In corporations
The Corporate Saving Glut
Giacomo Saibene
Journal of Macroeconomics, forthcoming
Abstract:
Since the 2000s, the non-financial corporate sector moved from net borrower to net lender in many advanced economies - what has been labelled the corporate saving glut. Using data on U.S. listed firms, I document that the firms behind this widespread pattern are the largest corporations. The glut is the consequence of a constant profit share, relative to total corporate assets, which is larger than the sum of a decreasing investment share and a small and constant dividend share. In addition, I find no explanation able to empirically account for this pervasive phenomenon: neither deleveraging, nor increased uncertainty, nor increased market power are meaningfully correlated with the emergence of the glut at the firm-level.
Noisy Stock Prices and Corporate Investment
Olivier Dessaint et al.
Review of Financial Studies, forthcoming
Abstract:
Firms significantly reduce their investment in response to nonfundamental drops in the stock price of their product-market peers. We argue that this results stems from managers’ limited ability to filter out the noise in the stock prices when using them as signals about their investment opportunities. Ensuing losses of capital investment and shareholders’ wealth are economically large and even affect firms not facing severe financing constraints or agency problems. Our findings offer a novel perspective on how stock market ineffciencies can affect the real economy, even in the absence of financing or agency frictions.
Long-Term Economic Consequences of Hedge Fund Activist Interventions
Ed deHaan, David Larcker & Charles McClure
Stanford Working Paper, October 2018
Abstract:
We examine the long-term effects of interventions by activist hedge funds. Prior papers document positive equal-weighted long-term returns and operating performance improvements following activist interventions, and typically conclude that activism is beneficial. We extend prior literature in two ways. First, we find that equal-weighted long-term returns are driven by the smallest 20% of firms with an average market value of $22 million. The larger 80% of firms experience insignificant negative long-term returns. On a value-weighted basis, which likely best gauges effects on shareholder wealth and the economy, we find that pre- to post-activism long-term returns are insignificantly different from zero. For operating performance, we find that prior results are a manifestation of abnormal trends in pre-activism performance. Using an appropriately matched sample, we find no evidence of abnormal post-activism performance improvements. Overall, our results do not strongly support the hypothesis that activist interventions drive long-term benefits for the typical shareholder, nor do we find evidence of shareholder harm.
How valuable are independent directors? Evidence from external distractions
Ronald Masulis & Emma Jincheng Zhang
Journal of Financial Economics, forthcoming
Abstract:
We provide new evidence on the value of independent directors by exploiting exogenous events that seriously distract independent directors. Approximately 20% of independent directors are significantly distracted in a typical year. They attend fewer meetings, trade less frequently in the firm's stock, and resign from the board more frequently, indicating declining firm-specific knowledge and a reduced board commitment. Firms with more preoccupied independent directors have declining firm valuation and operating performance and exhibit weaker merger and acquisition (M&A) profitability and accounting quality. These effects are stronger when distracted independent directors play key board monitoring roles and when firms require greater director attention.
Trade secrets and cyber security breaches
Michael Ettredge, Feng Guo & Yijun Li
Journal of Accounting and Public Policy, forthcoming
Abstract:
We study the association between firms’ disclosures in Forms 10-K of the existence of trade secrets, and cyber theft of corporate data (which we refer to as “Breaches”). Prior academic research explaining occurrence of Breaches is scarce, and no prior study has focused specifically on Breaches that likely target trade secrets. We provide such evidence, and our use of Form 10-K contents related to trade secrets is a first step toward determining whether corporations actually attract Breach activity through their public disclosures. We find that firms mentioning the existence of trade secrets have a significantly higher subsequent probability of being Breached relative to firms that do not do so. Our results are stronger among younger firms, firms with fewer employees, and firms operating in less concentrated industries. By conducting a battery of additional tests, we attempt to go beyond merely establishing correlations to provide evidence whether such proprietary information can actually attract cyber attacks. Specifically, our results are robust to additional control variables, an instrumental variable approach, firm fixed effects, and a propensity score matching technique.
Impression offsetting as an early warning signal of low CEO confidence in acquisitions
Daniel Gamache et al.
