Casting Directors and Officers
Director Liability Protection and the Quality of Independent Directors
Ronald Masulis, Sichen Shen & Hong Zou
Management Science, forthcoming
Abstract:
We study whether legal liability protection helps companies to recruit and retain high-quality independent directors. We conduct difference-in-differences analyses exploiting the 1999 Ninth Circuit Court of Appeals Ruling on the Silicon Graphics case, which substantially raised the bar for filing securities class action (SCA) lawsuits as a shock. We document supporting evidence for the talent attraction hypothesis by showing improvements in newly recruited independent director quality following the ruling, but only for candidates who are previously not exposed to SCA litigation risk. The effects are stronger for firms facing greater litigation risk ex ante or smaller local supplies of director candidates. Results are more evident for experience-based quality dimensions. We also analyze a sample of voluntary independent director departures and find little support for the talent retention hypothesis, suggesting that more complex factors enter into a director’s continuation decision once a director is already exposed to SCA litigation risk. A policy implication is that liability protection can be useful in attracting more unexposed high-quality candidates to the pool of public boards but does little to attract high-quality candidates who are already in the pool of public firms.
CEO turnover and director reputation
Felix von Meyerinck, Jonas Romer & Markus Schmid
Journal of Financial Economics, January 2025
Abstract:
This paper analyzes the reputational effects of forced CEO turnovers on outside directors. We find that directors interlocked to a forced CEO turnover experience large and persistent increases in withheld votes at subsequent re-elections relative to non-turnover-interlocked directors. Directors are not penalized for an involvement in a turnover per se but for forced CEO turnovers that are related to governance failures by the board. Our results challenge the widespread view that forcing out a CEO can generally be understood as a sign of a well-functioning corporate governance.
Polarized corporate boards
Thao Hoang, Phong Ngo & Le Zhang
Journal of Corporate Finance, April 2025
Abstract:
We show that political polarization among directors negatively affects corporate board effectiveness by reducing forced CEO turnover-performance sensitivity. Our results are more pronounced in presidential election years and for firms with more monitoring and advising needs. Polarization also increases the departure likelihood for directors who are ideologically distant from the rest of the board, making boards more politically homogeneous over time. Finally, we show that polarization in the boardroom lowers firms' investment-Q sensitivity and Environmental, Social and Governance (ESG) performance. Our findings highlight the real economic cost of political polarization.
Corporate Share Repurchase Policies and Labor Share
Darren Kisgen, Lei Kong & Xudong Fu
Boston College Working Paper, December 2024
Abstract:
Using census data, we investigate whether share repurchases are responsible for the fall in labor share in U.S. corporations. Recent legislation imposes taxes on share repurchases, motivated by the assertion that share repurchases have led to reduced labor payments. Using several empirical approaches, we find no evidence that increases in share repurchases contribute to decreases in labor share. Top share repurchasing firms since 1982 did not decrease labor share. We also rely on exogenous changes in share repurchases around EPS announcements to pinpoint causality. Policies aimed at improving labor share by discouraging share repurchases will likely not achieve their objectives.
Leveraged Payouts: How Using New Debt to Pay Returns in Private Equity Affects Firms, Employees, Creditors, and Investors
Abhishek Bhardwaj, Abhinav Gupta & Sabrina Howell
NBER Working Paper, January 2025
Abstract:
We study the causal effect of a large increase in firm leverage. Our setting is dividend recapitalizations in private equity (PE), where portfolio companies take on new debt to pay investor returns. After accounting for positive selection into more debt, we show that large leverage increases make firms much riskier, dramatically raising exit and bankruptcy rates but also IPOs. The debt-bankruptcy relationship is in line with Altman-Z model predictions for private firms. Dividend recapitalizations increase deal returns but reduce: (a) wages among surviving firms; (b) pre-existing loan prices; and (c) fund returns, which seems to reflect moral hazard via new fundraising. These results suggest negative implications for employees, pre-existing creditors, and investors.
