Paid for it
Social stigma and executive compensation
Jiri Novak & Pawel Bilinski
Journal of Banking & Finance, November 2018, Pages 169-184
Abstract:
We document that executives working at firms perceived negatively in light of social norms, such as tobacco, gambling and alcohol, earn a significant compensation premium. The premium compensates for personal costs executives bear due to their employer's negative public perception and include: (i) a reduced likelihood these CEOs will serve as directors on other firms’ boards, which associates with lower executives’ social status, and (ii) impaired job mobility as employers shun stigmatized executives. The compensation premium is not explained by higher managerial skill required in firms we investigate, higher employment contract risk, political capital, litigation risk, or differences in corporate governance quality, and robust to endogeneity concerns. Our results highlight the significant impact job-related social stigma has on executive compensation.
Competing Against Overconfident CEOs
Shane Johnson et al.
Texas A&M University Working Paper, August 2018
Abstract:
Motivated by studies that show overconfident agents are more competitive, we test whether overconfident CEOs respond differently and perform better when competition increases. Using tariff reductions as exogenous shocks to competition and a triple-difference specification on matched samples, we find that when competition increases, firms with overconfident CEOs slash their operating and gross profit margins, and increase advertising and research and development more intensively than rational CEOs do. Their actions lead to increased market share and value for their firms relative to firms led by rational CEOs. Our results imply that CEO overconfidence is beneficial when firms face increased competition.
The Local Spillover Effect of Corporate Accounting Misconduct: Evidence from City Crime Rates
Eric Holzman, Brian Miller & Brian Williams
Indiana University Working Paper, August 2018
Abstract:
This study examines whether the revelation of corporate accounting misconduct in a community is associated with an increase in neighborhood crime. We find that the revelation of an Accounting and Auditing Enforcement Release (AAER) in a city is associated with a subsequent increase in neighborhood-level financially motivated crime (robberies, thefts, etc.). We provide evidence that the increase in crime is incremental to the inclusion of a number of economic controls, the addition of local fixed effects, and a matched sample analysis. Further, we find that the association between the revelation of an AAER and neighborhood financial crime is strongest in communities where: 1) the misconduct is more salient to the local citizenry (i.e., smaller locations) and, 2) in locations where there is greater income inequality. Further, we find that the crime rate is approximately 3.3% higher in the year after the revelation of an AAER and remains at an elevated level for three to four years. In sum, our evidence suggests that accounting misconduct in corporations can spillover to crime in the local community.
Lazy Prices
Lauren Cohen, Christopher Malloy & Quoc Nguyen
NBER Working Paper, September 2018
Abstract:
Using the complete history of regular quarterly and annual filings by U.S. corporations from 1995-2014, we show that when firms make an active change in their reporting practices, this conveys an important signal about future firm operations. Changes to the language and construction of financial reports also have strong implications for firms’ future returns: a portfolio that shorts “changers” and buys “non-changers” earns up to 188 basis points in monthly alphas (over 22% per year) in the future. Changes in language referring to the executive (CEO and CFO) team, regarding litigation, or in the risk factor section of the documents are especially informative for future returns. We show that changes to the 10-Ks predict future earnings, profitability, future news announcements, and even future firm-level bankruptcies. Unlike typical underreaction patterns in asset prices, we find no announcement effect associated with these changes — with returns only accruing when the information is later revealed through news, events, or earnings — suggesting that investors are inattentive to these simple changes across the universe of public firms.
Voluntary disclosure of corporate political spending
Lisa Goh, Xuejiao Liu & Albert Tsang
Journal of Corporate Finance, forthcoming
Abstract:
In this paper, we study voluntary political spending disclosure, a widespread yet relatively unexplored corporate voluntary disclosure practice. Using an index created by the CPA-Zicklin Center that measures the level of voluntary political spending disclosure for S&P 500 firms, we examine firm-level characteristics associated with such disclosures, and their importance. We find that firms with greater political expenditures, direct political connections, higher investor activism, better corporate social responsibility performance and governance, and more industry competition tend to have a higher level of political spending disclosure. We also find that a higher level of political spending disclosure is positively associated with both the number of institutional investors and the proportion of shares owned by institutional investors, particularly socially responsible institutional investors, after controlling for the quality of other disclosures. The level of political spending disclosure is also associated with a higher analyst following, lower forecast error, and smaller forecast dispersion. Finally, we find that political spending disclosure enhances the positive relationship between annual corporate political spending and firm financial performance. Together, these results are consistent with the view that voluntary political spending disclosure helps align managers’ interests with those of shareholders.
Partisan Conflict, Policy Uncertainty and Aggregate Corporate Cash Holdings
Chak Hung Jack Cheng et al.
Journal of Macroeconomics, December 2018, Pages 78-90
Abstract:
This paper distinguishes political uncertainty from policy uncertainty shocks and uncovers new empirical facts about how each impacts the aggregate cash holdings of US firms. Our baseline structural vector autoregression model shows that an exogenous one standard deviation shock to political and economic policy uncertainty is followed by a 1 and 1.8 percent increase in aggregate corporate cash-to-total assets after five and eight quarters, respectively. The baseline result also shows that policy uncertainty shocks tend to raise financial market volatility while political uncertainty shocks tend to lower financial market volatility. Moreover, we find evidence that political uncertainty exerts asymmetric effects on aggregate corporate cash holdings, with a shock tending to raise cash holdings under normal financial conditions and lower cash holdings under tight financial conditions. Our main results are robust against a wide range of shock identification schemes as well as against parametric and non-parametric model estimations.
