Corporate Value
Private Equity and Workers: Modeling and Measuring Monopsony, Implicit Contracts, and Efficient Reallocation
Kyle Herkenhoff et al.
NBER Working Paper, June 2025
Abstract:
We measure the real effects of private equity buyouts on worker outcomes by building a new database that links transactions to matched employer-employee data in the United States. To guide our empirical analysis, we derive testable implications from three theories in which private equity managers alter worker outcomes: (1) exertion of monopsony power in concentrated markets, (2) breach of implicit contracts with targeted groups of workers, including managers and top earners, and (3) efficient reallocation of workers across plants. We do not find any evidence that private equity-backed firms vary wages and employment based on local labor market power proxies. Wage losses are also very similar for managers and top earners. Instead, we find strong evidence that private equity managers downsize less productive plants relative to productive plants while simultaneously reallocating high-wage workers to more productive plants. We conclude that post-buyout employment and wage dynamics are consistent with professional investors providing incentives to increase productivity and monitor the companies in which they invest.
Creating Controversy in Proxy Voting Advice
Andrey Malenko, Nadya Malenko & Chester Spatt
Journal of Finance, August 2025, Pages 2303-2354
Abstract:
We analyze how a profit-maximizing proxy advisor designs vote recommendations and research reports. The advisor benefits from producing informative, unbiased reports, but only partially informative recommendations, biased against the a priori likely alternative. Such recommendations induce close votes, increasing controversy and thereby the relevance and value of proxy advice. Our results suggest shifting from an exclusive emphasis on recommendations, highlighting the importance of both reports and recommendations in proxy advisors' information provision. They rationalize the one-size-fits-all approach and help reinterpret empirical patterns of voting behavior, suggesting that proxy advisors' recommendations may not be a suitable benchmark for evaluating shareholders' votes.
The Unintended Consequence of “Say on Pay” Votes on Firm-Level Innovation
Shantanu Dutta et al.
University of San Diego Working Paper, June 2025
Abstract:
We examine the impact of Say-on-Pay (SoP) voting on firm innovation. Our findings indicate that firms receiving higher shareholder support in SoP votes are more likely to reduce their R&D investments, leading to a subsequent decline in innovation outcomes, such as the number of patents, forward citations, and the market value of patents. This negative effect is more pronounced among smaller firms and those with weaker corporate governance and financial performance. The inverse relationship between SoP vote support and R&D investment remains robust across a variety of robustness checks addressing potential endogeneity concerns. These include omitted variable tests, firm fixed effects, instrumental variable approaches, regression discontinuity design, difference-in-differences analysis, propensity score matching, and placebo tests. We attribute the adverse impact of SoP voting on firm innovation to changes in the structure of executive compensation.
Product Similarity, Benchmarking, and Corporate Fraud
Audra Boone et al.
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We document that firms with greater product similarity to their peers exhibit lower rates of financial fraud. We show that peer similarity is associated with better information environments, which is consistent with monitors’ enhanced ability to benchmark against other firms. The negative relation between product similarity and fraud remains after controlling for alternative mechanisms including incentive compensation structures, competition, and internal and external governance characteristics. Overall, our findings suggest that greater peer similarity increases the marginal cost of fraud, and therefore, ex-ante disincentivizing managers from committing fraud.
Tone Distance: Managerial Tone Divergence and Market Reaction to Earnings Announcements
Ben Angelo et al.
Financial Review, forthcoming
Abstract:
We evaluate the market reaction to the between-manager variance of tone within an earnings call, which we term Tone Distance. We find that greater differences in Tone Distance are negatively associated with event period returns surrounding earnings announcements. Consistent with the notion that Tone Distance is informative, we show that Tone Distance is a positive predictor of stock volatility, information uncertainty, and operational risks. Tone Distance is inversely related to future growth prospects. Tone Distance also positively predicts monthly stock returns following the earnings announcement. We find that Tone Distance is robust to a variety of alternative constructions and after accounting for analyst tone. Overall, the results are consistent with investors interpreting greater Tone Distance as an information leakage related to the future performance of the firm.
