Captains of industry
Financing Constraints and Workplace Safety
Jonathan Cohn & Malcolm Wardlaw
Journal of Finance, forthcoming
Abstract:
We present evidence that financing frictions adversely impact investment in workplace safety, with implications for worker welfare and firm value. Using several identification strategies, we find that injury rates increase with leverage and negative cash flow shocks, and decrease with positive cash flow shocks. We show that firm value decreases substantially with injury rates. Our findings suggest that investment in worker safety is an economically important margin on which firms respond to financing constraints.
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Institutional Ownership and Corporate Tax Avoidance: New Evidence
Mozaffar Khan, Suraj Srinivasan & Liang Tan
Harvard Working Paper, May 2016
Abstract:
We provide new evidence on the agency theory of corporate tax avoidance (Slemrod, 2004; Crocker and Slemrod, 2005; Chen and Chu, 2005) by showing that increases in institutional ownership are associated with increases in tax avoidance. Using the Russell index reconstitution setting to isolate exogenous shocks to institutional ownership, and a regression discontinuity design that facilitates sharper identification of treatment effects, we find a significant and discontinuous increase in tax avoidance following Russell 2000 inclusion. The tax avoidance involves the use of tax shelters, and immediate benefits include higher profit margins and likelihood of meeting or beating analyst expectations. Collectively the results shed light on the effect of increased ownership concentration on tax avoidance.
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A Fleeting Glory: Self-Serving Behavior Among Celebrated MBA CEOs
Danny Miller & Xiaowei Xu
Journal of Management Inquiry, July 2016, Pages 286-300
Abstract:
Recent studies have criticized MBA programs for their association with self-serving behavior, although there is little empirical research to establish the firm-level consequences of that relationship. We explored whether MBAs versus non-MBAs in a sample of celebrated CEOs of major U.S. companies - thus CEOs who have achieved and had opportunity to exploit their fame - were more apt than their counterparts to engage in self-serving behavior that benefits them but disadvantages their companies. We assessed this behavior via the pursuit of costly growth strategies, an inability to sustain performance, and the capacity to obtain superior private benefits in compensation. Our analysis of 444 star CEOs celebrated on the covers of major business publications confirmed that an MBA education either fosters or is related to such behavior among these executives.
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CEO Home Bias and Corporate Acquisitions
Kiseo Chung, Clifton Green & Breno Schmidt
Emory University Working Paper, June 2016
Abstract:
We find that CEOs are significantly more likely to purchase cross-state targets from their birth state, consistent with either informational advantages or familiarity bias. Evidence from bidder announcement returns supports the latter view. Acquirer returns are significantly lower for CEO home state acquisitions, and the relation is robust to controls for firm and industry characteristics. The negative announcement effect is stronger for poorly-governed firms, when the target is located further away, and when the CEO has a deeper birth-state connection. CEOs' post-acquisition trading behavior also supports a familiarity bias interpretation. Our findings suggest CEO home bias influences firm investment.
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Ties that Bind: How Business Connections Affect Mutual Fund Activism
Dragana Cvijanović, Amil Dasgupta & Konstantinos Zachariadis
Journal of Finance, forthcoming
Abstract:
We investigate whether business ties with portfolio firms influence mutual funds' proxy voting using a comprehensive data set spanning 2003 to 2011. In contrast to prior literature, we find that business ties significantly influence pro-management voting at the level of individual pairs of fund families and firms after controlling for ISS recommendations and holdings. The association is significant only for shareholder-sponsored proposals and stronger for those that pass or fail by relatively narrow margins. Our findings are consistent with a demand-driven model of biased voting in which company managers use existing business ties with funds to influence how they vote.
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What Else Do Shareholders Want? Shareholder Proposals Contested by Firm Management
Eugene Soltes, Suraj Srinivasan & Rajesh Vijayaraghavan
Harvard Working Paper, April 2016
Abstract:
Shareholder proposals provide investors an opportunity to exercise their decision rights within a firm. However, not all proposals created by shareholders receive consideration. Managers can seek permission from the Securities and Exchange Commission (SEC) to exclude specific proposals from the proxy statement. From 2003-2013, we find that managers seek to exclude 40% of all proposals they receive, but the SEC does not permit exclusion in over a quarter of the cases. Of the proposals that managers seek to exclude but the SEC does not allow, 28% win shareholder support or the firm voluntarily implements prior to a vote. Our analysis of contested shareholder proposals suggests that managers often seek to avoid the implementation of legitimate shareholder interests.
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Product Market Competition and Internal Governance: Evidence from the Sarbanes-Oxley Act
Vidhi Chhaochharia et al.
Management Science, forthcoming
Abstract:
We use the Sarbanes-Oxley Act of 2002 (SOX) as a quasi-natural experiment to examine the link between product market competition and internal governance mechanisms. Consistent with the notion that competition plays an important role in aligning incentives within the firm, SOX has led to a larger improvement in the operation of firms in concentrated industries than in nonconcentrated industries. Furthermore, within concentrated industries, the effect is especially pronounced among firms with weaker governance mechanisms prior to SOX. We corroborate these findings using two additional regulatory changes in the United States and abroad. Overall, our results indicate that corporate governance is more important when firms face less product market competition.
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How Does Hedge Fund Activism Reshape Corporate Innovation?
Alon Brav et al.
