Public Business
Do Commercial Ties Influence ESG Ratings? Evidence from Moody's and S&P
Xuanbo Li, Yun Lou & Liandong Zhang
Journal of Accounting Research, December 2024, Pages 1901-1940
Abstract:
We provide the first evidence that conflicts of interest arising from commercial ties lead to bias in environmental, social, and governance (ESG) ratings. Using the acquisitions of Vigeo Eiris and RobecoSAM by Moody's and S&P as shocks to the commercial ties between ESG rating agencies and their rated firms, we show that, after their acquisitions by the credit rating agencies (CRAs), ESG rating agencies issue higher ratings to existing paying clients of the CRAs. This effect is greater for firms that have more intensive business relationships with the CRAs, but weaker for firms with more transparent ESG disclosures or higher long-term institutional ownership. The upwardly biased ESG ratings help client firms issue more green bonds and enable the CRAs to maintain credit rating business. Finally, the upwardly biased ESG ratings are less informative of future ESG news. Overall, the business incentives of rating providers appear to engender ESG rating bias.
Do Socially Responsible Firms Walk the Talk?
Aneesh Raghunandan & Shiva Rajgopal
Journal of Law and Economics, November 2024, Pages 767-810
Abstract:
Some firms claim to be socially responsible. We confront these claims with data based on the most notable recent proclamation, the Business Roundtable's 2019 "Statement on the Purpose of a Corporation." The influential Business Roundtable contains many of America's largest firms; the statement proclaimed a corporation's purpose as delivering value to all stakeholders, rather than only shareholders. However, we find no evidence that signatories -- who voluntarily signed -- engaged in such stakeholder-centric practices before or after signing. Relative to peers, signatories violate environmental and labor laws more frequently, have higher carbon emissions, rely more on government subsidies, and are more likely to disagree with proxy recommendations on shareholders' proposals. We also do not observe postsigning improvements along these dimensions, which suggests that the statement was not a credible commitment to improve. Our results suggest that firms' proclamations of stakeholder-centric behavior are not backed up by hard data.
Market Response to Court Rejection of California's Board Diversity Laws
Jonathan Klick
Journal of Empirical Legal Studies, forthcoming
Abstract:
California mandated that firms headquartered in the state include women (SB 826) and underrepresented minorities (AB 979) on their corporate boards. These laws, passed in 2018 and 2020 respectively, were held to violate the state's constitution by judges on the Los Angeles County Superior Court in 2022. This paper examines the market reaction to these surprising court decisions, finding that California firms appreciated significantly on the days of the rulings, and there is evidence that firms that were not in compliance with the laws exhibited larger abnormal returns than firms that were in compliance.
How Do Short-Term Incentives Affect Long-Term Productivity?
Heitor Almeida et al.
Review of Financial Studies, forthcoming
Abstract:
Previous research shows that incentives to meet short-term earnings targets can cause firms to increase share buybacks, leading to cuts in investments and employment. Using plant-level census data, we find that incentives to engage in earnings-per-share-motivated buybacks result in lower productivity at both the plant and firm level. We attribute this productivity drop to two mechanisms: reduced investment in productivity-augmenting technology, and inefficient allocation of resources across a firm's plants. We identify multiple frictions -- including labor unions, financial constraints, agency problems, and adjustment costs -- that can constrain efficient reallocations across plants and thus exacerbate the consequences of firms' short-term incentives.
The role of military directors in holding the CEO accountable for poor firm performance
Stevo Pavićević & Thomas Keil
Strategic Management Journal, forthcoming
Abstract:
Why do some boards of directors dismiss the CEO when a firm performs poorly, while others do not? We argue that military directors -- outside directors with military backgrounds -- on the board increase the likelihood of CEO dismissal under low-performance conditions. Military service instills a lifelong system of values and beliefs related to accountability -- the obligation to accept responsibility for one's own actions and outcomes -- which leads military directors to attribute low performance to the CEO and hold the CEO strictly accountable for such performance. This argument is supported by extensive quantitative data on CEO dismissal in publicly listed firms and qualitative data obtained from interviews with military directors who have served on boards of those firms.
Specialization and performance in private equity: Evidence from the hotel industry
Christophe Spaenjers & Eva Steiner
Journal of Financial Economics, December 2024
Abstract:
Using granular data on U.S. hotel investments over the past two decades, we show that industry-specialist PE firms achieve higher net income from operations and higher capital gains from sale than generalist PE firms for comparable properties. Those results are driven by specialists implementing more and larger cost savings without compromising revenues. Fundamentally, specialists utilize their hotel-specific operating expertise to produce superior performance outcomes. We show that specialists across investment sectors possess deeper industry-specific operating expertise. Our results suggest that specialist PE firms can compete with their generalist rivals by leveraging such expertise in a chosen market niche.
Broken Windows: SEC Enforcement of Delinquent Insider Filings
Caleb Houston, Brandon Cline & Valeriya Posylnaya
Mississippi State University Working Paper, September 2024
Abstract:
The SEC mandates insiders report trading activity by a deadline. Although insiders disregard this requirement 222,613 times from 1988 to 2023, only 0.5% of the violations prompt SEC enforcement action. Comparing enforced to unenforced filing violations we show the SEC pursues insiders who persistently violate the requirement. Evidence also suggests that targeted enforcement has a deterrence on future reporting violations and on other questionable trading practices, such as blackout and stealth trading. We illustrate the deterrence is not limited to the insider experiencing enforcement, and that the strength of the deterrence varies by the insiders' connection to the enforcement action.