Board games
Guy Shani & James Westphal
Academy of Management Journal, forthcoming
Abstract:
We consider how social and psychological connections among CEOs explain the propensity for corporate leaders to distance themselves socially from journalists who engage in negative reporting about firm leadership at other companies, and we examine the consequences for the valence of journalists' subsequent coverage. Our theoretical framework suggests that journalists who have engaged in negative coverage of a firm's leadership and strategy are especially likely to experience distancing from other leaders who (i) have friendship ties to the firm's CEO, (ii) are demographically similar to the CEO on salient dimensions, or (iii) are socially identified with the CEO as a fellow member of the corporate elite. Our theory and findings ultimately suggest that, due to the multiple sources of social identification between CEOs, journalists who engage in negative coverage of firm leadership tend to experience social distancing from multiple CEOs, and such distancing has a powerful influence on the valence of journalists' subsequent reporting about firm leadership and strategy across all the firms that they cover. We also extend our theoretical framework to suggest how the effect of social distancing on the valence of journalists' coverage is moderated by the early and late stages of a journalist's career.
---------------------
Political Values, Culture, and Corporate Litigation
Irena Hutton, Danling Jiang & Alok Kumar
Management Science, forthcoming
Abstract:
Using one of the largest samples of litigation data available to date, we examine whether the political culture of a firm determines its propensity for corporate misconduct. We measure political culture using the political contributions of top managers, firm political action committees, and local residents. We show that firms with a Republican culture are more likely to be the subject of civil rights, labor, and environmental litigation than are Democratic firms, consistent with the Democratic ideology that emphasizes equal rights, labor rights, and environmental protection. However, firms with a Democratic culture are more likely to be the subject of litigation related to securities fraud and intellectual property rights violations than are Republican firms, whose party ideology stresses self-reliance, property rights, market discipline, and limited government regulation. Upon litigation filing, both types of firms experience similar announcement reaction, which suggests that the observed relationship between political culture and corporate misconduct is unlikely to reflect differences in expected litigation costs.
---------------------
Timothy Quigley & Donald Hambrick
Strategic Management Journal, June 2015, Pages 821–830
Abstract:
We introduce a new explanation for one of the most pronounced phenomena on the American business landscape in recent decades: a dramatic increase in attributions of CEO significance. Specifically, we test the possibility that America's CEOs became seen as increasingly significant because they were, in fact, increasingly significant. Employing variance partitioning methodologies on data spanning 60 years and more than 18,000 firm-years, we find that the proportion of variance in performance explained by individual CEOs, or “the CEO effect,” increased substantially over the decades of study. We discuss the theoretical and practical implications of this finding.
---------------------
Signaling through Corporate Accountability Reporting
Thomas Lys, James Naughton & Clare Wang
Journal of Accounting and Economics, August 2015, Pages 56–72
Abstract:
We document that corporate social responsibility (“CSR”) expenditures are not a form of corporate charity nor do they improve future financial performance. Rather, firms undertake CSR expenditures in the current period when they anticipate stronger future financial performance. We show that the causality of the positive association between CSR expenditures and future firm performance differs from what is claimed in the vast majority of the literature and that corporate accountability reporting is another channel through which outsiders may infer insiders’ private information about firms’ future financial prospects.
---------------------
Do Better-Connected CEOs Innovate More?
Olubunmi Faleye, Tunde Kovacs & Anand Venkateswaran
Journal of Financial and Quantitative Analysis, December 2014, Pages 1201-1225
Abstract:
We present evidence suggesting that chief executive officer (CEO) connections facilitate investments in corporate innovation. We find that firms with better-connected CEOs invest more in research and development and receive more and higher quality patents. Further tests suggest that this effect stems from two characteristics of personal networks that alleviate CEO risk aversion in investment decisions. First, personal connections increase the CEO’s access to relevant network information, which encourages innovation by helping to identify, evaluate, and exploit innovative ideas. Second, personal connections provide the CEO with labor market insurance that facilitates investments in risky innovation by mitigating the career concerns inherent in such investments.
---------------------
CEO Visibility: Are Media Stars Born or Made?
