Owning Executives
Political Euphoria and Corporate Disclosures: An Investigation of CEO Partisan Alignment with the President of the United States
Mazhar Arikan et al.
Journal of Accounting and Economics, forthcoming
Abstract:
We examine how the partisan alignment between chief executive officers (CEOs) and the United States president influences corporate disclosure outcomes. We predict and find evidence that more partisan-aligned CEOs display greater optimism in their corporate disclosures. CEO partisan alignment is positively associated with the likelihood of issuing a management earnings forecast and issuing overly optimistic forecasts. More partisan-aligned CEOs also use a more optimistic tone in the corporate disclosure and exhibit a lower level of accounting conservatism. Our findings suggest that time-varying beliefs of CEOs formed by the political environment can shape corporate disclosures.
Friends in High Places: Political Ties and SEC Oversight of Foreign Firms
Jill Fisch & Xian Gu
University of Pennsylvania Working Paper, August 2022
Abstract:
In this paper, we examine the effect of country-level political relationships on SEC oversight of US-listed foreign firms, ranging from routine review of issuer filings to enforcement actions. We find that the political relationship between a foreign firm's home country and the US is an important determinant of the frequency and intensity of SEC comment letters as well as whether the firm is likely to face enforcement. When the firm's home country has stronger political ties with the US, the frequency of comment letters issued by the SEC is lower, the tone of comment letters is less negative and litigious and the firm is less likely to be the subject of an SEC enforcement action. We further examine the extent to which SEC routine monitoring through comment letters complements its enforcement activity, and we find that, although the relationship is generally complementary, when the political ties with the US are stronger, the complementary effect is mitigated.
Political Connections and Short Sellers
Yuecheng Jia, Betty Simkins & Hongrui Feng
Journal of Banking & Finance, forthcoming
Abstract:
This study finds that politically connected firms, comparing with their non-connected peers, are less likely to be targeted by short sellers, especially during the periods of market turmoil. Short sellers' avoidance of politically connected firms can be attributed to the implicit government guarantee, which significantly increases the target firms' information complexity and decreases short sellers' expected risk-adjusted profits. The absence of short sellers consequently results in less negative stock returns for politically connected firms as compared to their non-connected peers. Our findings extend Boehmer, Huszar and Jordan (2010) by showing that the absence of short sellers may not necessarily indicate good news but can be attributed to the presence of political connections. This study sheds some light on the sources of market value of political connections.
Did they live happily ever after? The fate of restructured firms after hedge fund activism
Wonik Choi & Jongha Lim
Financial Review, forthcoming
Abstract:
This paper studies the long-term effect of hedge fund activism on distressed firms by tracing the post-emergence performance of firms that successfully resolved distress. We find that the firms restructured with hedge funds' intervention, compared to their counterparts that emerged without such intervention, are more likely to lose their public status, enjoy higher financial stability, and invest more. Notably, the gap in financial strength lasts at least 3 years after emergence. These findings suggest that the efficiency gains brought by hedge fund activism during the restructuring process tend to positively impact the restructured firms' financial soundness in the post-intervention period.
The Real Effects of Equity Markets on Innovation
Chris Mace
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
In theory, financial markets promote innovation by selectively allocating capital to high-quality projects. In this paper, I show that equity markets can also inhibit innovation. In public firms, I find that short-term equity market declines cause pharmaceutical companies to abandon early-stage drug developments, irrespective of drug quality or changes in a firm's stock price. I show that financing constraints drive this behavior, highlighting that even short-term market fluctuations can have long-term effects on pharmaceutical innovation and prevent potentially life-saving drugs from progressing to the market.
"Dear CEO and Board": How Activist Investors' Confidence in Tone Influences Campaign Success
Matthias Brauer, Margarethe Wiersema & Philipp Binder
Organization Science, forthcoming
Abstract:
Activist hedge funds represent the most potent form of financial activism. Yet we do not fully understand how these activist investors, despite holding only a small stake in target firms, are able to influence management and the board to acquiesce to their demands, especially given the large uncertainty that their demands will improve shareholder value. Building on impression management (IM) theory, we propose that activist investors who express their concerns and demands with high confidence in their letters to target firms are likely to be perceived as knowledgeable and competent by the firm's other shareholders, thus influencing the response of the firm's management and board. In support of this theoretical proposition, results of our empirical analysis of 475 U.S. activist campaigns against U.S. companies between 2007 and 2019 suggest that confidence in tone in an activist's letter, as a form of self-promotion, is positively associated with campaign success. We also observe that the positive association between confidence in tone in activist letters and campaign success is less for activists with greater success in prior campaigns and in campaigns with multiple activists. Our paper contributes to financial activism research by showing that activists' verbal impression management can serve as an effective influence tactic in their campaigns. Our study also contributes to the emerging research stream on verbal IM by introducing a language attribute, confidence in tone, that has not been studied in management research and is distinct from past constructs examined in verbal IM research.
