Runners
What Doesn't Kill You Will Only Make You More Risk-Loving: Early-Life Disasters and CEO Behavior
Gennaro Bernile, Vineet Bhagwat & Raghavendra Rau
Journal of Finance, forthcoming
Abstract:
The literature on managerial style posits a linear relation between a CEO's past experiences and firm risk. We show that there is a nonmonotonic relation between the intensity of CEOs’ early-life exposure to fatal disasters and corporate risk-taking. CEOs who experience fatal disasters without extremely negative consequences lead firms that behave more aggressively, whereas CEOs who witness the extreme downside of disasters behave more conservatively. These patterns manifest across various corporate policies including leverage, cash holdings, and acquisition activity. Ultimately, the link between CEOs’ disaster experience and corporate policies has real economic consequences on firm riskiness and cost of capital.
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FORE! An Analysis of CEO Shirking
Lee Biggerstaff, David Cicero & Andy Puckett
Management Science, forthcoming
Abstract:
Using golf play as a measure of leisure, we provide direct evidence that some CEOs shirk their responsibilities to the detriment of firm shareholders. CEOs with lower equity-based incentives play more golf and those that golf the most are associated with firms that have lower operating performance and firm values. Numerous tests accounting for the possible endogenous nature of these relations support a conclusion that CEO shirking causes lower firm performance. New CEOs and those at firms with more independent boards are more likely to be replaced when they shirk, but those with long tenures or less independent boards appear to avoid discipline.
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Do CEOs Affect Employee Political Choices?
Ilona Babenko, Viktar Fedaseyeu & Song Zhang
Arizona State University Working Paper, July 2016
Abstract:
Employees donate almost three times more money to CEO-supported political candidates than to candidates not supported by the CEO. After CEO departures, including departures due to death or retirement, employees reduce campaign contributions to candidates supported by the departing CEO and increase campaign contributions to candidates supported by the replacement CEO. CEO influence is strongest in firms that explicitly advocate for political candidates. Further, employees located in areas in which CEOs make political contributions are more likely to vote in elections. Our results suggest that CEOs shape not only firms’ financial and operational decisions but also their employees’ political choices.
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Relative Peer Quality and Firm Performance
Bill Francis et al.
Journal of Financial Economics, forthcoming
Abstract:
We examine the performance impact of the relative quality of a Chief Executive Officer (CEO)’s compensation peers (peers to determine a CEO's overall compensation) and bonus peers (peers to determine a CEO's relative-performance-based bonus). We use the fraction of peers with greater managerial ability scores (Demerjian, Lev, and McVay, 2012) than the reporting firm to measure this CEO's relative peer quality (RPQ). We find that firms with higher RPQ earn higher stock returns and experience higher profitability growth than firms with lower RPQ. Learning among peers and the increased incentive to work harder induced by the peer-based tournament contribute to RPQ's performance effect.
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CEO Severance Pay and Corporate Tax Avoidance
John Campbell et al.
University of Georgia Working Paper, June 2016
Abstract:
We examine the association between CEO severance pay (i.e., payment the CEO would receive if s/he is involuntarily terminated) and corporate tax avoidance. We find that corporate tax avoidance is increasing in the amount of CEO severance pay. This finding is consistent with the notion that CEO severance pay encourages otherwise risk averse managers to take reasonable amounts of risk and, thus, fits into the optimal executive incentive scheme as a form of efficient contracting. Further analysis reveals that the association between CEO severance pay and corporate tax avoidance is stronger in situations where we expect the risk-taking incentives provided by severance pay to matter more – when the CEO is otherwise more risk averse and when firms exhibit a higher business risk. Overall, our findings suggest that firms can contract with their managers using CEO severance pay to provide incentives for them to engage in tax avoidance activities.
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Common Ownership, Competition, and Top Management Incentives
Miguel Anton et al.