The Real Effects of Bankruptcy Forum Shopping
Samuel Antill & Aymeric Bellon
Harvard Working Paper, December 2024
Abstract:
Many non-Delaware firms strategically file for bankruptcy in Delaware. Should this "forum shopping" be allowed? This question has motivated six congressional bill proposals over decades of policy debate. Using a novel natural experiment and Census-Bureau microdata, we inform this debate. Comparing observably similar firms within a Delaware-adjacent state, we show that physical proximity to Delaware predicts forum shopping. Instrumenting with proximity, we find that forum shopping causally: (i) prevents closures and liquidations, (ii) shortens bankruptcies, (iii) boosts creditor recovery, and (iv) increases post-bankruptcy employment by 62%. Proximity to Delaware is uncorrelated with pre-bankruptcy employment trends, validating the exclusion restriction.
Impact of OM Content in Earnings Calls on a Firm’s Stock Performance
Sudhir Voleti, Vishwakant Malladi & Milind Sohoni
Management Science, forthcoming
Abstract:
We investigate whether and to what extent financial markets value and respond to operations management (OM)-related information in quarterly earnings calls directed toward financial market participants. We develop and use a novel construct called “stated OM focus” (SOMF) to mine the incidence of and emphasis on OM information in the quarterly earnings conference calls for a large cross-section of firms (S&P 1500) over a time frame of 15 years. We empirically establish the value-relevance of OM information as well as summarize and capture both explanatory and predictive aspects of the OM function’s contribution to firm value. We show that OM-related information disclosed by firms systematically, significantly, positively, and persistently affects abnormal stock returns after controlling for known covariates and controls (financial metrics, standard OM metrics, firm and time effects, and lexical-structure related) and after accounting for earnings surprise. Furthermore, we find evidence that firms’ stated OM focus bears significant predictive power in the short term. Long-short portfolios, created using a sorting signal derived solely from stated OM-focus information, predict future abnormal returns consistently over one, two and three months forward from the earnings call event. We show that the OM information metric is reliable and bears internal, external, and predictive validity. These findings offer useful implications for firms, financial market participants, and OM function stakeholders.
Short selling and product market competition
Rafael Matta, Sergio Rocha & Paulo Vaz
Journal of Banking & Finance, February 2025
Abstract:
We empirically investigate how short selling affects firms’ product market performance via a managerial monitoring channel. Using both historical data and exogenous shocks to short selling, we find robust evidence that short interest negatively impacts market shares, especially in large firms. Our Reg SHO results are stronger in concentrated industries and industries where firms compete in strategic substitutes. Further tests show that these effects are driven by low ex-ante stock price informativeness. The evidence suggests that the interaction between market power and price opacity generates in
Do “say-on-pay” votes affect M&A decisions?
Shantanu Dutta et al.
Journal of Corporate Finance, April 2025
Abstract:
This paper demonstrates that firms receiving above-industry-average support in their “say-on-pay” (SoP) votes engage in more M&A transactions in the subsequent year. Our empirical findings suggest that high levels of SoP voting support may boost managerial confidence, thereby stimulating increased pursuit of acquisitions. Moreover, we observe that managers garnering higher SoP vote support are more likely to secure shareholders' backing in M&A votes, receive higher compensation in successful deals, and face a reduced likelihood of forced turnover following unsuccessful deals. Additionally, we find that both short-term and long-term M&A performance significantly improves in deals announced by managers receiving higher SoP voting support. These findings contribute to our understanding of the relation between shareholder support for CEOs and firm investment.
Value-Based CEO Equity Grants
Jin Xu, Pengfei Ye & Cheng Zhang
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We document firms often determine CEO equity grants based on a predetermined dollar value (value-based equity grant) instead of on the number of shares (share-based grant). Value-based equity grants weaken the relationship between stock performance and CEO equity pay, lower CEO portfolio delta, and slow firms’ investment in R&D. We find that retention pressure is a key reason for the use of value-based equity pay, while governance could also matter. Overall, this paper alerts boards to the unintended consequences of pursuing a target pay level or pay structure because such practices can lead to value-based equity grants in CEO compensation.