Incorporated
Is the American Public Corporation in Trouble?
Kathleen Kahle & René Stulz
NBER Working Paper, November 2016
Abstract:
We examine the current state of the American public corporation and how it has evolved over the last forty years. There are fewer public corporations now than forty years ago, but they are much older and larger. They invest differently, as the importance of R&D investments has grown relative to capital expenditures. On average, public firms have record high cash holdings and in most recent years they have more cash than long-term debt. They are less profitable than they used to be and profits are more concentrated, as the top 100 firms now account for most of the net income of American public firms. Accounting statements are less informative about the performance and the value of firms because firms increasingly invest in intangible assets that do not appear on their balance sheets. Firms’ total payouts to shareholders as a percent of net income are at record levels, suggesting that firms either lack opportunities to invest or have poor incentives to invest. The credit crisis appears to leave few traces on the course of American public corporations.
---------------------
Executive compensation and political sensitivity: Evidence from government contractors
Brandy Hadley
Journal of Corporate Finance, forthcoming
Abstract:
Using federal contractor data, this paper examines the political costs hypothesis through the impact of government scrutiny and political sensitivity on executive compensation. The political cost hypothesis proffers that firms subject to government scrutiny take actions to deflect potential negative government reactions which can result in increased political costs for the firm. Results suggest that government contractor firms with the most political sensitivity (i.e., firms with government contracts that are most visible and comprise significant portions of their revenue) are associated with lower total (and excess) compensation to their CEOs, but with larger portions of cash, leading to lower long-term CEO wealth performance sensitivity. However, politically sensitive contractors with significant bargaining power (due to concentration, competition, or political contributions), are actually associated with greater excess compensation than other politically sensitive firms. These findings provide insight into the effects and limitations of additional government monitoring of executive compensation.
---------------------
Shareholder Litigation and Ownership Structure: Evidence from a Natural Experiment
Alan Crane & Andrew Koch
Management Science, forthcoming
Abstract:
We use a natural experiment to identify a causal effect of the threat of shareholder litigation on ownership structure, governance, and firm performance. We find that when it becomes harder for small shareholders to litigate, ownership becomes more concentrated and shifts from individuals to institutions. Director and officer governance protections drop among these firms, and operating performance drops among firms whose ownership structure does not change. These results suggest that the ability of shareholders to coordinate and litigate against management is important for governance.
---------------------
Murali Jagannathan & A.C. Pritchard
Journal of Banking & Finance, January 2017, Pages 85–101
Abstract:
Critics have charged that state competition in corporate law, which Delaware dominates, leads to a “race to the bottom” making management unaccountable. We argue that Delaware corporate law attracts firms with particular financial and governance characteristics. We find that Delaware attracts growth firms in industries with more takeover activity. Delaware firms have smaller boards, and their directors are paid more and serve on more boards. In addition, Delaware firms attract greater institutional ownership. We also provide a bottom-line test of the race-to-the-bottom hypothesis by examining forced CEO turnover. After controlling for differences in firm characteristics, we find that firms incorporated in Delaware are more likely to terminate CEOs. We also find that that termination decision is less sensitive to poor performance. Overall, we see no clear pattern supporting the “race to the bottom” hypothesis.
---------------------
Knighthoods, Damehoods, and CEO Behaviour
Konrad Raff & Linus Siming
Journal of Corporate Finance, forthcoming
Abstract:
We study whether and how politicians can influence the behaviour of CEOs and firm performance with prestigious government awards. We present a simple model to develop the hypothesis that government awards have a negative effect on firm performance. The empirical analysis uses two legal reforms in New Zealand for identification: knighthoods and damehoods were abolished in April 2000 and reinstated in March 2009. The findings are consistent with the predictions of the model. The results suggest that government awards serve as an incentive tool through which politicians influence firms in favour of employees to the detriment of shareholders.
---------------------
Information Disclosure, Firm Growth, and the Cost of Capital
Sunil Dutta & Alexander Nezlobin
Journal of Financial Economics, forthcoming
Abstract:
We study how information disclosure affects the cost of equity capital and investor welfare in a dynamic setting. We show that a firm’s cost of capital decreases (increases) in the precision of public disclosure if the firm’s growth rate is below (above) a certain threshold. The threshold growth rate is higher when the firm’s cash flows are more persistent, or when other firms in the economy are growing at low rates. While current shareholders always prefer maximum public disclosure, future shareholders’ welfare decreases (increases) in the precision of public disclosure if the firm’s growth rate is below (above) the threshold.
---------------------
The effects of the 2006 SEC executive compensation disclosure rules on managerial incentives
Reza Espahbodi, Nan Liu & Amy Westbrook
Journal of Contemporary Accounting & Economics, December 2016, Pages 241–256
Abstract:
In 2006, the SEC amended the disclosure requirements for executive compensation and stock ownership. This paper examines the effects of these amendments on (1) the association between equity-based executive incentives and firm payout choice, and (2) the association between executive compensation and earnings management. We find that after the effective date of the SEC rules, the positive associations between executive stock option holdings and firm open-market repurchases, and between executive shareholdings and firm dividend payouts, have weakened. In addition, the positive associations between bonus and discretionary accruals, between bonus and real earnings management, and between equity compensation and real earnings management, have decreased. In general, these findings are consistent with the notion that the 2006 SEC disclosure rules lowered management's self-interested actions by mitigating the information asymmetry between investors and managers.
