Findings

Corporate connections

Kevin Lewis

January 16, 2018

Are overconfident CEOs better leaders? Evidence from stakeholder commitments
Kenny Phua, Mandy Tham & Chishen Wei
Journal of Financial Economics, forthcoming

Abstract:
We find evidence that the leadership of overconfident chief executive officers (CEOs) induces stakeholders to take actions that contribute to the leader's vision. By being intentionally overexposed to the idiosyncratic risk of their firms, overconfident CEOs exhibit a strong belief in their firms' prospects. This belief attracts suppliers beyond the firm's observable expansionary corporate activities. Overconfident CEOs induce more supplier commitments including greater relationship-specific investment and longer relationship duration. Overconfident CEOs also induce stronger labor commitments as employees exhibit lower turnover rates and greater ownership of company stock in benefit plans.


Differences make a difference: Diversity in social learning and value creation
Yiwei Fang, Bill Francis & Iftekhar Hasan
Journal of Corporate Finance, February 2018, Pages 474-491

Abstract:
Prior research has demonstrated that CEOs learn privileged information from their social connections. Going beyond the importance of the number of social ties in a CEO's social network, this paper studies the value generated from a diverse social environment. We construct an index of social-network heterogeneity (SNH) that captures the extent to which CEOs are connected to people of different demographic attributes and skill sets. We find that higher CEO SNH leads to greater firm value through the channels of better corporate innovation and diversified M&As. Overall, the evidence suggests that CEOs' exposure to human diversity enhances social learning and creates greater growth opportunities for firms.


Nonvoting Shares and Efficient Corporate Governance
Dorothy Shapiro Lund
University of Chicago Working Paper, September 2017

Abstract:
Nonvoting stock is on the rise, especially among founders of successful technology startups. But the surge in nonvoting stock offerings has generated public outcry and calls for regulation. Critics argue that nonvoting shares perpetually insulate corporate insiders from influence and oversight and increase management agency costs. By contrast, proponents contend that nonvoting shares enable corporate insiders to pursue their long term vision for the company without interference from shareholders with short-term interests. This paper offers a new perspective on this debate. It demonstrates an unrecognized benefit of nonvoting stock: it can be used to lessen agency and transaction costs in a corporation by dividing voting power between shareholders who are informed about the company and its performance and those who are not. Put differently, the paper contends that a company may lower its cost of capital by issuing nonvoting shares. Doing so would make the company more attractive to informed investors, who get more influence at a lower cost, and also to uninformed investors, who will save on costs associated with voting. Moreover, market forces can be expected to push uninformed shareholders toward purchasing nonvoting shares, obviating the need for legal intervention. For these reasons, the paper contends that proposals to restrict companies from issuing nonvoting shares may impede efficient corporate structuring.


Globalization and the Evolution of Corporate Governance
Jan Schymik
European Economic Review, February 2018, Pages 39-61

Abstract:
How does globalization affect the balance of power between managers and firm owners? This paper studies the effect of economic integration on governance practices within firms. I propose a theory of endogenous corporate governance investments in industry equilibrium with monopolistic competition. Firms can use investments into better corporate governance as a cheap substitute to performance compensation to mitigate agency problems. International integration alters the demand for managers in the economy such that firms may reduce their corporate governance investments and offer higher performance payments. This globalization-induced deterioration of corporate governance in the economy diminishes the welfare gains from globalization. Using data on governance practices in U.S. manufacturing corporations, I provide empirical evidence that conforms to the model predictions. Firms in industries that experienced substantial trade liberalization between 1990 and 2006 have changed their governance practices allowing for more managerial slack and offered higher equity payments to their CEOs. These effects are particularly large in relatively dynamic industries that are characterized by large exit rates.


Share Repurchases and Myopia: Implications on the Stock and Consumer Markets
David Bendig et al.
Journal of Marketing, forthcoming

Abstract:
Investor demand has promoted share repurchases to the dominating payout instrument for U.S. firms. However, critics worry that the repurchase boom leads to firms neglecting long-term investments. Even worse, scholars show that investor pressure also motivates firms to cut marketing investments with the aim to boost short-term income - a practice called myopic marketing management. Extant theory still lacks an understanding of whether and how the co-occurrence of share repurchases and myopic marketing affects firm stakeholders such as investors and consumers. Based on a large-scale cross-industry sample, the authors reveal that there is a higher share of firms cutting marketing investments among repurchasing firms than among non-repurchasing firms. Furthermore, investors immediately respond negatively to myopic firms that also repurchase shares. Finally, repurchases and myopic marketing are also associated with an increase in product recalls. This first study to assess share repurchases through a marketing lens hence reveals negative effects on both the stock and the consumer markets.


