Earnings per share
Peer Effects of Corporate Social Responsibility
Jie Cao, Hao Liang & Xintong Zhan
Management Science, forthcoming
Abstract:
We investigate how firms react to their product-market peers’ commitment to and adoption of corporate social responsibility (CSR) using a regression discontinuity design approach. Relying on the passage or failure of CSR proposals by a narrow margin of votes during shareholder meetings, we find the passage of a close-call CSR proposal and its implementation are followed by the adoption of similar CSR practices by peer firms. In addition, peers that have greater difficulty in catching up with the voting firm in CSR experience significantly lower stock returns around the passage, consistent with the notion that the spillover effect of the adoption of CSR is a strategic response to competitive threat. Using alternative definitions of peers and examining underlying mechanisms, we further rule out alternative explanations, such as that based on propagation by financial intermediaries.
Credit Default Swaps and Corporate Innovation
Xin Chang et al.
Journal of Financial Economics, forthcoming
Abstract:
We show that credit default swap (CDS) trading on a firm's debt positively influences its technological innovation output measured by patents and patent citations. This positive effect is more pronounced in firms relying more on debt financing or being more subject to continuous monitoring by lenders prior to CDS trade initiation. Moreover, after CDS trade initiation, firms pursue more risky and original innovations and generate patents with higher economic value. Further analysis suggests that CDSs improve borrowing firms’ innovation output by enhancing lenders’ risk tolerance and borrowers’ risk- taking in the innovation process, rather than by increasing Research and Development (R&D) investment. Taken together, our findings reveal the real effects of CDSs on companies’ investments and technological progress.
Unintended Consequences: Information Releases and CEO Stock Option Grants
Timothy Quigley et al.
Academy of Management Journal, forthcoming
Abstract:
Scholars, regulators, and practitioners have long struggled with challenges emanating from the separation of ownership and control of modern corporations. Agency theory typically prescribes the use of options grants, or other outcome-based contractual arrangements, to overcome the critical issue of information asymmetry. We theorize that this arrangement, which leaves information asymmetry in place, provides CEOs an informational advantage that can be used, via impression management techniques, to circumvent some of the intended benefits of option grants. Specifically, we argue that the period leading up to an option grant is the one time where CEOs are incentivized to reduce the stock price of their firm for personal gain. Our results suggest that CEOs respond to this incentive by adjusting the tenor of releases from the firm during the pre-grant period, providing CEOs a substantial economic gain. We also show that underpaid CEOs and CEOs with higher discretion pursue this activity more frequently. Our findings highlight a critical challenge of agency theory: if information asymmetry remains, a motivated CEO can often circumvent the contractual arrangements intended to mitigate that very problem. We offer future research paths and practical recommendations to address this issue.
Has Section 404 of the Sarbanes-Oxley Act Discouraged Corporate Investment? New Evidence from a Natural Experiment
Ana Albuquerque & Julie Lei Zhu
Management Science, forthcoming
Abstract:
Prior studies conclude that an unintended consequence of firms complying with the Sarbanes-Oxley Act is lower levels of risk-taking activities, including investment. We first show that prior studies cannot isolate the effects of SOX from other contemporaneous events. We then use the implementation requirements of SOX404 to construct a natural experiment that isolates the effects of SOX404 for a sample of small firms. We do not find a reduction in investment and other risk-taking activities for firms that had to comply with SOX404, relative to other firms. Because small firms are expected to be the most adversely affected by the regulation, our results cast doubt on the notion that SOX404 had a negative impact on larger firms.
CEO selection as risk‐taking: A new vantage on the debate about the consequences of insiders versus outsiders
Timothy Quigley et al.
Strategic Management Journal, forthcoming
Abstract:
Our paper sheds new light on the performance implications associated with insider versus outsider CEOs. We frame CEO selection as risk‐taking, in which outsiders are relatively risky hires, with a greater tendency to generate extreme performance outcomes -- either positive or negative -- as compared to insiders. We base this expectation on two complementary theoretical perspectives: human capital and information asymmetry. We conduct multiple tests on large samples of CEO successions, with controls for endogeneity, and find that outsiders are indeed associated with more extreme performance outcomes than are insiders.