---------------------
Corporate Governance and Costs of Equity: Theory and Evidence
Di Li & Erica Li
Management Science, forthcoming
Abstract:
We propose and test an alternative explanation for the existence of the positive governance–return relation in the 1990s and its disappearance in the 2000s: The governance–return relation is positive under good states of the economy and negative under bad states. Corporate governance mitigates investment distortions so that firms with strong governance have more valuable investment options during booms and more valuable divestiture options during busts than the ones with weak governance. Because investment options are riskier and divestiture options are less risky than assets in place, the expected returns of strongly governed firms are higher during booms but lower during busts than the weakly governed ones. Empirical evidence is consistent with our hypothesis.
---------------------
Agency Problem and Ownership Structure: Outside Blockholder As a Signal
Sergey Stepanov & Anton Suvorov
Journal of Economic Behavior & Organization, January 2017, Pages 87–107
Abstract:
We model the decision of an entrepreneur, seeking outside financing, on whether to sell a large equity share to a blockholder. A conventional theoretical rationale for the presence of an outside blockholder is mitigation of the agency problem via monitoring. Our model provides a novel insight: outside blockholders may be attracted by entrepreneurs with low, rather than high, agency problems in order to signal their low propensity to extract private benefits. Our result yields a new interpretation of an often documented positive relationship between outside ownership concentration in a firm and its market valuation: it may be driven by ”sorting” rather than by the direct effect of monitoring. We show that the positive correlation may arise even if the blockholder derives private benefits and has no positive impact on the value of small shares. Our analysis also helps to explain why the market reacts more favorably to private placements of equity as opposed to public issues.
---------------------
The Effect of Voluntary Clawback Adoptions on Corporate Tax Policy
Thomas Kubick, Thomas Omer & Zac Wiebe
University of Kansas Working Paper, October 2016
Abstract:
Firms are adopting executive compensation recoupment (“clawback”) policies to discourage aggressive financial reporting choices. Recent research suggests clawbacks might encourage other, less aggressive, forms of earnings management. We suggest that managing effective tax rates (ETRs), through greater discretion or tax planning, is an alternative for meeting earnings expectations and examine whether ETR management is affected by clawback adoptions. Using a matched sample, we find that effective tax rates are lower after clawback adoption, suggesting that firms use ETR management to increase earnings following clawback adoption. We also find that increased ETR management after clawback adoption does not increase tax outcome volatility or reduce tax disclosure quality. In further tests, we find lower ETRs among clawback firms that barely beat earnings estimates. We also find some evidence of a tradeoff between accruals, or real, earnings management and ETR management.
---------------------
Valuing talent: Do CEOs' ability and discretion unambiguously increase firm performance
Kwok Tong Samuel Cheung et al.
Journal of Corporate Finance, February 2017, Pages 15–35
Abstract:
This study investigates how the association between more able managers and firm performance, documented in prior research, is affected by the joint effect of managerial discretion and monitoring quality. We find that higher levels of managerial discretion afford more able managers to further improve firm outcomes only when such discretion is monitored closely to curb more able managers' rent seeking incentives. Our results are robust to a battery of additional and sensitivity analyses that we perform.
---------------------
Spillovers Inside Conglomerates: Incentives and Capital
Ran Duchin, Amir Goldberg & Denis Sosyura
Review of Financial Studies, forthcoming
Abstract:
Using hand-collected data on divisional managers at conglomerates, we find that a change in industry pay in one division generates spillovers on managerial pay in other divisions of the same firm. These spillovers arise only within the boundaries of a conglomerate. The intra-firm spillovers increase when conglomerates have excess cash and when managers have more influence over its distribution, but decline in the presence of strong governance. These spillovers are associated with weaker performance and lower firm value. Our evidence is consistent with simultaneous cross-subsidization via managerial compensation and capital budgets and suggests that these practices arise in similar firms.
---------------------
Do the FASB's Standards add Shareholder Value?
Urooj Khan et al.
Columbia University Working Paper, October 2016
Abstract:
We examine the cost effectiveness, from the shareholders’ perspective, of the accounting standards issued by the FASB during 1973-2009. In particular, we evaluate (i) the stock market reactions of firms affected by the standards surrounding the events that changed the probability of issuance of these standards; and (ii) whether the market reactions are related, in the cross-section, to affected firms’ agency problems, information asymmetry, proprietary costs, contracting costs, and estimation risk changes. The average standard is a non-event from the investors’ perspective. We find that 104 of the 138 standards we examine are associated with no change in shareholder value. Thirty-four standards are associated with significant abnormal returns. Of these 19 (15) are shareholder value decreasing (increasing). Thus, a mere 11% of the standards improve shareholder value. The fair value pronouncements (SFAS 105, 107, 115) and the R&D expensing standard (SFAS 2) cause the highest negative stock price reaction whereas standards related to the securitization of mortgage backed securities (SFAS 134) and the disclosure of derivative instruments (SFAS 119) are associated with the highest positive returns. Surprisingly, 25 standards are associated with an increase in estimation risk. Stock returns associated with standards are higher for affected firms that experience a decrease in estimation risk. Principles-based standards are associated with more positive stock price reactions relative to rules-based standards. However, standards that involve more managerial estimates are associated with negative stock price reactions.