Board of Activism
Institutional Investor Activism and Employee Safety: The Role of Activist and Board Political Ideology
Wei Shi, Chongwu Xia & Philipp Meyer-Doyle
Organization Science, forthcoming
Abstract:
Although prior research on shareholder activism has highlighted how such activism can economically benefit the shareholders of targeted firms, recent studies also suggest that shareholder activism can economically disadvantage nonshareholder stakeholders, notably employees. Our study extends this research by exploring whether shareholder activism by institutional investors (i.e., institutional investor activism) can adversely affect employee health and safety through increased workplace injury and illness. Furthermore, deviating from the assumption that financially motivated institutional investor activists are homogeneous in their goals and preferences, we investigate whether the influence of institutional investor activism on employee health and safety hinges on the political ideology of the shareholder activist and of the board of the targeted firm. Using establishment-level data, we find that institutional investor activism adversely influences workplace injury and illness at targeted firms and that this influence is stronger for nonliberal shareholder activists and for firms with a nonliberal board. Our study contributes to shareholder activism research by highlighting how the political ideology of shareholder activists and boards affects the impact of shareholder activism on stakeholders and how shareholder activism can adversely affect the health and safety of employees. Furthermore, our paper also contributes to research on workplace safety and the management of employee relations and human capital resources by highlighting the detrimental effect of a firm's ownership by investor activists on its employees and how the board's political ideology may enable a firm to reduce this risk.
The Politics of Management Earnings Guidance Bias
Xuejiao Liu et al.
University of Michigan Working Paper, August 2021
Abstract:
Theory suggests that personal managerial attributes are a driver of voluntary disclosures such as earnings guidance. The empirical challenge in isolating the effect of these attributes is that managers endogenously match to firms, whose business model attributes also drive guidance choices. We overcome this challenge by exploiting changes in the political party governing the White House that are naturally exogenous to the firm-CEO matching. In a large sample of US firms, we show that CEOs issue more pessimistic annual earnings guidance in periods when the White House is governed by the political party they did not contribute to. This increased pessimism does not appear to be driven by CEOs facing more information uncertainty when they are politically opposed, because these CEOs do not reduce their guidance incidence, frequency, or forecast precision (range width). We also find no significant business model effect, either in R&D and capex outlays or in earnings outcomes, when the White House is governed by the opposing party, further supporting the unchanged uncertainty premise. Investors discount the CEOs' pessimism during politically opposed periods, suggesting that the reporting pessimism is not investor-driven.
Acquired employees versus hired employees: Retained or turned over?
Weiyi Ng & Toby Stuart
Strategic Management Journal, forthcoming
Abstract:
Thousands of acquisitions of technology companies result in the de facto hiring of myriad individuals into new employers every year. We analyze the effects of such deals on acquired employee (AE) retention relative to a matched sample of directly hired employees (HEs) joining the same acquirers in the same year. In a dataset with all acquisitions of VC-backed companies in the previous two decades paired to over 30 million resumes, we find that acquired employees (AEs) turnover at a much higher rate than matched, HEs. Importantly, this difference in turnover rates is larger for AEs in higher job ranks and with advanced degrees. Likewise, we show that the postacquisition departure rate is highest for AEs in critical executive, technical, business development, and sales roles.
Competition Links and Stock Returns
Assaf Eisdorfer et al.
Review of Financial Studies, forthcoming
Abstract:
This paper demonstrates that value-relevant information about a firm appearing in regulatory disclosures of other firms is overlooked by investors. Firms highly mentioned in the 10-K competition section of other firms tend to outperform with risk-adjusted returns of up to 9% annually. Outperformance is concentrated in firms whose competition references are made in the context of targeting rather than admiration. Consistent with investor inattention, abnormal returns stem from cross-sector competition mentions as well as firms with low-analyst coverage. Moreover, highly mentioned firms exhibit improved fundamentals in subsequent years, further signifying they are underpriced.
Morale and Debt Dynamics
Daniel Barron, Jin Li & Michał Zator
Management Science, forthcoming
Abstract:
This paper shows that debt undermines relational incentives and harms worker morale. We build a dynamic model of a manager who uses limited financial resources to simultaneously repay a creditor and motivate a worker. If the manager can divert or misuse revenue, then debt makes the manager less willing to follow through on promised rewards, leading to low worker effort. In profit-maximizing equilibria, the firm prioritizes repaying its debts, leading to gradual increases in effort and wages. These dynamics can persist even after debts have been fully repaid. Consistent with this analysis, we document that a firm's financial leverage is negatively related to measures of employee morale, wages, and productivity.
Are all activists created equal? The effect of interventions by hedge funds and other private activists on long-term shareholder value
Edward Swanson, Glen Young & Christopher Yust
Journal of Corporate Finance, forthcoming
Abstract:
The allegation that activist investors demand changes that increase short-term stock prices at the expense of long-term shareholder value ("short-termism") has led to extensive research on interventions by hedge funds. Few studies include other private (non-hedge fund) activists, even though we find they constitute almost half of interventions. Using a 20-year sample that includes over 2000 interventions by each type of activist, we find that short- and long-window abnormal returns are positive and economically significant around ownership announcements for each activist, and they do not reverse. Importantly, positive returns are observed for both sale and most other (non-sale) demands. Demands to sell all, or part, of the targeted firms earn especially sizable returns, and interestingly, sale demands are made more frequently by other private activists than by hedge funds. Despite the sizable returns, informed users do not regard the equity as overvalued. Analysts' recommendations become more favorable-a reversal of the pre-announcement trend-and long-term, "dedicated" institutional investors increase their ownership. We also find post-intervention improvements in operating performance (ROA) and firm valuation (Tobin's Q), further justifying the positive response by market participants. Our study provides new evidence that activism increases long-term shareholder value and opens an avenue for a line of research on other private activists.