NBER Working Paper, May 2016
Abstract:
This paper studies how hedge fund activism reshapes corporate innovation. Firms targeted by hedge fund activists experience an improvement in innovation efficiency during the five-year period following the intervention. Despite a tightening in R&D expenditures, target firms experience increases in innovation output, measured by both patent counts and citations, with stronger effects seen among firms with more diversified innovation portfolios. We also find that the reallocation of innovative resources and the redeployment of human capital contribute to the refocusing of the scope of innovation. Finally, additional tests refute alternative explanations attributing the improvement to mean reversion, sample attrition, management's voluntary reforms, or activists' stock-picking abilities.
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Corporate Finance Policies and Social Networks
Cesare Fracassi
Management Science, forthcoming
Abstract:
This paper shows that managers are influenced by their social peers when making corporate policy decisions. Using biographical information about executives and directors of U.S. public companies, we define social ties from current and past employment, education, and other activities. We find that more connections two companies share with each other, more similar their capital investments are. To address endogeneity concerns, we find that companies invest less similarly when an individual connecting them dies. The results extend to other corporate finance policies. Furthermore, central companies in the social network invest in a less idiosyncratic way and exhibit better economic performance.
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Windowdressing individual backgrounds: Evidence from biographies of corporate directors
Ian Gowm, Aida Sijamic Wahid & Gwen Yu
Harvard Working Paper, April 2016
Abstract:
We examine disclosure of prior experience in the biographies of corporate directors. Using biographies in proxy statements filed with the SEC, we find that directors are less likely to disclose directorships held at firms that experienced adverse events such as accounting restatements, securities litigation, or bankruptcy. When directors disclose adverseevent directorships, stock reaction at appointment is more negative and the likelihood of loss of existing directorships in future years is higher. Nondisclosure of directorships is significantly reduced following changes to SEC rules in 2010, with the greatest change being for adverseevent directorships. These findings suggest that corporate directors make strategic disclosure choices with consequences in both capital and labor markets.
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Does the Market Value CEO Styles?
Antoinette Schoar & Luo Zuo
American Economic Review, May 2016, Pages 262-266
Abstract:
We study how investors perceive the skill set that different types of CEOs bring into their companies. We compare CEOs who started their careers during a recession with other CEOs. We show that the announcement return around the appointment of a recession CEO is very significant and positive, and this positive market reaction is driven by cases where a recession CEO replaces a non-recession CEO. Our results indicate that the market assigns a positive and economically meaningful value to a recession CEO, suggesting that there is a limited supply of these types of CEOs in the executive labor market.
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Analyst Coverage and Real Earnings Management: Quasi-Experimental Evidence
Rustom Irani & David Oesch
Journal of Financial and Quantitative Analysis, April 2016, Pages 589-627
Abstract:
We study how securities analysts influence managers' use of different types of earnings management. To isolate causality, we employ a quasi-experiment that exploits exogenous reductions in analyst following resulting from brokerage house mergers. We find that managers respond to the coverage loss by decreasing real earnings management while increasing accrual manipulation. These effects are significantly stronger among firms with less coverage and for firms close to the zero-earnings threshold. Our causal evidence suggests that managers use real earnings management to enhance short-term performance in response to analyst pressure, effects that are not uncovered when focusing solely on accrual-based methods.
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Andrew Prevost, Udomsak Wongchoti & Ben Marshall
Journal of Banking & Finance, forthcoming
Abstract:
Activist shareholders have an incentive to communicate and cooperate with other major shareholders. However, the impact of their activity on information flow surrounding targeted firms is largely unknown. We explore this aspect using a prolific proponent: labor unions. Following the mailing of proxies containing union-sponsored shareholder proposals, trading volume increases significantly and at-issue bond yield spreads of targeted firms are lower compared to matched firms. Subsequent difference-in-differences analyses show that stock prices of targeted firms become more informative as a result of activism, affirming the intuition that activism results in a reduction of differential information between outside investors.
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Firm Selection and Corporate Cash Holdings
Juliane Begenau & Berardino Palazzo
Harvard Working Paper, May 2016
Abstract:
The gradual replacement of traditional U.S. public companies by more R&D-intensive firms is key to understanding the secular trend in average cash-holdings. Over the last 35 years, an increasing share of R&D-intensive firms has entered the stock market with progressively higher cash-balances. This positive entry-effect dominates the negative within-firm effect post IPO. We build a firm industry model with endogenous entry to quantify the importance of two competing selection mechanisms: an increasing share of R&D-intensive firms in the overall economy and more favorable IPO conditions. Only the combination of both mechanisms successfully generates a sizable secular increase.
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Managerial Ability and Credit Risk Assessment
Samuel Bonsall, Eric Holzman & Brian Miller
Management Science, forthcoming
Abstract:
Research on the credit rating process has primarily focused on how rating agencies incorporate firm characteristics into their rating opinions. We contribute to this literature by examining the impact of managerial ability on the credit rating process. Given debt market participants' interest in assessing default risk, we begin by documenting that higher managerial ability is associated with lower variability in future earnings and stock returns. We then show that higher managerial ability is associated with higher credit ratings (i.e., lower assessments of credit risk). To provide more direct identification of the impact of managerial ability, we examine chief executive officer (CEO) replacements and document that ratings increase (decrease) when CEOs are replaced with more (less) able CEOs. Finally, we show that managerial ability also has capital market implications by documenting that managerial ability is associated with bond offering credit spreads. Collectively, our evidence suggests that managerial ability is an important factor that bond market participants impound into their assessments of firm credit risk.