Executive Authority
Investors respond negatively to executives' discussion of creativity
Michael Haselhuhn, Elaine Wong & Margaret Ormiston
Organizational Behavior and Human Decision Processes, July 2022
Abstract:
Creativity and innovation are often considered to be essential characteristics of effective organizations. However, recent experimental research suggests that individual-level creativity in the workplace is not always perceived positively because of the uncertainty inherent in creative ideas. Although this research has advanced our understanding of perceptions of individual creativity in organizations, less is known about whether this creativity bias holds in real world contexts and, if so, whether there are organizational consequences. In this paper, we examine the organizational implications of executives’ use of words related to creativity and innovation (i.e., creativity-speak) during quarterly earnings calls. We predict that due to the association between creativity and uncertainty, market reactions to creativity-speak will be negative. However, we also predict that these same discussions of creativity will be associated with higher firm financial performance. We find support for our predictions, and additionally find that the creativity bias can be ameliorated through executives’ use of a positive tone when discussing creativity and innovation. Our study has a number of theoretical implications for the study of creativity, innovation, and executive communication.
Shareholder Power and the Decline of Labor
Antonio Falato, Hyunseob Kim & Till von Wachter
NBER Working Paper, July 2022
Abstract:
Shareholder power in the US grew over recent decades due to a steep rise in concentrated institutional ownership. Using establishment-level data from the US Census Bureau’s Longitudinal Business Database for 1982-2015, this paper examines the impact of increases in concentrated institutional ownership on employment, wages, shareholder returns, and labor productivity. Consistent with theory of the firm based on conflicts of interests between shareholders and stakeholders, we find that establishments of firms that experience an increase in ownership by larger and more concentrated institutional shareholders have lower employment and wages. This result holds in both panel regressions with establishment fixed effects and a difference-in-differences design that exploits large increases in concentrated institutional ownership, and is robust to controls for industry and local shocks. The result is more pronounced in industries where labor is relatively less unionized, in more monopsonistic local labor markets, and for dedicated and activist institutional shareholders. The labor losses are accompanied by higher shareholder returns but no improvements in labor productivity, suggesting that shareholder power mainly reallocates rents away from workers. Our results imply that the rise in concentrated institutional ownership could explain about a quarter of the secular decline in the aggregate labor share.
The Political Polarization of Corporate America
Vyacheslav Fos, Elisabeth Kempf & Margarita Tsoutsoura
NBER Working Paper, June 2022
Abstract:
Executive teams in U.S. firms are becoming increasingly partisan. We establish this new fact using political affiliations from voter registration records for top executives of S&P 1500 firms between 2008 and 2020. The new fact is explained by both an increasing share of Republican executives and increased assortative matching by executives on political affiliation. Departures of politically misaligned executives are value-destroying for shareholders, implying the increasing political polarization of corporate America may not be in the financial interest of shareholders.
Partisan Entrepreneurship
Joseph Engelberg et al.
NBER Working Paper, July 2022
Abstract:
Republicans start more firms than Democrats. In a sample of 40 million party-identified Americans between 2005 and 2017, we find that 6% of Republicans and 4% of Democrats become entrepreneurs. This partisan entrepreneurship gap is time-varying: Republicans increase their relative entrepreneurship during Republican administrations and decrease it during Democratic administrations, amounting to a partisan reallocation of 170,000 new firms over our 13-year sample. We find sharp changes in partisan entrepreneurship around the elections of President Obama and President Trump, and the strongest effects among the most politically active partisans: those that donate and vote.
The face of morality: Powerful Chief Executive Officers’ (CEOs’) facial characteristics and moral foundations
Dejun Tony Kong, Shih-chi (Sana) Chiu & George Christopoulos
Evolutionary Behavioral Sciences, forthcoming
Abstract:
The present study examines the moral aspects of Chief Executive Officers (CEOs). We focus on two fundamental moral foundations—binding (prioritizing group loyalty and authority) and individualizing (prioritizing individual rights and welfare). Based on 10-year data of U.S. CEOs from S&P 500 firms, we found that only among high-power CEOs, binding foundations are predicted by the facial width-to-height ratio (fWHR; an androgen-sensitive phenotype associated with social dominance), but not by facial symmetry (fS; a phenotype associated with social concern), whereas individualizing foundations are predicted by fS but not by fWHR. Our findings suggest that CEOs’ moral foundations are characteristic adaptations, varying upon genetic predispositions contextualized in their social roles (positional power). Given the potentially significant influence of executives’ morality on various firm stakeholders, the economy, and society, we shed light on the strategic leadership literature by identifying important predictors of CEOs’ moral foundations.
