Company Man
Lucian Bebchuk, Martijn Cremers & Urs Peyer
Journal of Financial Economics, forthcoming
Abstract:
We investigate the relation between the CEO Pay Slice (CPS) - the fraction of the aggregate compensation of the top-five executive team captured by the Chief Executive Officer - and the value, performance, and behavior of public firms. The CPS could reflect the relative importance of the CEO as well as the extent to which the CEO is able to extracts rents. We find that, controlling for all standard controls, CPS is negatively associated with firm value as measured by industry-adjusted Tobin's q. CPS also has a rich set of relations with firms' behavior and performance. In particular, CPS is correlated with lower (industry-adjusted) accounting profitability, lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements, higher odds of the CEO receiving a lucky option grant at the lowest price of the month, lower performance sensitivity of CEO turnover, and lower stock market returns accompanying the filing of proxy statements for periods when CPS increases. Taken together, our results are consistent with the hypothesis that higher CPS is associated with agency problems and indicate that CPS can provide a useful tool for studying the performance and behavior of firms.
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Chipping Away at the Glass Ceiling: Gender Spillovers in Corporate Leadership
David Matsa & Amalia Miller
American Economic Review, May 2011, Pages 635-639
Abstract:
This paper examines the role of women helping women in corporate America. Using a merged panel of directors and executives for large US corporations between 1997 and 2009, we find a positive association between the female share of the board of directors in the previous year and the female share among current top executives. The relationship's timing suggests that causality runs from boards to managers and not the reverse. This pattern of women helping women at the highest levels of firm leadership highlights the continued importance of a demand-side "glass ceiling" in explaining the slow progress of women in business.
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Nicholas Rule & Nalini Ambady
Leadership Quarterly, forthcoming
Abstract:
First impressions can predict numerous subjective and objective outcomes. Here we show that judgments of the faces of the Managing Partners (MPs) of America's top 100 law firms relate to their firms' success. Participants' ratings of Power (competence, dominance, and facial maturity) from the MPs' faces significantly correlated with the profit margin, profitability index, and profits per equity partner (PPP) that the firms earned. Participants' ratings of Warmth (likeability and trustworthiness) showed no relationship with these variables, however. These effects remained after controlling for important factors, such as facial attractiveness, MP years of experience, photo quality, and firm size, as measured by number of lawyers. Based on previous research and leadership theory, traits related to leadership may therefore become manifest in individuals' faces, influencing the performance of the organizations that they lead.
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International Business Travel: An Engine of Innovation?
Nune Hovhannisyan & Wolfgang Keller
NBER Working Paper, May 2011
Abstract:
While it is well known that managers prefer in-person meetings for negotiating deals and selling their products, face-to-face communication may be particularly important for the transfer of technology because technology is best explained and demonstrated in person. This paper studies the role of short-term cross-border labor movements for innovation by estimating the recent impact of U.S. business travel to foreign countries on their patenting rates. Business travel is shown to have a significant effect up and beyond technology transfer through the channels of international trade and foreign direct investment. On average, a 10% increase in business travel leads to an increase in patenting by about 0.3%. We show that the technological knowledge of each business traveler matters by estimating a higher impact for travelers that originate in U.S. states with substantial innovation, such as California. Moreover, the business traveler effect on innovation also varies across industries. This study provides initial evidence that international air travel may be an important channel through which cross-country income differences can be reduced. We also discuss a number of policy issues in the context of short-term cross-border labor movements.
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Peter Roberts, Mukti Khaire & Christopher Rider
American Economic Review, May 2011, Pages 147-151
Abstract:
Because wines are aged for several years before they are released, newly hired winemakers arrive as wines made by their predecessors enter the market. An analysis of winemaker hiring events reveals that wines released right after a new winemaker's arrival from a prominent competitor are priced significantly higher than corresponding wines released in the preceding year. However, the wines released before and after the hiring event are indistinguishable in terms of quality. These findings isolate a "purely symbolic" effect of employee mobility, which affirm sociological accounts of markets - under conditions of uncertainty, inter-organizational affiliations condition producers' returns to quality demonstrations.