Academy of Management Journal, forthcoming
Abstract:
Researchers have long been interested in understanding the motives behind CEOs’ actions. On the one hand, CEOs may pursue strategic actions because they are confident they will enhance firm value. Alternatively, CEOs may take actions even when they have low confidence in the value of those actions, perhaps driven by self-interest or social pressures. Although research suggests that CEO option exercises following an acquisition announcement are an ex post behavioral outcome of low CEO confidence in the acquisition’s value-creation potential, currently research has not identified any ex ante signals shareholders can look for to assess acquiring CEOs’ confidence when the acquisition is announced. We address this concern by exploring a potential early warning signal of low CEO confidence: impression offsetting. We theorize that impression offsetting - measured as other unrelated positive announcements made by the firm in the days immediately surrounding the acquisition announcement - may serve as an ex ante signal of low CEO confidence in the acquisition’s value-creation potential, and as such, will be positively associated with CEO option exercises, an ex post behavioral outcome of low confidence. We test our theory with a sample of 491 large acquisitions and find consistent support for our hypotheses.
Acquirer Reference Prices and Acquisition Performance
Qingzhong Ma, David Whidbee & Wei Zhang
Journal of Financial Economics, forthcoming
Abstract:
In a comprehensive sample of mergers and acquisitions, we find a reference price effect: Acquirers earn higher (lower) announcement-period returns when their pre-announcement stock prices are well below (near) their 52-week highs. This reference price effect is stronger in acquisitions of private targets, deals involving greater uncertainty, and acquirers with greater individual investor ownership, and it is reversed in the subsequent year. Further, acquirer reference prices affect bid premia and target announcement-period returns in deals with greater uncertainty in acquirer valuation. The overall evidence is consistent with investors irrationally using 52-week high prices as a measure of acquirer valuation.
Board interlock networks and informed short sales
Shijun Cheng, Robert Felix & Yijiang Zhao
Journal of Banking & Finance, January 2019, Pages 198-211
Abstract:
This study examines the association between informed short selling and a firm's position in the board interlock network formed by shared directors. We find that better-connected firms experience higher levels of informed short selling and that this association is driven by both eigenvector centrality (a measure that accounts for both the quantity and quality of firms’ ties) and betweenness centrality (a measure of the extent to which firms serve as information intermediaries), not by degree centrality (a measure that only counts the quantity of their ties) in interlock networks. In addition, the positive association between interlock centrality and informed trading is more pronounced for firms whose directors have more opportunities to interact with directors of external firms in the network, consistent with director information leakage serving as a plausible underlying channel. Our further tests do not support an alternative interpretation based on short sellers’ superior processing of public information. Our findings have important policy implications for regulators and professional director associations.
Governance under the Gun: Spillover Effects of Hedge Fund Activism
Nickolay Gantchev, Oleg Gredil & Chotibhak Jotikasthira
Review of Finance, forthcoming
Abstract:
Hedge fund activism is associated with improvements in the governance and performance of targeted firms. In this paper, we show that these positive effects of activism reach beyond the targets, as non-targeted peers make similar improvements under the threat of activism. Peers with higher threat perception, as measured by director connections to past targets, are more likely to increase leverage and payout, decrease capital expenditures and cash, and improve return on assets and asset turnover. As a result, their valuations improve, and their probability of being targeted declines. Our results are not explained by time-varying industry conditions or competition effects whereby improved targets force their product market rivals to become more competitive.
Watching TVs Left and Right: Partisanship in Media and Corporate Decision-making
April Knill, Baixiao Liu & John McConnell
Florida State University Working Paper, October 2018
Abstract:
Prior studies on the role of the media in corporate decision-making treat media outlets as a homogeneous group, though the political science literature has long established heterogeneity in media slant typically characterized as media partisanship. Using the introduction of Fox News into local cable markets as a natural experiment, we investigate whether partisanship in television outlets influences corporate decision-making. Under the Bush (Republican) presidency, we find that firms headquartered in regions where Fox News is introduced experience relatively more total investment, a higher fraction of investment in R&D, higher leverage ratios and a greater use of equity-linked CEO compensation than other firms. The consequence of these decisions is an increase in the firms’ stock return volatility. Using a triple-difference framework, we find that this effect is more pronounced for firms that have Republican-leaning management and those that are located in Republican-leaning states. We interpret our findings to imply that partisanship in media influences corporate decisions by affecting managers’ perceptions of an increased (decreased) likelihood of good (bad) economic outcomes when media outlets aligned with the political ideology of the president are optimistic. Our results highlight the importance of the heterogeneity in media slant in understanding the role of the media in corporate decision-making.