Yale Working Paper, July 2016
Abstract:
Standard corporate finance theories assume the absence of strategic product market interactions or that shareholders don't diversify across industry rivals; the optimal incentive contract features pay-for-performance relative to industry peers. Empirical evidence, by contrast, indicates managers are rewarded for rivals' performance as well as for their own. We propose common ownership of natural competitors by the same investors as an explanation. We show theoretically and empirically that executives are paid less for own performance and more for rivals' performance when the industry is more commonly owned. The growth of common ownership also helps explain the increase in CEO pay over the past decades.
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John Graham, Campbell Harvey & Manju Puri
Management Science, forthcoming
Abstract:
We provide new evidence that the subjective “look of competence” rather than beauty is important for CEO selection and compensation. Our experiments, studying the facial traits of CEOs using nearly 2,000 subjects, link facial characteristics to both CEO compensation and performance. In one experiment, we use pairs of photographs and find that subjects rate CEO faces as appearing more “competent” than non-CEO faces. Another experiment matches CEOs from large firms against CEOs from smaller firms and finds large-firm CEOs look more competent. In a third experiment, subjects numerically score the facial traits of CEOs. We find competent looks are priced into CEO compensation, more so than attractiveness. Our evidence suggests this premium has a behavioral origin. First, we find no evidence that the premium is associated with superior performance. Second, we separately analyze inside and outside CEO hires and find that the competence compensation premium is driven by outside hires — the situation where first impressions are likely to be more important.
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The Facial Appearance of CEOs: Faces Signal Selection but Not Performance
Janka Stoker, Harry Garretsen & Luuk Spreeuwers
PLoS ONE, July 2016
Abstract:
Research overwhelmingly shows that facial appearance predicts leader selection. However, the evidence on the relevance of faces for actual leader ability and consequently performance is inconclusive. By using a state-of-the-art, objective measure for face recognition, we test the predictive value of CEOs’ faces for firm performance in a large sample of faces. We first compare the faces of Fortune500 CEOs with those of US citizens and professors. We find clear confirmation that CEOs do look different when compared to citizens or professors, replicating the finding that faces matter for selection. More importantly, we also find that faces of CEOs of top performing firms do not differ from other CEOs. Based on our advanced face recognition method, our results suggest that facial appearance matters for leader selection but that it does not do so for leader performance.
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CEO Materialism and Corporate Social Responsibility
Robert Davidson, Aiyesha Dey & Abbie Smith
University of Chicago Working Paper, March 2016
Abstract:
We study the role of individual CEOs in explaining corporate social responsibility (CSR) scores. We show that CEO fixed-effects explain 63% of the variation in CSR scores, a significant portion of which is attributable to a CEO’s “materialism” (relatively high luxury asset ownership). Specifically, firms led by materialistic CEOs have lower CSR scores, and increases in CEOs’ materialism are associated with declining scores. Finally, CSR scores in firms with non-materialistic CEOs are positively associated with accounting profitability. In contrast, CSR scores in firms with materialistic CEOs are unrelated to profitability on average; however this association is decreasing in CEO power.
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John Campbell, Brady Twedt & Benjamin Whipple
University of Georgia Working Paper, July 2016
Abstract:
Regulation Fair Disclosure (Reg FD) prohibits managers from releasing material information in non-public forums. Prior research concludes that Reg FD was effective at curtailing selective disclosure. However, these results have been called into question due to confounding events, an inability to ensure the disclosure was intended to comply with Reg FD, and an inability to identify the timing of the disclosure. We address these limitations and offer new evidence on the effectiveness of Reg FD. First, we find significant increases in abnormal trading volume during the trading hour immediately prior to the public release of Reg FD disclosures. Specifically, we find that 20 percent of the volume reaction over the two hour window surrounding Reg FD disclosures occurs during the hour before the disclosure. Second, this pre-disclosure increase in trading volume is larger when the information is of greater consequence to the market. Finally, stock returns during the trading hour immediately prior to Reg FD filings predict returns during the trading hour immediately after the filings, but only for the disclosure of consequential, negative information. Additional analysis reveals that selective disclosure is larger for firms with greater growth opportunities and weaker information environments, and that corporate insiders and large traders account for about 50 percent of the trading in the hour leading up to Reg FD filings. Overall, our results suggest that, despite Reg FD's goal of providing information to all investors simultaneously, disclosure provided pursuant to the regulation appears to be selectively disclosed to subsets of investors beforehand.