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Mobility and Cash Compensation: The Moderating Effects of Gender, Race, and Executive Search Firms
George Dreher, Jeong-Yeon Lee & Thomas Clerkin
Journal of Management, May 2011, Pages 651-681
Abstract:
This study addresses a phenomenon observed in past research on career success and attainment in which White male managers and executives seemingly gain more from external labor market mobility than do their female and minority male counterparts. Focusing on the executive search industry, the authors found that executive search firm representatives are more likely to contact White males than females and minority males, that the compensation advantage resulting from an external labor market strategy is strongest among White male managers and executives, and that search firm-initiated contacts moderate the relationship between compensation and mobility in an external labor market. Implications for management research, theory, and practice are discussed.
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The market reaction to corporate governance regulation
David Larcker, Gaizka Ormazabal & Daniel Taylor
Journal of Financial Economics, forthcoming
Abstract:
This paper investigates the market reaction to recent legislative and regulatory actions pertaining to corporate governance. The managerial power view of governance suggests that executive pay, the existing process of proxy access, and various governance provisions [e.g., staggered boards and Chief Executive Officer (CEO)-chairman duality] are associated with managerial rent extraction. This perspective predicts that broad government actions that reduce executive pay, increase proxy access, and ban such governance provisions are value-enhancing. In contrast, another view of governance suggests that observed governance choices are the result of value-maximizing contracts between shareholders and management. This perspective predicts that broad government actions that regulate such governance choices are value destroying. Consistent with the latter view, we find that the abnormal returns to recent events relating to corporate governance regulations are, on average, decreasing in CEO pay, decreasing in the number of large blockholders, decreasing in the ease by which small institutional investors can access the proxy process, and decreasing in the presence of a staggered board.
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It's Showtime: Do Managers Report Better News before Annual Shareholder Meetings?
Valentin Dimitrov & Prem Jain
Journal of Accounting Research, forthcoming
Abstract:
Annual shareholder meetings provide an opportunity for shareholders to express their concerns with corporate performance, pressuring managers to demonstrate good performance. We show that managers respond to the shareholder pressure by reporting positive corporate news before the annual shareholder meetings. Specifically, we find significantly positive average cumulative abnormal returns during the 40 days before the annual meeting date. The pre-meeting returns are significantly higher when shareholder discontent with managerial performance is likely to be stronger. The decile of companies with the worst past stock price performance exhibits average cumulative abnormal returns of 3.4% and buy-and-hold returns of 7.0% during the 40-day pre-meeting period. Companies with poor past performance exhibit even higher pre-meeting returns when shareholder pressure on management is greater, such as when institutional ownership is high, when CEO compensation is high, and when shareholders submit proxy proposals on corporate governance. We complement the evidence based on CARs by showing how managers of poorly performing firms manage the timing and content of earnings announcements and management forecast announcements before the annual shareholder meetings. Overall, the results suggest that managers attempt to influence shareholders before annual shareholder meetings through positive news.
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Shareholders' Say on Pay: Does It Create Value?
Jie Cai & Ralph Walkling
Journal of Financial and Quantitative Analysis, April 2011, Pages 299-339
Abstract:
Congress and activists recently proposed giving shareholders a say (vote) on executive pay. We find that when the House passed the Say-on-Pay Bill, the market reaction was significantly positive for firms with high abnormal chief executive officer (CEO) compensation, with low pay-for-performance sensitivity, and responsive to shareholder pressure. However, activist-sponsored say-on-pay proposals target large firms, not those with excessive CEO pay, poor governance, or poor performance. The market reacts negatively to labor-sponsored proposal announcements and positively when these proposals are defeated. Our findings suggest that say-on-pay creates value for companies with inefficient compensation but can destroy value for others.
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Are all CEOs above average? An empirical analysis of compensation peer groups and pay design
John Bizjak, Michael Lemmon & Thanh Nguyen
Journal of Financial Economics, June 2011, Pages 538-555
Abstract:
Companies can potentially use compensation peer groups to inflate pay by choosing peers that are larger, choosing a high target pay percentile, or choosing peer firms with high pay. Although peers are largely selected based on characteristics that reflect the labor market for managerial talent, we find that peer groups are constructed in a manner that biases compensation upward, particularly in firms outside the Standard & Poor's (S&P) 500. Pay increases close only about one-third of the gap between the pay of the Chief Executive Officer (CEO) and the peer group, however, suggesting that boards exercise discretion in adjusting compensation. Preliminary evidence suggests that increased disclosure has reduced the biases in peer group choice.
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More Than Adopters: Competing Influences in the Interlocking Directorate
Brian Connelly et al.
