness of these two marketing instruments differs between times of economic expansions versus periods of economic contractions-and whether these results depend on the cyclicality of the industry in question. We consider a key marketing metric (market share) and a key financial metric (firm profit). Our empirical setting is 1,175 U.S. firms across a time period spanning over three decades. We find that R&D and advertising contribute to firm performance but that their effectiveness is not constant across the business cycle. Increasing advertising share in contractions has a stronger effect on profit and market share than increasing advertising share in expansions. Likewise, investments in R&D in contractions lead to higher gains in market share and profit than R&D investments in expansions, albeit only in subsequent years. If in contractions the firm faces tight budget constraints and has to choose between either maintaining R&D or advertising, our simulation results show that maintaining R&D is associated with better company performance. We find that advertising effectiveness, in general, and in contractions, in particular, is systematically moderated by the degree of cyclicality of the industry in which the firm operates. In relatively stable industries, advertising effects are small or even nonsignificant, and they do not go beyond the year the firm advertises. However, in highly cyclical industries, advertising effects are long-lasting, its total effect being 50% larger (market share) and 200% larger (profits) than in industries of average cyclicality. The effect of industry cyclicality on advertising effectiveness is especially pronounced in contractions. Collectively, these findings provide valuable and actionable insights into how firms should respond to contractions in order to grow profits and market share.
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Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices
Charles Courtemanche & Art Carden
NBER Working Paper, July 2011
Abstract:
Prior research shows grocery stores reduce prices to compete with Walmart Supercenters. This study finds evidence that the competitive effects of two other big box retailers - Costco and Walmart-owned Sam's Club - are quite different. Using city-level panel grocery price data matched with a unique data set on Walmart and warehouse club locations, we find that Costco entry is associated with higher grocery prices at incumbent retailers, and that the effect is strongest in cities with small populations and high grocery store densities. This is consistent with incumbents competing with Costco along non-price dimensions such as product quality or quality of the shopping experience. We find no evidence that Sam's Club entry affects grocery stores' prices, consistent with Sam's Club's focus on small businesses instead of consumers.
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Conference Presentations and the Disclosure Milieu
Brian Bushee, Michael Jung & Gregory Miller
Journal of Accounting Research, December 2011, Pages 1163-1192
Abstract:
Conference presentations differ from other voluntary disclosures in that the audience for the disclosure is co-located with managers in a well-defined physical and social setting, or "disclosure milieu." The milieu affects the degree to which conference participants can update their prior beliefs about the firm with information signals obtained through interactions with management and other informed participants. While the average abnormal stock return and volume reactions to presentations are positive, there is a great deal of cross-sectional variation as indicated by negative median reactions. We find that conference characteristics that determine the nature of the audience and its interactions, such as sponsor, location, size, and industry-focus, are significantly associated with the market reaction, consistent with the disclosure milieu explaining the cross-sectional variation in the information content of the presentation. We also find that conference characteristics explain changes in subsequent analyst and institutional investor following, consistent with the disclosure milieu creating differences in access to management by potential new investors and analysts.