CEOs imbue organizations with feelings, increasing punishment satisfaction and apology effectiveness
Simone Tang & Kurt Gray
Journal of Experimental Social Psychology, November 2018, Pages 115-125
Abstract:
Organizations are easy to blame for wrongdoing because they seem capable of intention and planning (i.e., they possess perceived agency). However, punishing organizations for wrongdoing is often unsatisfying, perhaps because organizations seem incapable of feeling pain (i.e., they lack perceived experience). Without the ability to suffer, corporations and organizations cannot slake people's thirst for retribution, even with large fines and other penalties. CEOs may provide a potential solution to this “organization experience deficiency.” As feeling humans who embody the organizations they lead, CEOs provide a possible source of suffering and therefore organizational redemption. Across five experiments and one pre-registered experiment, we found that CEOs imbue their organizations with the ability to feel (Experiments 1–4b) and ability to suffer (Experiments 2a, 2b, and 3), which makes organizational punishments more satisfying (Experiments 2a, 2b, and 3), and apologies more effective (Experiments 4a and 4b). Implications for justice and mind perception in organizations are discussed.
CEO educational background and acquisition targets selection
Ye Wang & Sirui Yin
Journal of Corporate Finance, October 2018, Pages 238-259
Abstract:
Using hand-collected CEO education data of 3574 CEOs over the period of 2000 to 2015, we document that CEOs are significantly more likely to acquire targets that are headquartered in those states where the CEOs received their undergraduate and graduate degrees. Education-state deals are larger, have higher completion rates, and exist with both public and private targets. Acquirers pay a lower target premium for education-state deals and the cumulative abnormal announcement returns are positive. The combined evidence suggests that education-state acquisitions are more likely to be driven by bidder CEO's information advantage toward firms headquartered in the education state.
Firms’ innovation strategy under the shadow of analyst coverage
Bing Guo, David Pérez-Castrillo & Anna Toldrà-Simats
Journal of Financial Economics, forthcoming
Abstract:
We study the effect of analyst coverage on firms’ innovation strategy and outcome. Using data of US firms from 1990 to 2012, we find evidence that an increase in financial analysts leads firms to cut research and development expenses, acquire more innovative firms, and invest in corporate venture capital. We attribute the first result to the effect of analyst pressure and the others to the informational role of analysts. We also find that financial analysts encourage firms to make more efficient investments related to innovation, which increases their future patents and citations and influences the novelty of their innovations.
The Effect of Cultural Similarity on Mergers and Acquisitions: Evidence from Corporate Social Responsibility
Fred Bereskin et al.
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We study the effect of corporate cultural similarity on merger decisions and outcomes. Using the similarity in firms’ corporate social responsibility characteristics to proxy for cultural similarity, we find that culturally similar firms are more likely to merge. Moreover, these mergers are associated with greater synergies, superior long-run operating performance, and fewer write-offs of goodwill. Our evidence is consistent with the notion that cultural similarity eases post-deal integration. Our results contribute to the literature on the determinants of merger success, provide new evidence on the impact of corporate culture, and offer a new approach to defining firms’ cultural similarity.
Financing Acquisitions with Earnouts
Thomas Bates, Jordan Neyland & Yolanda Yulong Wang
Journal of Accounting and Economics, forthcoming
Abstract:
We present evidence that earnout agreements in acquisition contracts provide a substantial source of financing for acquirers. Acquirers in transactions with earnouts are significantly more likely to be financially constrained, face tighter credit market conditions, and use less debt and equity to fund acquisitions. Financially constrained acquirers also book lower fair values for the contingent claim. Earnout use is more likely in transactions that involve liquid sellers, and earnout bids garner higher transaction valuation multiples. Overall, the evidence suggests that earnouts are an economically material and increasingly common source of acquisition financing for acquirers with limited access to external capital.
Disciplinary directors: Evidence from the appointments of outside directors who have fired CEOs
Jay Cai & Tu Nguyen
Journal of Banking & Finance, November 2018, Pages 221-235
Abstract:
By examining board appointments of outside directors who have previously fired a CEO, we study how directors’ willingness to take disciplinary actions is related to a firm's performance and risk-taking. Such directors (‘disciplinary directors’) appear to benefit firms with weak monitoring, but hurt firms in innovative industries. Firms appointing a disciplinary director subsequently exhibit lower idiosyncratic risk, leverage, and R&D expense, make fewer acquisitions, and are more likely to replace poorly performing CEOs. Overall, disciplinary directors appear to influence managerial behavior and shareholder wealth.
Divisional buyouts by private equity and the market for divested assets
Ulrich Hege et al.
Journal of Corporate Finance, December 2018, Pages 21-37
Abstract:
We study the role and performance of private equity (PE) in corporate asset sales. Corporate sellers obtain significantly positive excess returns in PE deals, gains in wealth significantly greater than for intercorporate asset sales. Based on exit valuations for 98% of PE deals, we find gains in enterprise value in buyouts are significantly greater than for benchmark firms. Corporate seller excess returns are positively correlated with subsequent gains in asset enterprise value. A parsimonious auction model suggests that only restructuring capabilities of PE (not acquisition of undervalued assets) can explain the pattern of the gains generated in these PE deals.