How Much Do Boards Learn About CEO Ability in Crises? Evidence From CEO Turnover
Peter Schäfer
Journal of Banking & Finance, forthcoming
Abstract:
I present evidence from CEO turnover decisions suggesting that boards update their beliefs about CEO ability more in industry crises than in booms. Consistent with predictions from an extended learning model that allows for increased productivity of CEO ability in crises, I find that the turnover-performance relation is weaker the more often the board has observed the CEO in past crises, and crisis performance reduces future dismissal risks more than boom performance. These effects persist after controlling for CEO entrenchment and firm effects, and they are stronger for more severe and recent crises. Employing a proxy of CEO ability, I also find that the dismissal risk of weak-ability CEOs is highest in crises. The results help refine our models of how boards learn about CEO ability and, in particular, help explain the turnover puzzle, i.e., why boards are more likely to dismiss CEOs in industry downturns: rather than misattributing poor industry conditions to CEOs, boards view performance in crises as a more informative signal of CEO ability than performance in booms.
Frequent Reporting and Short-Termism: An Experimental Investigation
Douglas Davis et al.
Management Science, forthcoming
Abstract:
Financial market regulators have long debated the appropriate frequency of mandatory corporate financial disclosures. Whereas frequent disclosures may help deter overinvestment, they may also encourage short-termism. This paper reports an experiment that examines the effects of varying reporting frequencies on managerial investment decisions. Experimental results indicate that frequent reporting modestly induces short-termism, but it fails to reduce the overinvestment observed in the infrequent reporting regime. Nonbinding communication of intended investment plans does reduce overinvestment, but only in the infrequent reporting regime.
How Are Firms Sold? The Role of Common Ownership
Mohammad (Vahid) Irani, Wenhao Yang & Feng Zhang
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We find that common ownership among acquirers enhances rather than hinders competition in the firm sale process. One common owner raises the likelihood that target firms are sold through auction (vs. negotiation with one buyer) by 21.5%. The effect is causal according to identifications based on mergers between financial institutions. Exploring economic channels, we observe selling firms respond to common ownership among acquirers by avoiding cross-owned acquirers, bargaining hard, and inviting more buyers when cross-owned acquirers initiate the deal but not by terminating the deal. Consistent with enhanced competition, common ownership among acquirers is positively associated with deal quality.
The Politics of Product Safety: Top Management Team Political Ideology and Serious Medical Product Recalls
Kaitlin Wowak et al.
Management Science, forthcoming
Abstract:
There is growing research exploring the influence of executives’ political ideologies on firm strategy, but little is known about how these ideologies influence product quality. Leveraging research that suggests liberal firm leaders prioritize customer safety, whereas conservative firm leaders emphasize firm financial returns, we theorize that a firm’s top management team’s (TMT’s) political ideology influences the number of serious medical product recalls that a firm initiates and how quickly the firm initiates them. Analyzing political donations recorded by the Federal Election Committee from top executives of 88 firms that had 4,072 serious medical product recalls from 2002 through 2015, we find that as firms’ TMTs are more liberal, they issue fewer recalls, but as firms’ TMTs are more conservative, they initiate recalls faster. Results suggest that firms with TMTs one standard deviation more liberal than the mean issue 1.10 fewer recalls per year, but take 22 days longer to initiate them. Findings from a post hoc analysis lend support to our theorizing, as we find that product quality-related adverse events act as a mechanism explaining the relationship between TMT political ideology and recalls. Firms with more liberal TMTs experience fewer product quality-related adverse events, and this reduction in adverse events acts as a mediator to partially explain the reduction in the number of recalls that more liberal firms initiate. Post hoc analyses provide support for an important firm implication; firms with more politically diverse TMTs have fewer recalls, similar to more liberal TMTs, and faster recalls, similar to more conservative TMTs.
Does Speculative News Hurt Productivity? Evidence from Takeover Rumors
Christian Andres et al.
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We show that productivity at both the firm and employee (i.e., analyst and inventor) level temporarily declines upon announcements of takeover rumors that do not materialize. Such speculative news may hurt productivity because uncertainty and the threat of job loss cause anxiety, distraction, and reduced commitment among employees and managers. Consistently, we observe a more pronounced productivity dip for rumored targets and when the likelihood of job loss is higher. Firm performance mirrors these results. We find no indication of reverse causality. The evidence fosters our understanding of potential real effects of speculative financial news and the costs of takeover threats.