Elizabeth Blankespoor & Ed DeHaan
Stanford Working Paper, March 2015
Abstract:
Recent literature finds that a CEO’s media visibility leads to improved career outcomes. However, the literature has been quiet about whether media coverage is naturally bestowed on CEOs for operating performance, or whether firms and/or CEOs are able to influence media coverage through strategic disclosure. That is, are CEO media stars "born" from their performance or "made" by managing the press? We develop a measure of “CEO promotion” in firm disclosures that captures the extent to which the CEO is individually represented in press releases. Specifically, our measure is based on whether the CEO is named or quoted in firm-initiated press releases, as well as the clarity and vividness of the CEO’s quotes. We find that CEO promotion is associated with a more than three-fold increase in media coverage of the CEO, and that the flow of specific CEO-related content from press releases into subsequent media articles is increasing with CEO promotion. We also find that abnormally high CEO promotion is associated with CEO entrenchment and declining future performance. Our evidence that firms and CEOs can influence CEO media coverage not only broadens our understanding of the causes and effects of CEO media visibility, but also indicates that firms can likely influence the content and context of firm-related media articles more generally.
---------------------
CEO Incentives and Product Development Innovation: Insights from Trademarks
Lucile Faurel et al.
University of California Working Paper, March 2015
Abstract:
We introduce trademarks as a new measure of product development innovation, and study the relation between CEO risk-taking incentives and trademarks in a broad set of industries. Our novel dataset contains 123,545 USPTO trademark registrations by S&P 1500 firms from 1993 to 2011. We find that the number of trademarks increases with the fraction of CEO pay in the form of stock options, the convexity of CEO incentives, and the amount of unvested CEO stock options. These relations hold within low-tech, mid-tech, and high-tech industries, whereas patents are related to CEO incentives mainly in high-tech industries. We also find that changes in stock option compensation around the implementation of SFAS 123(R), an exogenous shock, are positively related to trademark creation. Overall, the evidence suggests that CEO risk-taking incentives are important drivers of product development innovation.
---------------------
The bonding hypothesis of takeover defenses: Evidence from IPO firms
William Johnson, Jonathan Karpoff & Sangho Yi
Journal of Financial Economics, forthcoming
Abstract:
We propose and test an efficiency explanation for why firms deploy takeover defenses using initial public offering (IPO) firm data. We hypothesize that takeover defenses bond the firm's commitments by reducing the likelihood that an outside takeover will change the firm's operating strategy and impose costs on its business partners. Consistent with this hypothesis, we find that IPO firms deploy more takeover defenses when they have important business relationships to protect. An IPO firm's use of takeover defenses is positively related to the longevity of its business relationships. IPO firms’ use of takeover defenses create positive spillovers for their large customers. And IPO firms’ valuation and subsequent operating performance are positively related to their use of takeover defenses when they have important business relationships.
---------------------
CEO opportunism?: Option Grants and Stock Trades around Stock Splits
Erik Devos, William Elliott & Richard Warr
Journal of Accounting and Economics, August 2015, Pages 18–35
Abstract:
Decades of research confirm that, on average, stock split announcements generate positive abnormal returns. In our sample, 80% of CEO stock option grants are timed to occur on or before the split announcement date. With the average market-adjusted announcement return of 3.1%, awarding the grant before the split announcement results in an average gain per CEO-grant of $451,748. We find additional evidence consistent with timing of CEO stock trading around the split announcement. In the case of CEO stock sales, about two-thirds occur after the split announcement, resulting in an average gain of $345,613.
---------------------
Delaware Law as Lingua Franca: Theory and Evidence
Brian Broughman, Jesse Fried & Darian Ibrahim
Journal of Law and Economics, November 2014, Pages 865-895
Abstract:
Why would a firm incorporate in Delaware rather than in its home state? Prior explanations have focused on the inherent features of Delaware corporate law and on the positive network externalities created by so many other firms domiciling in Delaware. We offer an additional explanation: a firm may choose Delaware simply because its law is nationally known and thus can serve as a lingua franca for in-state and out-of-state investors. Analyzing the incorporation decisions of 1,850 venture-capitalist-backed start-ups, we find evidence consistent with this lingua franca explanation. Indeed, the lingua franca effect appears to be more important than other factors that have been shown to influence corporate domicile, such as corporate law flexibility and the quality of a state’s judiciary. Our study contributes to the literature on the market for corporate charters by providing evidence that Delaware’s continued dominance is in part due to investors’ familiarity with its corporate law.
---------------------
Costs and benefits of friendly boards during mergers and acquisitions
Breno Schmidt
Journal of Financial Economics, forthcoming
Abstract:
Finance theory predicts that board independence is not always in the shareholders' interest. In situations in which board advice is more important than monitoring, independence can decrease firm value. I test this prediction by examining the connection between takeover returns and board friendliness, using social ties between the CEO and board members as a proxy for less independent boards. I find that social ties are associated with higher bidder announcement returns when the potential value of board advice is high, but with lower returns when monitoring needs are high. The evidence suggests that friendly boards can have both costs and benefits, depending on the company's specific needs.