Rivals’ Negative Earnings Surprises, Language Signals, and Firms’ Competitive Actions
Wei Guo, Metin Sengul & Tieying Yu
Academy of Management Journal, forthcoming
Abstract:
Research in competitive dynamics has primarily analyzed how characteristics of observable attacks influence firms’ competitive responses. Why and how firms take action in response to critical events that affect their rivals, without being attacked themselves, is less well understood. Focusing on negative earnings surprises, we argue that a focal firm is likely to view a rival’s negative earnings surprise as an opportunity to exploit its vulnerability. Therefore, such surprises are positively associated with the intensity of competitive actions initiated by a focal firm. Furthermore, the complexity and vagueness of a rival’s language in an earnings conference call strengthens the positive relationship between the negative earnings surprise and the focal firm’s intensity of competitive actions. We tested our arguments using data from 3,202 earnings releases and conferences calls of publicly listed firms between 2003 and 2014 in the United States. The results and robustness checks support our predictions.
Internalizing governance externalities: The role of institutional cross-ownership
Jie (Jack) He, Jiekun Huang & Shan Zhao
Journal of Financial Economics, forthcoming
Abstract:
We analyze the role of institutional cross-ownership in internalizing corporate governance externalities using granular mutual fund proxy voting data. Exploiting within-proposal and within-institution variation, we show that an institution's holdings in peer firms are positively associated with the likelihood that the institution votes against management on shareholder-sponsored governance proposals. We further find that high aggregate cross-ownership positively predicts management losing a vote. Overall, our results provide evidence that cross-ownership incentivizes institutional investors to play a more active monitoring role, suggesting that institutional cross-ownership serves as a market-based mechanism to alleviate the inefficiency induced by governance externalities.
Officers’ fiduciary duties and acquisition outcomes
Syed Walid Reza
Financial Review, forthcoming
Abstract:
Using a Delaware case law that recognized officers’ distinct fiduciary duties for the first time in 2009, I examine the effect of officers' fiduciary duties (OFDs) on corporate acquisitions. I find that firms with entrenched officers prior to 2009 experienced increased announcement‐period abnormal stock returns, mainly because their acquisitions created more synergies and reduced officers’ incentives to preserve control. These firms increased liability insurance premium expenditures, but reduced value‐decreasing acquisition frequencies. Furthermore, the effect of OFDs is more pronounced in firms where officers are not directors, have wealth risk, face less product market competition, are insulated from the market for corporate control, or are able to avoid board monitoring. Overall, OFDs are a critical corporate governance mechanism that works in tandem with other disciplinary mechanisms.
Mutual Fund Board Connections and Proxy Voting
Paul Calluzzo & Simi Kedia
Journal of Financial Economics, forthcoming
Abstract:
We study fund-firm connections that arise when firm executives and directors serve as fund directors. We find that connected funds are significantly more likely to vote with management in proposals with negative Institutional Shareholder Services (ISS) recommendations or low shareholder support. As our data show that management support does not exist either before connection formation or after its termination, this result is unlikely to be caused by omitted factors. Rather, the connected fund's voting patterns show independence from ISS recommendations and successful connected voting is associated with positive announcement returns, suggesting that connected fund support for management reflects information advantages. Lastly, we find that a fund family and firm are more likely to connect when the fund family holds a large stake in the firm and is geographically proximate as well as when it has a record of voting independently from ISS.
Shareholder Wealth Consequences of Insider Pledging of Company Stock as Collateral for Personal Loans
Ying Dou, Ronald Masulis & Jason Zein
Review of Financial Studies, forthcoming
Abstract:
We study a widespread yet unexplored corporate governance phenomenon: the pledging of company stock by insiders as collateral for personal bank loans. Utilizing a regulatory change that exogenously decreases pledging, we document a negative causal impact of pledging on shareholder wealth. We study two channels that could explain this effect. First, we find that margin calls triggered by severe price falls exacerbate the crash risk of pledging firms. Second, since margin calls may cause insiders to suffer personal liquidity shocks or to forgo private benefits of control, we hypothesize and find that pledging is associated with reduced firm risk-taking.
Shareholder bargaining power and the emergence of empty creditors
Stefano Colonnello, Matthias Efing & Francesca Zucchi
Journal of Financial Economics, forthcoming
Abstract:
Credit default swaps (CDSs) can create empty creditors who potentially force borrowers into inefficient bankruptcy but also reduce shareholders’ incentives to default strategically. We show theoretically and empirically that the presence and the effects of empty creditors on firm outcomes depend on the distribution of bargaining power among claimholders. If creditors would face powerful shareholders in debt renegotiation, firms are more likely to face the empty creditor problem. The empirical evidence confirms that more CDS insurance is written on firms with strong shareholders and that CDSs increase the bankruptcy risk of these same firms. The ensuing effect on firm value is negative.