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Rank and File Employees and the Discovery of Misreporting: The Role of Stock Options
Andrew Call, Simi Kedia & Shivaram Rajgopal
Journal of Accounting and Economics, forthcoming
Abstract:
We find that firms grant more rank and file stock options when involved in financial reporting violations, consistent with managements’ incentives to discourage employee whistle-blowing. Violating firms grant more rank and file options during periods of misreporting relative to control firms and to their own option grants in non-violation years. Moreover, misreporting firms that grant more rank and file options during violation years are more likely to avoid whistle-blowing allegations. Although the Dodd-Frank Act (2010) offers financial rewards to encourage whistle-blowing, our findings suggest that firms discourage whistle-blowing by giving employees incentives to remain quiet about financial irregularities.
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The effect of price targets on the composition of CEO pay
Giuliano Bianchi
Applied Economics, Summer 2016, Pages 4299-4311
Abstract:
This article analyzes the impact of price targets from the IBES Detail Price History Target database on CEO compensation retained from Execucomp. The two databases are merged at fiscal year frequency and an OLS regression with fixed effect is used to analyze the impact of price target on CEO compensation. The analysis reveals that analysts’ price targets affect top executives’ compensation: when analysts predict a growth in the share price for a company, the compensation package tilts towards stock options, when analysts forecast a drop in the share price, the compensation package tilts towards cash-based compensation and restricted stocks. I argue that the result is more aligned with the managerial power model of compensation (which assumes the board of directors maximizes managers’ compensation) than with the arm’s length bargaining model (that states that managers’ compensation is set to maximize shareholders’ profit).
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Do Institutional Investors Demand Public Disclosure?
Andrew Bird & Stephen Karolyi
Review of Financial Studies, forthcoming
Abstract:
We examine the effect of institutional ownership on corporate disclosure policy using a regression discontinuity design. Using a novel dataset comprising every 8-K filing between 1996 and 2006, we find that positive shocks to institutional ownership around Russell index reconstitutions increase the quantity, form, and quality of disclosure. Compared with those at the bottom of the Russell 1000 index, firms at the top of the Russell 2000 index increase institutional ownership by 9.8%, and disclose 4.7% longer 8-K filings with 21.3% more embedded graphics. This incremental disclosure significantly increases the information content of 8-K filings for the market and for analysts.
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Does going private add value through operating improvements?
Brian Ayash & Harm Schütt
Journal of Corporate Finance, October 2016, Pages 192–215
Abstract:
Previous studies document a large positive effect of private equity ownership on operating performance between 1980 and 1990 while evidence on the more recent buyout wave is mixed. We revisit the evidence on post-LBO performance and offer an additional explanation for the varied and time-inconsistent results found in the literature: the effect of accounting for LBO transactions and its change over time. Using hand-collected financial statements for 183 U.S. public-to-private LBOs, we illustrate how previously used proxies for operating performance suffer from an accounting distortion induced by the buyout transaction. We reproduce the results of previous studies. However, once proxies are modified slightly to account for the LBO process, we find no robust evidence of post-buyout improvements in public-to-private LBOs, regardless of the time period of the study.
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CEO Personality and Firm Policies
Ian Gow et al.
University of Chicago Working Paper, July 2016
Abstract:
Based on two samples of high quality personality data for chief executive officers (CEOs), we use linguistic features extracted from conferences calls and statistical learning techniques to develop a measure of CEO personality in terms of the Big Five traits: agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. These personality measures have strong out-of-sample predictive performance and are stable over time. Our measures of the Big Five personality traits are associated with financing choices, investment choices and firm operating performance.