---------------------
Firms’ Earnings Smoothing, Corporate Social Responsibility, and Valuation
Lei Gao & Joseph Zhang
Journal of Corporate Finance, forthcoming
Abstract:
Earnings smoothing via accounting discretion could improve or garble actual earnings information. Although managers prefer a less volatile earnings path and perceive lower risk for earnings smoothness, prior studies show that there is no discernible relation between smoothness and firm valuation. Recent literature documents that socially responsible firms behave differently from other firms in their earnings management and financial reporting. We conjecture that the reported earnings of smoothers that are socially responsible deviate less from their permanent earnings, thus their reported earnings are more value relevant. Our empirical tests show income-smoothing firms with higher corporate social responsibility (CSR) experience higher contemporaneous earnings-return relationship, greater Tobin’s Q, and stronger current return-future earnings relationship. The results show that CSR is proved desirable as it adds a unique “quality dimension” to earnings attributes and is useful for firm valuation.
---------------------
Arm’s Length Financing and Innovation: Evidence from Publicly Traded Firms
Julian Atanassov
Management Science, forthcoming
Abstract:
Using a large panel of U.S. companies, I document that firms that rely more on arm’s length financing, such as public debt and equity, innovate more and have higher-quality innovations than firms that use other sources, such as relationship-based bank financing. I hypothesize that one possible reason for this finding is the greater flexibility and tolerance to experimentation associated with arm’s length financing. I find support for this hypothesis by showing that firms with more arm’s length financing have greater volatility of innovative output, and are more likely to innovate in new technological areas. Furthermore, focusing only on bank financing, I demonstrate that firms have more novel innovations if they borrow from multiple banks, use predominantly credit lines, and have less intense covenants. I address potential endogeneity concerns by using instrumental variable analysis, and by showing that innovation increases significantly after new public debt offerings and seasoned equity offerings, but does not change after new bank loans.
---------------------
Andrey Golubov, Alfred Yawson & Huizhong Zhang
Journal of Financial Economics, forthcoming
Abstract:
Firm fixed effects alone explain as much of the variation in acquirer returns as all the firm- and deal-specific characteristics combined. An interquartile range of acquirer fixed effects is over 6%, comparable to the interquartile range of acquirer returns. Acquirer returns persist over time, but mainly at the top end of the distribution. Persistence continues under different chief executive officers (CEOs), and attributes of the broader management team do not explain the fixed effect. Firm-specific heterogeneity in acquirer returns suggests that some organizations are extraordinary acquirers irrespective of the leadership at the top and the deal structures they choose. Implications for the M&A research are discussed.
---------------------
Do shareholder rights influence managerial propensity to engage in earnings management?
Kenneth Small, Seung Woog Kwag & Joanne Li
Journal of Economics and Finance, April 2015, Pages 308-326
Abstract:
We examine the relationship between shareholder rights and managerial propensity to engage in earnings smoothing. Using a measure of shareholder rights, and after controlling for factors that influence management’s decision to manage earnings, we conclude that increases in shareholder rights significantly increase management’s willingness to engage in earnings management. We find that firms with more democratic governance systems tend to have higher levels of current discretionary accruals and firms with less democratic governance structures tend to have lower levels of current discretionary accruals.
---------------------
Stealth Trading and Trade Reporting by Corporate Insiders
André Betzer et al.
Review of Finance, March 2015, Pages 865-905
Abstract:
Regulations in the pre-Sarbanes–Oxley era allowed corporate insiders considerable flexibility in timing their trades and engaging in stealth trading, for example, by executing several trades and reporting them jointly after the last trade. We document that even these lax reporting requirements were frequently violated and stealth trading was common. Event study abnormal returns are larger after reports of stealth trades than after reports of otherwise similar non-stealth trades. Our results imply that delayed reporting impedes the adjustment of prices to the information revealed by insider trades. They lend strong support to the more stringent reporting requirements established by the Sarbanes–Oxley Act.
---------------------
Ownership, Visibility and Effort: Golf Handicaps as Proxies for Managers' Extra Effort
Constantin Schön, Thomas Ehrmann & Katja Rost
Kyklos, May 2015, Pages 255–274
Abstract:
Economics suggests that owners, CEOs and chairmen have different claims in a company's output, and thus that these groups exert different efforts. However, the effort an agent invests in his/her firm is difficult to measure. Golf handicaps enable us to look into the relationship between different degrees of ownership and their implications for the effort that agents exert. Handicaps have the advantage that they can be directly observed and can be viewed as a mirror image of a manager's effort. We expect that times of crisis and changes in management positions influence golf handicaps, mostly for owners and, to a lesser extent, for CEOs and chairmen. Data of 440 Swiss top managers and their handicaps during eight years, from 2003 to 2010, strongly support this assumption.