Stepping Across for Social Approval: Ties to Independent Foundations' Boards After Financial Restatement
Razvan Lungeanu, Srikanth Paruchuri & Wenpin Tsai
Strategic Management Journal, forthcoming

Abstract:
Integrating research on independent philanthropy and organizational misconduct, we argue that affiliations with independent foundations provide social approval benefits for firms that restate their financials. We use a panel of S&P 500 companies from 2004 to 2011 to investigate the addition of foundation board ties by restating firms. CEOs of restating firms add more new foundation board ties than CEOs of non-restating firms, while existing corporate philanthropy and greater corporate reputation diminish this effect. We also find that new ties to foundations boards influences media tenor for restating firms more than it does for non-restating peers. Our study offers a nuanced analysis of the post-crisis actions of restating firms relative to non-restating peers and highlights the relevance of ties to nonprofit boards for corporate governance.


Who Does Private Equity Buy? Evidence on the Role of Private Equity From Buyouts of Divested Businesses
Aseem Kaul, Paul Nary & Harbir Singh
Strategic Management Journal, forthcoming

Abstract:
We examine the role of non-venture private equity firms in the market for divested businesses, comparing targets bought by such firms to those bought by corporate acquirers. We argue that a combination of vigilant monitoring, high-powered incentives, patient capital and business independence makes private equity firms uniquely suited to correcting underinvestment problems in public corporations, and that they will therefore systematically target divested businesses that are outside their parents' core area, whose rivals invest more in long-term strategic assets than their parents, and whose parents have weak managerial incentives both overall and at the divisional level. Results from a sample of 1,711 divestments confirm these predictions. Our study contributes to our understanding of private equity ownership, highlighting its advantage as an alternate governance form.


Under The Microscope: An Experimental Look at Board Transparency and Director Monitoring Behavior
Weiwen Li et al.
Strategic Management Journal, forthcoming

Abstract:
It is well known in corporate governance scholarship that independent directors differ in the vigilance with which they monitor corporate insiders. This difference depends largely on whether independent directors are concerned more with their public reputation or with their prospects in the director labor market. The explanation for this difference depends on an assumption of information asymmetry, however. In the present study, we relax the assumption of information asymmetry to examine how boardroom transparency affects directors' monitoring behavior. Using a randomized experimental study of actual independent directors, we find that boardroom transparency amplifies the effect of directors' inclinations toward either active or passive monitoring, with directors inclined toward vigilant monitoring becoming even more vigilant, and directors inclined toward passive monitoring becoming even more passive.


Labor unemployment insurance and firm cash holdings
Erik Devos & Shofiqur Rahman
Journal of Corporate Finance, April 2018, Pages 15-31

Abstract:
This paper presents evidence that firms conserve cash to manage employees' perceptions of the risk of becoming unemployed. Employing a matched sample design and using state level changes in unemployment insurance (UI) benefits to proxy for unemployment risk, we test the hypothesis that cash holdings and unemployment risk are positively related. We find an economically and statistically significant association between decreases in cash holdings, following an increase in UI benefits (i.e., lower unemployment risk). Our findings are robust to alternative specifications and we find that the positive relation between cash holdings and unemployment risk is more pronounced for firms that are more labor intensive, have a high layoff propensity, have a higher fraction of low-wage workers, and are in industries with a higher fraction of UI recipients. Overall, our results are consistent with the idea that cash holdings are affected by not only shareholders but also other stakeholders: namely employees.


Financial market frictions and diversification
Gregor Matvos, Amit Seru & Rui Silva
Journal of Financial Economics, January 2018, Pages 21-50

Abstract:
We find new facts that relate the evolution of firm scope to the changing frictions in external capital markets over the last three decades. We find that large, diversified publicly traded firms increase their scope during times of high external capital market frictions, such as in the recent Great Recession. Moreover, during these times firms diversify their investment needs and cash flow across industries. We also find similar phenomena outside diversified public firms. Examining the mergers and acquisitions activity of stand-alone and diversified private firms, we uncover similar patterns. In aggregate data, we find that the composition of mergers shifts from focused to diversifying and back with changes in external market conditions. Our evidence is broadly consistent with the notion that firms diversify their scope in response to tightening in external capital markets.


Do Financial Analysts Restrain Insiders' Informational Advantage?
Andrew Ellul & Marios Panayides
Journal of Financial and Quantitative Analysis, forthcoming

Abstract:
By collecting and disseminating price-sensitive information, financial analysts should reduce firm insiders' informational advantage with a consequent impact on trading dynamics and market quality. We empirically examine the impact of complete analysts' coverage termination on stocks' liquidity, price discovery, and insider trading profitability. Termination leads to deteriorating liquidity and price efficiency, more informed trading, and higher profitability of insider trades. The magnitude of these effects depends on the strength of insiders' ownership and on management's decision whether to improve the firm's information environment after coverage termination. Institutional investors alleviate, but do not eliminate, the negative effects of termination.