Investor Tastes, Corporate Behavior, and Stock Returns: An Analysis of Corporate Social Responsibility
Chuan Yang Hwang, Sheridan Titman & Ying Wang
Management Science, forthcoming
Abstract:
We classify institutions into socially responsible investors (SRI) and not socially responsible investors using the value weighted corporate social responsibility (CSR) scores of their portfolio holdings. We find that firms that exhibit increases in SRI ownership tend to increase future CSR scores. Our analysis of stock price responses to the revelation of SRI ownership changes indicates that the revelation of higher SRI ownership is associated with negative stock returns. These effects are particularly strong when we focus on SRI-activists, who tend to target firms with low CSR scores and lobby to increase them over time. These observations are consistent with the hypothesis that anticipated increases in CSR activities reduce firm values.
Rewarding morality: How corporate social responsibility shapes top management team compensation votes
Ryan Fehr, Abhinav Gupta & Cristiano Guarana
Organizational Behavior and Human Decision Processes, November 2021, Pages 170-188
Abstract:
In recent years, scholars have become increasingly interested in the effects of organizations' corporate social responsibility (CSR) efforts on observers' perceptions and behaviors. We extend this literature by drawing from person perception theories and ethics research to propose that CSR impacts shareholders' approval of TMT compensation packages. In contrast to the view that shareholders prefer organizations to avoid allocating resources to CSR, we argue that CSR increases shareholder perceptions of Top Management Team (TMT) members' moral character, which in turn increase shareholder approval of TMT compensation. Furthermore, we hypothesize that CSR industry norms moderate these effects, such that the effects are strongest when a company's CSR engagement exceeds its industry's norm. We test our model by triangulating evidence from three distinct studies: an archival analysis of the S&P 1500, a decision-making experiment based on a sample of shareholders, and an online experiment using a more stringent manipulation of firms' CSR stances. Implications for theory and practice are discussed.
Bankrupt Innovative Firms
Song Ma, Joy Tianjiao Tong & Wei Wang
Management Science, forthcoming
Abstract:
We study how innovative firms manage their innovation portfolios after filing for Chapter 11 reorganization using three decades of data. We find that they sell off core (i.e., technologically critical and valuable), rather than peripheral, patents in bankruptcy. The selling pattern is driven almost entirely by firms with greater use of secured debt, and the mechanism is secured creditors exercising their control rights on collateralized patents. Creditor-driven patent sales in bankruptcy have implications for technology diffusion - the sold patents diffuse more slowly under new ownership and are more likely to be purchased by patent trolls.
A Test of Income Smoothing Using Pseudo Fiscal Years
Dirk Black, Spencer Pierce & Wayne Thomas
Management Science, forthcoming
Abstract:
The purpose of our study is to further understand managerial incentives that affect the volatility of reported earnings. Prior research suggests that the volatility of fourth-quarter earnings may be affected by the integral approach to accounting (i.e., "settling up" of accrual estimation errors in the first three quarters of the fiscal year) or earnings management to meet certain reporting objectives (e.g., analyst forecasts). We suggest that another factor affecting fourth-quarter earnings is managers' intentional smoothing of fiscal-year earnings. For each firm, we create pseudo-year earnings using four consecutive quarters other than the four quarters of the reported fiscal year. We then compare the earnings volatility of pseudo years to the earnings volatility of the firm's own reported fiscal year. We find evidence consistent with fourth-quarter accruals reflecting managerial incentives to smooth fiscal-year earnings. This conclusion is validated by several cross-sectional tests, the pattern in quarterly cash flows and accruals, and several robustness tests. Overall, we contribute to the literature exploring alternative explanations for the differential volatility of fiscal-year and fourth-quarter earnings.
Accounting Performance Goals in CEO Compensation Contracts and Corporate Risk Taking
Clara Xiaoling Chen et al.
Management Science, forthcoming
Abstract:
This study provides the first large-sample archival evidence on the impact of three commonly used accounting performance goals (thresholds, targets, and maximums) in CEO compensation contracts on corporate risk taking. Using proxy statement disclosure on performance goals for CEOs of U.S. public companies, we find that lower thresholds and higher maximums are associated with greater corporate risk taking, and these results are more pronounced when CEOs have greater incentives to achieve accounting performance goals or have lower innate risk aversion. In addition, we find that target difficulty is not significantly associated with corporate risk taking after controlling for thresholds and maximums. Finally, we find that CEO compensation contracts are more likely to have lower thresholds and higher maximums when risk taking is more value-enhancing or when R&D investment is more profitable, consistent with boards setting performance goals to induce an appropriate amount of corporate risk taking. Our study contributes to the accounting literature on target setting and corporate risk taking by identifying accounting performance goals as a tool in executive compensation contract design to influence risk taking.