Organization Science, May-June 2011, Pages 688-703
Abstract:
This study explores the competing influences of different types of board interlocks on diffusion of a strategic initiative among a population of firms. We examine a broad social network of interlocking directors in U.S. firms over a period of 17 years and consider the likelihood that these firms will adopt a strategy of expansion into China. Results show that ties to adopters that unsuccessfully implement this strategy have a nearly equal and opposing effect on the likelihood of adoption as do ties to those that successfully implement the strategy. Ties to those that do not implement the strategy also have a suppressive effect on the likelihood of adoption. Furthermore, we examine a firm's position in the core-periphery structure of the interlocking directorate, finding that ties to adopters closer to the network core positively affect the likelihood of adoption. We discuss the implications of our study for social network analysis, governance, and internationalization research.
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Boards, CEOs, and surviving a financial crisis: Evidence from the internet shakeout
Glen Dowell, Margaret Shackell & Nathan Stuart
Strategic Management Journal, forthcoming
Abstract:
We examine whether corporate governance matters more for firms facing financial distress. We theorize that financial crisis changes the relative costs and benefits of governance mechanisms and that more independent and smaller boards become more valuable in distressed firms. We further hypothesize that CEO power becomes increasingly beneficial as concentrated power allows the firm to respond more rapidly to the crisis. Event-history analysis of the failure of publicly traded Internet firms over the period 2000-2002 confirms our hypotheses. Our results suggest that the association between governance and survival depends on firm and environmental context and that one-size-fits-all prescriptions for governance mechanisms are therefore likely to be ineffective.
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New Evidence on What Happens to CEOs After They Retire
Changmin Lee
Journal of Corporate Finance, June 2011, Pages 474-482
Abstract:
I analyze directorships held by CEOs who retired during the periods 1989-1993, 1995-1999 (before the Sarbanes-Oxley Act) and 2001-2005 (after the Sarbanes-Oxley Act). My results suggest that retired CEOs became less popular on boards after the Sarbanes-Oxley Act. In addition, although pre-retirement accounting performance helps explain the number of outside directorships a retired CEO held in the 1989-1993 sample, as Brickley et al. (1999) have found, it does not explain this number for the 1995-1999 sample and 2001-2005 sample. Third, a company's stock performance during a CEO's tenure is negatively related to the number of outside directorships only in the 2001-2005 sample. Fourth, the number of outside directorships is positively correlated with the size of a retired CEO.s original firm before the Sarbanes-Oxley Act, but this is not the case after the Sarbanes-Oxley Act. Finally, if retired CEOs worked in regulated industries, their probability of serving at least one outside directorship 2 years after retirement falls by 21% in the 1989-1993 sample. However, this negative effect is marginally significant in the 1995-1999 sample, and vanishes in the 2001-2005 sample.
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Stock option grants to target CEOs during private merger negotiations
Eliezer Fich, Jie Cai & Anh Tran
Journal of Financial Economics, forthcoming
Abstract:
Unscheduled stock options to target chief executive officers (CEOs) are a nontrivial phenomenon during private merger negotiations. In 920 acquisition bids during 1999-2007, over 13% of targets grant them. These options substitute for golden parachutes and compensate target CEOs for the benefits they forfeit because of the merger. Targets granting unscheduled options are more likely to be acquired but they earn lower premiums. Consequently, deal value drops by $62 for every dollar target CEOs receive from unscheduled options. Conversely, acquirers of targets offering these awards experience higher returns. Therefore, deals involving unscheduled grants exhibit a transfer of wealth from target shareholders to bidder shareholders.
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Is a Team Different from the Sum of its Parts? Evidence from Mutual Fund Managers
Michaela Bär, Alexander Kempf & Stefan Ruenzi
Review of Finance, April 2011, Pages 359-396
Abstract:
This paper provides the first empirical test of the diversification of opinions theory and the group shift theory using real business data. Our data set covers management teams and single managers of US equity mutual funds. Our results reject the group shift theory and support the diversification of opinions theory: teams follow less extreme investment styles, their portfolios are less industry concentrated, and they are eventually less likely to achieve extreme performance outcomes. These results hold after taking into account the impact of fund and family characteristics as well as manager characteristics.