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Golden hellos: Signing bonuses for new top executives
Jin Xu & Jun Yang
Journal of Financial Economics, forthcoming
Abstract:
We examine signing bonuses awarded to executives hired for or promoted to named executive officer (NEO) positions at Standard & Poor's 1500 companies during the period 1992–2011. Executive signing bonuses are sizable and increasing in use, and they are labeled by the media as “golden hellos.” We find that executive signing bonuses are mainly awarded at firms with greater information asymmetry and higher innate risks, especially to younger executives, to mitigate the executives’ concerns about termination risk. When termination concerns are strong, signing bonus awards are associated with better performance and retention outcomes.
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Are Ex Ante CEO Severance Pay Contracts Consistent with Efficient Contracting?
Brian Cadman, John Campbell & Sandy Klasa
Journal of Financial and Quantitative Analysis, June 2016, Pages 737-769
Abstract:
Efficient contracting predicts that ex ante severance pay contracts are offered to chief executive officers (CEOs) as protection against downside risk and to encourage investment in risky projects with a positive net present value (NPV). Consistent with this prediction, we find that ex ante contracted severance pay is positively associated with proxies for a CEO’s risk of dismissal and costs the CEO would incur from dismissal. Additionally, we show that the contracted severance payment amount is positively associated with CEO risk taking and the extent to which a CEO invests in projects that have a positive NPV. Overall, our findings imply that ex ante severance pay contracts are consistent with efficient contracting.
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The financial reporting consequences of proximity to political power
Christian Gross et al.
Journal of Accounting and Public Policy, forthcoming
Abstract:
In this study, we apply a new concept, corporate proximity to political power, to accounting research and examine its consequences on corporate financial reporting. Prior literature shows that higher proximity to political power leads to higher policy risk, i.e., uncertainty regarding the impact of future administration policies on the cash flow of the firm. An increase in policy risk implies an increase in the opaqueness of the information environment and in the expected volatility of future operating profitability; we argue that these effects both encourage and facilitate earnings management. Drawing on recent research in finance and political science, we use a measure of the alignment along party lines between politicians elected at the state level and the federally elected President as our main measure of proximity to political power. We find a significant positive association between the political alignment of firms’ home states and their level of absolute discretionary accruals. Consistent with the idea that firms engage in corporate political activities (lobbying and financial contributions) to hedge against policy risk, our results only hold for firms not engaging in such activities.
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Do corporate governance mandates impact long-term firm value and governance culture?
Reena Aggarwal, Jason Schloetzer & Rohan Williamson
Journal of Corporate Finance, forthcoming
Abstract:
Motivated by recent changes to corporate governance standards around the world, we use a regulatory shock that substantially altered the governance structure for some firms to shed light on the long-term impact of mandates that are of global interest. Firms affected by this shock had lower values and non-mandated governance practices that were less shareholder friendly before the mandates were in effect when compared to unaffected matched peers. In the post-mandate period, we document a 48% tightening of the relative value gap, and show that this gap relates to the continued use of less shareholder friendly non-mandated governance practices. Our results suggest that governance mandates can tighten, but not eliminate, the value gap between poorly and well governed firms, and that firms affected by the shock continue to have less shareholder friendly governance cultures long after regulatory intervention.
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Customer Concentration and Corporate Tax Avoidance
Henry He Huang et al.
Journal of Banking & Finance, forthcoming
Abstract:
Firms with a concentrated corporate customer base need to hold more cash and have a stronger incentive to manage earnings upwards. Since tax planning can increase both cash flow and accounting earnings, firms with a concentrated customer base may be more likely to engage in tax avoidance. We find evidence of a positive association between the level of corporate customer concentration and the extent of tax avoidance. In addition, we find that the positive relation between corporate customer concentration and tax avoidance is more pronounced when a firm has a lower market share in its industry, enjoys less revenue diversification, and engages less in real earnings management. In contrast to corporate major customers, governmental major customers provide stable cash flow to suppliers, which is likely to alleviate supplier firms’ need for tax avoidance. We find that firms engage in lower levels of tax avoidance when they have a governmental major customer, and that this association is less pronounced under Democratic presidencies. Taken together, our findings indicate that a firm's customer concentration (i.e., corporate and governmental major customers) has a significant effect on the extent to which it avoids taxes.
