Incorporating Risk
Private Equity Buyouts and Workplace Safety
Jonathan Cohn, Nicole Nestoriak & Malcolm Wardlaw
Review of Financial Studies, forthcoming
Abstract:
This paper presents evidence of a large, persistent decline in establishment-level workplace injury rates after private equity (PE) buyouts of publicly traded U.S. firms. We find that firms experience fewer OSHA safety violations after buyouts and that a larger decline in injury rates is associated with an increased probability of exit via IPO. Employment reductions after buyouts are concentrated in relatively low-injury-risk establishments. Overall, our results suggest that buyouts improve workplace safety and that PE acquirers benefit from this improvement. We explore possible causes of these changes through interviews with executives of companies acquired in buyouts and through cross-sectional analysis.
Hedge fund investor activism and human capital loss
Guoli Chen, Philipp Meyer‐Doyle & Wei Shi Strategic
Management Journal, forthcoming
Abstract:
Prior research suggests that hedge fund activism can benefit targeted firms. We explore a potential negative side‐effect of hedge fund activism: the unwanted loss of human capital in targeted firms. We find that firms targeted by hedge fund activists experience a greater departure of valuable employees compared with a matched sample of non‐targeted firms. Further, the positive effect of hedge fund activism on firm performance is stronger when firms experience a lower departure of valuable employees. These results suggest that hedge fund activism can lead to the unwanted loss of human capital, which may reduce the otherwise positive performance effect on targeted firms. These findings contribute to research on investor activism and human capital.
“Stiff Business Headwinds and Uncharted Economic Waters”: The Use of Euphemisms in Earnings Conference Calls
Kate Suslava
Management Science, forthcoming
Abstract:
This paper studies whether euphemisms obfuscate the content of earnings conference calls and cause investors to underreact. I argue that managers’ use of euphemisms can alleviate the impact of bad news and delay the market reaction to adverse information. Using a dictionary of corporate euphemisms, I find that their use by managers - but not by analysts - is negatively associated with both immediate and future abnormal returns, and their frequency moderates the negative market reaction to bad earnings news. Finally, stock underreaction is more pronounced on busy earnings announcement dates, when investor attention is distracted.
Labor Mobility and Antitakeover Provisions
Aiyesha Dey & Joshua White
Journal of Accounting and Economics, forthcoming
Abstract:
How do firms protect their human capital? We test whether firms facing an increased threat of being acquired strengthen their antitakeover provisions (ATPs) in order to bond with their employees. We use the adoption of the Inevitable Disclosure Doctrine (IDD) by US state courts, which exogenously decreases knowledge-worker mobility, thus elevating takeover risk and reducing employee incentives to innovate. Firms respond to the IDD adoption by strengthening ATPs that defend against hostile takeovers, especially when they have greater ex-ante employee mobility and human capital and place greater importance on employee relations. We find no evidence that managers strengthen ATPs for entrenchment or takeover bargaining purposes in this setting. Our findings show that ATPs can be used to credibly commit to employees in order to protect long-term value creation.
Investors’ Attention to Corporate Governance
Peter Iliev, Jonathan Kalodimos & Michelle Lowry
Review of Financial Studies, forthcoming
Abstract:
Using unique data on investor views of EDGAR company filings, we document that many investors engage in governance research. However, investors’ monitoring is disproportionately focused on large firms and firms with meetings outside the busy spring proxy season. Using an instrumental variables approach that isolates the drop in governance attention during the busy proxy season, we show that governance research is related to investors’ monitoring of firms, through voice and exit. Moreover, governance research disciplines management, who, as a result, reduce investments and increase payouts. The concentration of attention results in joint monitoring of a relatively small subset of firms.
Directors’ career concerns: Evidence from proxy contests and board interlocks
Shuran Zhang
Journal of Financial Economics, forthcoming
Abstract:
This paper studies the disciplinary spillover effects of proxy contests on companies that share directors with target firms, that is, interlocked firms. In difference-in-differences tests, I find that interlocked firms reduce excess cash holdings, increase shareholder payouts, cut CEO compensation, and engage in less earnings management in the year after proxy contests. The effects are more pronounced when both the interlocked and target firms have a unitary board and when the interlocking director is up for election, is younger, or has shorter tenure. Overall, the evidence highlights the importance of directors’ career concerns in policy spillovers across firms with board interlocks.
Uncovering the Hidden Effort Problem
Azi Ben-Rephael et al.
NBER Working Paper, February 2021
Abstract:
We use machine learning to analyze minute-by-minute Bloomberg online status data and study how the effort provision of top executives in public corporations affects firm value. While executives likely spend most of their time doing other activities, Bloomberg usage data allows us to characterize their work habits. We document a positive effect of effort on unexpected earnings, cumulative abnormal returns following firm earnings announcements, and credit default swap spreads. We form long-short, calendar-time, effort portfolios and show that they earn significant average daily returns. Finally, we revisit several agency issues that have received attention in the prior academic literature on executive compensation.
Remotely Productive: The Economics of Long-Distance CEOs
Ran Duchin & Denis Sosyura
Arizona State University Working Paper, January 2021
Abstract:
We provide the first evidence on the efficacy of long-distance working arrangements between CEOs and firms. Long-distance CEOs underperform according to operating performance, insider reviews, and announcement returns to CEO departures. These effects are stronger when the CEO’s commute is longer and crosses multiple time zones. Using the quality of schools available to the CEO’s children as an instrument for the decision to commute, we argue that these effects are causal. CEOs’ private costs of working remotely have long-run effects on their strategic decisions and on the future of their firms. Remote CEOs are 60% more likely to sell their firm to an acquirer, and they do so at bargain prices.
Political Corruption and Firm Value in the U.S.: Do Rents and Monitoring Matter?
Nerissa Brown
Journal of Business Ethics, January 2021, Pages 335-351
Abstract:
Political corruption imposes substantial costs on shareholders in the U.S. Yet, we understand little about the basic factors that exacerbate or mitigate the value consequences of political corruption. Using federal corruption convictions data, we find that firm-level economic rents and monitoring mechanisms moderate the negative relation between corruption and firm value. The value consequences of political corruption are exacerbated for firms operating in low-rent product markets and mitigated for firms subject to external monitoring by state governments or monitoring induced by disclosure transparency. Our results should inform managers and policymakers of the tradeoffs imposed on firms operating in politically corrupt districts.
Corporate Culture in M&As: Evidence from CEO Letters to Shareholders
Sunny (Seung Yeon) Yoo
University of Southern California Working Paper, November 2020
Abstract:
This paper examines the role of corporate culture for mergers and acquisitions. To quantify corporate culture, I run a textual analysis of the language used in CEOs' annual letters. This analysis categorizes firms into three different corporate cultures: collaborative, innovative, and customer-centric. Using the novel measure of corporate culture, I find that firms with more similar corporate cultures are more likely to merge. Second, buyers' announcement returns are higher if targets have more similar corporate cultures. Finally, the cultural integration of two merged firms is positively related to post-merger performance and is negatively associated with ex post divestiture. In sum, this paper shows that cultural differences have meaningful impacts on mergers.