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The First Deal: The Division of Founder Equity in New Ventures
Thomas Hellmann & Noam Wasserman
NBER Working Paper, April 2011
Abstract:
This paper examines the division of founder shares in entrepreneurial ventures, focusing on the decision of whether or not to divide the shares equally among all founders. To motivate the empirical analysis we develop a simple theory of costly bargaining, where founders trade off the simplicity of accepting an equal split, with the costs of negotiating a differentiated allocation of founder equity. We test the predictions of the theory on a proprietary dataset comprised of 1,476 founders in 511 entrepreneurial ventures. The empirical analysis consists of three main steps. First we consider determinants of equal splitting. We identify three founder characteristics -idea generation, prior entrepreneurial experience and founder capital contributions - regarding which greater team heterogeneity reduces the likelihood of equal splitting. Second, we show that these same founder characteristics also significantly affect the share premium in teams that split the equity unequally. Third, we show that equal splitting is associated with lower pre-money valuations in first financing rounds. Further econometric tests suggest that, as predicted by the theory, this effect is driven by unobservable heterogeneity, and it is more pronounced in teams that make quick decisions about founder share allocations. In addition we perform some counterfactual calculations that estimate the amount of money ‘left on the table' by stronger founders who agree to an equal split. We estimate that the value at stake is approximately 10% of the firm equity, 25% of the average founder stake, or $450K in net present value.
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Too Many Cooks Spoil the Broth: How High-Status Individuals Decrease Group Effectiveness
Boris Groysberg, Jeffrey Polzer & Hillary Anger Elfenbein
Organization Science, May-June 2011, Pages 722-737
Abstract:
Can groups become effective simply by assembling high-status individual performers? Though an affirmative answer may seem straightforward on the surface, this answer becomes more complicated when group members benefit from collaborating on interdependent tasks. Examining Wall Street sell-side equity research analysts who work in an industry in which individuals strive for status, we find that groups benefited - up to a point - from having high-status members, controlling for individual performance. With higher proportions of individual stars, however, the marginal benefit decreased before the slope of this curvilinear pattern became negative. This curvilinear pattern was especially strong when stars were concentrated in a small number of sectors, likely reflecting suboptimal integration among analysts with similar areas of expertise. Control variables ensured that these effects were not the spurious result of individual performance, department size or specialization, or firm prestige. We discuss the theoretical implications of these results for the literatures on status and groups, along with practical implications for strategic human resource management.
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The bigger they are, the harder they fall: Linking team power, team conflict, and performance
Lindred Greer, Heather Caruso & Karen Jehn
Organizational Behavior and Human Decision Processes, forthcoming
Abstract:
Across two field studies, we investigate the impact of team power on team conflict and performance. Team power is based on the control of resources that enables a team to influence others in the company. We find across both studies that low-power teams outperform high-power teams. In both studies, higher levels of process conflict present in high-power teams explain this effect fully. In our second study, we show that team interpersonal power congruence (i.e., the degree to which team members' self-views of their individual power within the team align with the perceptions of their other team members) ameliorates the relationship between team power and process conflict, such that when team interpersonal power congruence is high, high-power teams are less likely to experience performance-detracting process conflict.
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Fabio Feriozzi
RAND Journal of Economics, Summer 2011, Pages 387-415
Abstract:
This article examines why CEOs are rewarded for luck, namely for observable shocks beyond their control. I propose a simple hidden action model where the agent has implicit incentives to avoid bankruptcy. After signing the contract, but before acting, the agent observes a signal on future luck. Implicit incentives are weaker after good news, and call for higher pay-for-performance sensitivity in good times. As a result, managerial pay is tied to luck. The model is also consistent with recent evidence of asymmetric pay for luck, that is, a larger exposure of managerial pay to good luck than to bad.
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The Death of the Deal: Are Withdrawn Acquisition Deals Informative of CEO Restraint?
Stacey Jacobsen
Indiana University Working Paper, January 2011
Abstract:
Withdrawn acquisition bids provide a unique mechanism to identify CEOs who restrain from extracting private benefits. I show that the market extracts valuable information about CEOs who exhibit restraint and withdraw from a deal when it becomes too expensive. Using a hand-collected sample of 530 withdrawn acquisition bids, I find that firms that cancel deals rather than raise their offer, experience 5% higher withdrawal returns than a control group of firms that withdraw for other reasons. Moreover, restraint information is more valuable to the capital market when CEO quality is uncertain and when monitoring is poor. The labor market also utilizes information on restraint. CEOs who exercise restraint are less likely to experience a turnover event, and more likely to advance to an executive role at a firm larger than the bidding firm, compared to a control group of CEOs who also initiate acquisition deals.