Shoot the Arrow, Then Paint the Target: CEO Compensation and ISS Benchmarking
Subramanian Iyer, Oded Palmon & Harikumar Sankaran
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We document that firms that expect their CEOs' compensation to exceed the median CEO compensation of their ISS peers influence ISS to revise these peer sets. Controlling for changes in firm characteristics that ISS uses to select peers, we find that ISS applies an abnormally high turnover rate in the members of these peer sets and increases the representation of focal firms' chosen peers. This turnover results in increases in the medians of the ISS peers' CEO compensation and size. We find that these firms underperform and conclude that they attempt to camouflage high CEO pay to mitigate outrage costs.
Disloyal Managers and Shareholders' Wealth
Eliezer Fich, Jarrad Harford & Anh Tran
Review of Financial Studies, forthcoming
Abstract:
A duty of loyalty prohibits fiduciaries from appropriating business opportunities from their companies. Starting in 2000, Delaware, followed by several other states, allowed boards to waive their duty. We show that public firms covered by waiver laws invest less in R&D, produce fewer and less valuable patents, and exhibit abnormally high inventor departures. Remaining innovation activities contribute less to firm value, a fact confirmed by the market reaction when firms reveal their curtailed internal growth opportunities by announcing acquisitions. Consistent with the laws' intent to provide contracting flexibility to emerging firms, we find evidence of positive impacts for small firms.
Thy Neighbor's Vote: Peer Effects in Proxy Voting
Jiekun Huang
Management Science, forthcoming
Abstract:
Institutional investors' proxy voting decisions are influenced by their neighbors. I identify peer effects in proxy voting using close-call votes on shareholder-sponsored governance proposals at publicly traded financial institutions (focal institutions). I first show that the passage of a governance proposal at a focal institution makes the institution more likely to vote against management at its portfolio firms. Using a triple-difference approach, I find that the neighboring institutions of the focal institution that passes a governance proposal become more likely to vote against management in stocks that are heavily held by the focal institution. These results suggest that peer influence is an important determinant of proxy voting behavior.
Options trading and earnings management: Evidence from the penny pilot program
(Grace) Qing Hao & Keming Li
Journal of Corporate Finance, forthcoming
Abstract:
Using a difference-in-differences approach that relies on the exogenous increase in options trading activity generated by the Securities and Exchange Commission's Penny Pilot Program, we find a negative causal effect of options trading on earnings management. With a reduced magnitude of discretionary accruals, the pilot firms are less likely to marginally beat earnings targets and less likely to have financial misstatements during the pilot period. Cross-sectional analysis shows that the effects are more pronounced among firms with a small or less independent board or a small audit committee. Furthermore, the pilot firms receive more market attention, and their stock price efficiency improves more than the nonpilot firms during the pilot period. The evidence is consistent with the argument that active options trading enhances market scrutiny of firms' reporting behavior, improving financial reporting quality and price efficiency.
Do Individual Directors Matter? Evidence of Director-Specific Quality
Dipesh Bhattarai, Matthew Serfling & Tracie Woidtke
University of Tennessee Working Paper, September 2022
Abstract:
We adopt a methodology to quantify the component of director quality that is unique to each director and transferable across firms and over time, which we call director-specific quality (DSQ). DSQ explains about 10% of the total variation in Tobin's Q. Previously examined director characteristics explain very little of the variation in DSQ, suggesting that it represents a distinct and new measure of director quality. We also show that DSQ is significantly correlated with other measures of value and director performance. DSQ is positively (negatively) related to announcement returns when firms announce director appointments (deaths). Higher DSQ directors also receive more shareholder support during elections. At the firm-level, firms with higher average board-level DSQ make higher quality M&A deals, tie CEO compensation more closely to shareholder returns, produce more and higher quality innovation, and manage cash better. Overall, our results suggest that directors have unique value-relevant attributes, and who firms hire matters.
Analysts' Connections and M&A Outcomes
Felipe Cortes & Francisco Marcet
Management Science, forthcoming
Abstract:
This paper studies the role of shared analysts, who cover the target and the acquirer, in mergers and acquisitions outcomes. We find that deals where both firms are connected through shared analysts are less likely to be completed than deals without shared analysts. If completed, however, deals with shared analysts exhibit higher expected synergy gains, acquirer announcement returns, and acquirer post-completion performance. Shared analysts are also more likely to issue estimates about the acquirer in the proximity of the impending deal and their estimates are associated with a decrease in the uncertainty about acquirer's cash flows. Our results highlight how the position of analysts in a deal results in an informational edge that enhances the screening of deals and mitigation of the acquirer's informational disadvantage. Shared analysts who enhance the acquirer's ability to screen out deals also exhibit superior career outcomes post-completion. We find similar results in the pre- and post-Regulation Fair Disclosure period, using brokerage house closures as a quasi-natural experiment and after controlling for analysts' affiliations.