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Executives’ Legal Records and Insider Trading Activities
Robert Davidson, Aiyesha Dey & Abbie Smith
University of Chicago Working Paper, May 2016
Abstract:
We examine how and why insider trading varies across senior executives and their firms. As predicted, the profitability of both purchases and sales are higher for “recordholder” executives (those who have a record of legal infractions), than for other “non-recordholder” executives at the same firms. The profitability of recordholder executives’ purchases and sales decrease significantly with proxies for strong information and governance environments, suggesting that recordholders have a relatively higher propensity to exploit inside information given the opportunity to do so. Finally, our classification of executives (recordholder status) can predict future returns and firm-specific information events.
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Corruption culture and corporate misconduct
Xiaoding Liu
Journal of Financial Economics, forthcoming
Abstract:
Despite significant interest in corporate culture, there is little empirical research on its role in influencing corporate misconduct. Using cultural background information on key company insiders, I construct a measure of corporate corruption culture, capturing a firm's general attitude toward opportunistic behavior. Firms with high corruption culture are more likely to engage in earnings management, accounting fraud, option backdating, and opportunistic insider trading. I further explore the inner workings of corruption culture and find evidence that it operates both as a selection mechanism and by having a direct influence on individual behavior.
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Do Private Firms Invest Differently than Public Firms? Taking Cues from the Natural Gas Industry
Erik Gilje & Jerome Taillard
Journal of Finance, August 2016, Pages 1733–1778
Abstract:
We study how listing status affects investment behavior. Theory offers competing hypotheses on how listing-related frictions affect investment decisions. We use detailed data on 74,670 individual projects in the U.S. natural gas industry to show that private firms respond less than public firms to changes in investment opportunities. Private firms adjust drilling activity for low capital-intensity investments. However, they do not increase drilling in response to new capital-intensive growth opportunities. Instead, they sell these projects to public firms. Our evidence suggests that differences in access to external capital are important in explaining the investment behavior of public and private firms.
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Anticipated vs. Actual Synergy in Merger Partner Selection and Post-Merger Innovation
Vithala Rao, Yu Yu & Nita Umashankar
Marketing Science, forthcoming
Abstract:
Past research has primarily focused on what happens after a merger. This research attempts to determine whether anticipated benefits from the merger actually accrue. We characterize the effects of observed variables on whether pairs of firms merge, vis-à-vis roommate matching, and then link these factors to post-merger innovation (i.e., number of patents). We jointly estimate the two models using Markov Chain Monte Carlo methods with a unique panel data set of 1,979 mergers between 4,444 firms across industries and countries from 1992 to 2008. We find that similarity in national culture and technical knowledge has a positive effect on partner selection and post-merger innovation. Anticipated synergy from subindustry similarity, however, is not realized in post-merger innovation. Furthermore, some key synergy sources are unanticipated when selecting a merger partner. For example, financial synergy from higher total assets and complementarity in total assets and debt leverage as well as knowledge synergy from breadth and depth of knowledge positively influence innovation but not partner selection. Furthermore, factors that dilute synergy (e.g., higher debt levels) are unanticipated, and firms merge with firms that detract from their innovation potential. Overall, the results reveal some incongruity between anticipated and realized synergy.
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Securities fraud and corporate board turnover: New evidence from lawsuit outcomes
Christopher Baum, James Bohn & Atreya Chakraborty
International Review of Law and Economics, October 2016, Pages 14–25
Abstract:
We examine the relationship between outcomes of securities fraud class action lawsuits (SFCAs) and corporate board turnover rates. Our results indicate that turnover rates for board members are higher when a firm settles a lawsuit than when a suit is dismissed. Outside director turnover is most sensitive to SFCA outcomes, perhaps reflecting reputational effects. Results demonstrate that involvement in securities fraud is costly for corporate board members.