Bankruptcy Claims Trading
Jared Ellias
Journal of Empirical Legal Studies, December 2018, Pages 772-799
Abstract:
A robust secondary market has emerged over the past 20 years in the debt of Chapter 11 firms. Critics worry that the trading associated with this market has undermined bankruptcy governance by forcing managers to negotiate with shifting groups of activist investors in the Chapter 11 bargaining process. This article investigates whether this is a common problem and concludes that it is not. Although trading of bond debt is pervasive, the activist groups that tend to participate in negotiations usually enter cases early and rarely change significantly. Trading in general, therefore, does not appear to have the impact on governance that many claims trading critics fear, at least insofar as the average case is concerned.
Bargaining with the CEO: The Case for “Negotiate First, Choose Second”
Russell Korobkin & Michael Dorff
Negotiation Journal, October 2018, Pages 347-377
Abstract:
Whether chief executive officers (CEOs) and other senior executives are too highly compensated is one of the most publicized and divisive issues in corporate governance. In this article, we address this question not by asking whether executives are paid more than the value they create, but by asking whether firms could pay executives less money without reducing quality - thus retaining more money for shareholders - by using a better negotiation strategy. The focus of our attention is a particular feature of the way in which the compensation of CEOs and other high‐level employees is often determined, although rarely discussed: the firm first decides which candidate it prefers and only then negotiates the amount of compensation with the desired candidate. We hypothesize that this approach to negotiation, which we call “choose first, negotiate second,” is inferior to its alternative, which we call “negotiate first, choose second.” We explain the theoretical basis for this hypothesis and then present the results of an experiment designed to test it. We conclude by suggesting a number of possible explanations for firms' failure to take advantage of what we consider to be a superior negotiating strategy.
Shareholder approval thresholds in acquisitions: Evidence from tender offers
Audra Boone, Brian Broughman & Antonio Macias
Journal of Corporate Finance, December 2018, Pages 225-245
Abstract:
We exploit a 2013 Delaware law that reduces the shareholder support threshold for two-step tender offers to investigate the impact of differing levels of shareholder support on deal structures and outcomes. After the legal change, Delaware acquisitions, as opposed to other states, are more likely to be completed via tender offer, and Delaware targets collectively receive greater acquisition premiums and returns relative to firms incorporated in other states. Our results caution that supermajority shareholder approval thresholds can increase the risk of shareholder holdup and have little (if any) effect on managerial self-dealing.
Labor Unions and Income Smoothing
Sophia Hamm, Boochun Jung & Woo‐Jong Lee
Contemporary Accounting Research, Fall 2018, Pages 1201-1228
Abstract:
We study labor unions, an important stakeholder group that has not been a focus of the earnings smoothing literature. We posit that managers strike a balance between sheltering resources from employees’ profit sharing demands and catering to employees’ aversion to downside risk by smoothing earnings. We then hypothesize that a strong labor union would intensify managerial incentives to smooth earnings. Consistent with our hypothesis, we find that union strength is positively associated with earnings smoothing activities through management of both accruals and R&D expenditures.
Does short-maturity debt discipline managers? Evidence from cash-rich firms' acquisition decisions
Qianqian Huang, Feng Jiang & Szu-Yin (Jennifer) Wu
Journal of Corporate Finance, December 2018, Pages 133-154
Abstract:
We study the disciplinary role of short-maturity debt in cash-rich firms. We report evidence that such debt mitigates cash-rich firms' overinvestment in acquisitions. The disciplinary role is mostly concentrated among cash-rich firms that are weakly governed and have limited access to the public debt market and is also more pronounced for cash-rich firms that operate in less competitive industries. Furthermore, for cash-rich acquirers, high levels of short-maturity debt are associated with higher acquisition announcement returns and better post-acquisition operating performance. Overall, our results highlight the effective role of short-maturity debt in reducing agency cost.