Do venture capital firms benefit from a presence on boards of directors of mature public companies?
Iftekhar Hasan et al.
Journal of Corporate Finance, forthcoming

Abstract:
This paper examines the benefits to venture capital firms of their officers holding directorships in mature public companies in terms of fundraising and investment performance. Our empirical results show that venture capital firms raise more funds, set higher fund-raising targets, and are more likely to successfully exit their investments post-appointment of their officers to boards of directors of S&P 1500 companies. Directorship status in mature public firms provides venture capital firms with enhanced networks, visibility, and credibility, all of which facilitate their fundraising activities. In addition, the knowledge, expertise, and experience acquired through holding directorships in mature public firms are beneficial for their portfolio companies, as measured by the likelihood of successful exits.


Opting out of good governance
Fritz Foley et al.
Journal of Empirical Finance, March 2018, Pages 93-110

Abstract:
Cross-listing on a US exchange does not force foreign firms to follow the exchange's corporate governance rules. Hand-collected data show that 80% of cross-listed firms opt out of at least one exchange governance rule and those that opt out have a smaller share of independent directors. Cross-listed firms opt out more when coming from countries with weak corporate governance rules, but if these firms are growing and need external financing, they are more likely to comply. For firms in such countries, opting out also lowers firm valuations, decreases the value of cash holdings, and reduces investment sensitivity to market valuations.


Peer influence on payout policies
Binay Adhikari & Anup Agrawal
Journal of Corporate Finance, February 2018, Pages 615-637

Abstract:
Using a large sample of US public companies, we find robust evidence that firms' payout policies, i.e., dividends and share repurchases, are significantly influenced by the policies of their industry peers. To overcome endogeneity problems, we employ instrumental variable techniques based on peers' stock price shocks. Peer influence on payouts is more pronounced among firms that face greater product market competition and operate in better information environments. With regards to dividends, firms, especially smaller and younger firms, are more sensitive to industry peers that are similar to them in size and age. However, mimicking repurchases is concentrated among large and mature firms only. Peer influence on dividends, compared to repurchases, seems more stable across firm and industry conditions. Overall, peer influence on dividends, and, to a less extent, on repurchases, is consistent with a rivalry-based theory of imitation, which posits that firms imitate peers' actions to maintain their competitive parity.


CEO ability and firm performance: Stock market and job market reactions
Tarun Mukherjee & Huong Nguyen
Journal of Economics and Finance, January 2018, Pages 138-154

Abstract:
Does the stock market and job market evaluate a CEO based on the performance of his/her previous employer? We answer this question by examining a sample of 48 CEOs who voluntarily resigned from old firms to obtain similar positions with new firms. Using a sample of CEOs that voluntarily resigned from S&P 500 firms during 2004-2012, we find that the stock market's reactions to announcements of them resigning from old firms and being hired by new firms depend on how well the old firms had performed. The market is able to differentiate a "better" CEO from a "good" one by reacting more negatively when the former resigns and more positively when the former is hired by a new firm. Long-term performances of the firms that hire these executives are consistent with market expectations: the firms that hire the better-performing group are rewarded with significantly better long-term returns than the firms that hire the good-performing executives. It appears that the job market is at par with the stock market- the better group finds jobs much faster than the good group. We also find that better CEOs are more likely than good ones to have a Master's (or higher) degree.


Worth the wait? Delay in CEO succession after unplanned CEO departures
Mia Rivolta
Journal of Corporate Finance, forthcoming

Abstract:
This paper analyzes changes in shareholder value and firm performance in relation to the delay (or lack thereof) in CEO succession. I find that, on average, delay in succession is associated with stronger performance after an unplanned CEO departure. However, the value effect of delay varies and not all firms benefit from long delay. Firms with higher stock price volatility and those whose CEO is hired away experience lower performance. These results suggest that delay affects frictions in the CEO labor market. The impact of delay is particularly important when firms have no succession plan in place.


Short interest as a signal to issue equity
Don Autore et al.
Journal of Corporate Finance, February 2018, Pages 797-815

Abstract:
We find that the level of short interest in a firm's stock significantly predicts future seasoned equity offers (SEOs). The probability of an SEO announcement increases by 34% (decreases by 49%) for firms in the top (bottom) quintile of short interest. We identify a causal impact of short interest on SEO issuance using a novel instrument for short interest based on future litigation filings in close geographical proximity to hedge fund centers. Our findings suggest that corporate decisions can be triggered by the aggregate trading activity of sophisticated outside investors.


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