The Effect of Stock Liquidity on the Firm’s Investment and Production
Yakov Amihud & Shai Levi
Review of Financial Studies, forthcoming
Abstract:
We propose that stock market liquidity affects corporate investment and production. Illiquidity, which raises firms’ cost of capital, lowers investment in capital assets, R&D, and inventory. This effect holds after we control for endogeneity using exogenous liquidity events, the 2001 decimalization, and the 1997 Nasdaq reform and after employing instrumental variable estimation. Illiquidity affects investment regardless of firms’ financial constraints. Consequently, illiquidity induces firms to adopt less capital-intensive production processes. Illiquid firms have higher marginal productivity of capital, greater labor input increases for given increases in assets, and lower operating leverage, which means lower reliance on fixed costs.
Face-to-face interactions and the returns to acquisitions: Evidence from smartphone geolocational data
Marco Testoni, Mariko Sakakibara & Keith Chen Strategic
Management Journal, forthcoming
Abstract:
We examine the effect of face-to-face interactions between acquirers and targets before the acquisition announcements on acquisition returns. We argue that frequent interactions increase the target management's trust in the acquirer and benefit the acquirer by mitigating competition in the bidding process. For a sample of U.S. domestic acquisitions, we use smartphone geolocational data to measure the movement of people between merging companies in the months before the announcement. We find that with more frequent interactions, acquirers earn higher stock market returns at the announcement and targets receive fewer later bids from other bidders. Moreover, more frequent interactions are associated with lower returns to public targets vis-à-vis their acquirers. The effect of interactions is weaker when shareholder-manager agency problems in the target are less severe.
Labor unions and real earnings management
Kiyoung Chang et al.
Journal of Corporate Finance, forthcoming
Abstract:
Using firm-level union membership data for the period of 2002–2016, we show that firms with higher union membership are more likely to engage in real earnings management than accrual-based earnings management, with abnormal production as the dominant form of real earnings management. We further show the causal effect of union membership on real earnings management by exploiting two natural experiments-the staggered enactment of state-level right-to-work (RTW) laws and the shock to unemployment insurance benefits (UIB)-as exogenous shocks to union power. Further exploration shows that the positive association between union membership and real earnings management is more pronounced for unionized firms with (1) high managerial incentives to reduce employee hiring and retention costs and (2) operating inflexibility created by labor overinvestment. Our evidence is consistent with managerial incentives for upward earnings management to mitigate employees' perceived job security and the cost of employee management in competitive labor markets.
The real effects of disclosure regulation: Evidence from mandatory CFO compensation disclosure
Dichu Bao, Lixin (Nancy) Su & Yong Zhang
Journal of Accounting and Public Policy, forthcoming
Abstract:
The 2006 SEC rule, by changing the definition of Named Executive Officers, mandates CFO compensation disclosure. Using this setting and a difference-in-differences research design, we study the real effects of CFO compensation disclosure regulation on CFO job performance. We hypothesize that the disclosure of CFO compensation information, by facilitating shareholder monitoring of the board in providing appropriate incentives to CFOs, leads to better CFO job performance in providing high-quality financial reports. The analyses support our prediction: the treatment firms, which start disclosing CFO compensation information under the 2006 rule, compared to the control firms, which already disclose CFO compensation before 2006, experience an improvement in CFO performance, as exhibited in decreases in accounting misstatements and unexplained audit fees. The results are more pronounced for firms with concentrated ownership, smaller compensation committees, and CFOs subject to weaker monitoring by audit committees. Overall, we provide evidence of a real effect resulting from mandatory CFO compensation disclosure.
Audit Disruption: The Case of Outside Job Opportunities for External Auditors and Audit Quality
Matthew Ege, Young Hoon Kim & Dechun Wang
Texas A&M University Working Paper, June 2022
Abstract:
Public accountants are in high demand by non-accounting firms. While this demand attracts high-quality accountants to public accounting, it can negatively impact audit quality via disrupting the audit (e.g., through distraction, reduced motivation to work hard, and human capital loss). We find that the number of and increase in MSA-level busy season job postings for public accountants by non-accounting firms are negatively associated with audit quality. Results are most pronounced for audit offices with recent audit failures and auditor shortages, consistent with auditor workload moderating the effect. Results also suggest that accounting firms can mitigate the negative audit quality effects of audit disruption from busy season job postings for public accountants by increasing auditor pay and using seconded staff from nearby large offices. These results suggest that accounting firms are not immune to negative effects of audit disruption from outside job opportunities for external auditors despite accounting firms knowing that their auditors are highly sought after by non-accounting firms.