Running Corporations
Strategic CEO Activism in Polarized Markets
Swarnodeep Homroy & Shubhashis Gangopadhyay
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
In this paper we show that statements of US CEOs on contentious social issues are not necessarily an expression of their political views. Republican-donor CEOs are three-times more likely to make social statements with a liberal-slant. CEO activism is more likely if firms' operating environment is politically polarized, and employees are Democrat-leaning. Such statements are associated with a 3% increase in consumer visits to a firm’s Democrat county stores without significantly reducing them in Republican counties. CEO activism is associated with a 0.12% gain in firm value, increased quarterly sales, and a reduced likelihood of shareholder activism on social issues.
CEO Activism and Firm Value
Anahit Mkrtchyan, Jason Sandvik & Vivi Zhu
Management Science, forthcoming
Abstract:
We investigate the increasingly common practice of chief executive officers (CEOs) taking public stances on social and political issues (CEO activism). We find that CEO activism stems from a CEO’s personal ideology and its alignment with investor, employee, and customer ideologies. We show that CEO activism results in positive market reactions. Furthermore, firms with CEO activism realize increased shareholdings from investors with a greater liberal leaning, who rebalance their portfolios toward these firms. Our results suggest that investors’ socio-political preferences are an important channel through which CEO activism affects equity demand and stock prices. Notably, CEOs are less likely to be fired when their activist stances generate positive market responses.
Sharing names and information: Incidental similarities between CEOs and analysts can lead to favoritism in information disclosure
Omri Even-Tov et al.
Proceedings of the National Academy of Sciences, 5 December 2023
Abstract:
When two people coincidentally have something in common (such as a name or birthday), they tend to like each other more and are thus more likely to offer help and comply with requests. This dynamic can have important legal and ethical consequences whenever these incidental similarities give rise to unfair favoritism. Using a large-scale, longitudinal natural experiment, covering nearly 200,000 annual earnings forecasts over more than 25 y, we show that when a CEO and a securities analyst share a first name, the analyst’s financial forecast is more accurate. We offer evidence that name matching improves forecast accuracy due to CEOs privately sharing pertinent information with name-matched analysts. Additionally, we show that this effect is especially pronounced among CEO−analyst pairs who share an uncommon first name. Our research thus demonstrates how incidental similarities can give way to special treatment. Whereas most investigations of the effects of similarity consider only one-shot interactions, we use a longitudinal dataset to show that the effect of name matching diminishes over time with more interactions between CEOs and analysts. We also point to the findings of an experiment suggesting that favoritism born of sharing a name may evade straightforward regulation in part due to people’s perception that name similarity would exert little influence on them. Taken together, our work offers insight into when private disclosures are likely to be made. Our results suggest that the effectiveness of regulatory policies can be significantly impacted by psychological factors shaping the context in which they are implemented.
The saliency of the CEO pay ratio
Audra Boone, Austin Starkweather & Joshua White
Review of Finance, forthcoming
Abstract:
The US Securities and Exchange Commission’s mandated CEO pay ratio is a simple, but salient, metric that could resonate with employees given it focuses on their compensation. Reporting a relatively or surprisingly high ratio reduces employee perceptions of their pay, views of the CEO, and hampers productivity growth. Employee pay satisfaction drops after disclosing a high ratio even if their wages were previously disclosed and when the pay ratio disclosure adds little new information. Disclosures by firms with a high ratio contain more discretionary language to explain the ratio or portray employee relations positively and are more likely to be covered by the media. However, neither information source substantially alters the employee response to a salient ratio. Our work illustrates that requiring firms to disclose a salient metric can have unintended consequences on employees and suggests caution in requiring firms to report simplified Environmental, Social, and Governance (ESG) metrics that are inherently multifaceted.
When Myopic Managers Must Mark to Market
Adam Kolasinski & Nan Yang
Management Science, forthcoming
Abstract:
Although prior research suggests strict, fair value-based securities accounting rules cause banks to sell securities into negative liquidity shocks, a value-destroying behavior called “liquidity feedback trading,” the mechanism is uncertain. We find the sooner chief executive officers (CEOs) are permitted to cash out of their stock and option grants, the more prone are their banks to feedback trading. Furthermore, the sooner CEOs can cash out, the more positive their banks’ stock price reaction to news of accounting rule relaxation. We conclude incentives for managerial short-term focus are a mechanism by which stricter accounting rules cause feedback trading. We also find evidence that regulatory compliance concerns play a role.
Are Third-Party Fundamental Valuations Relevant in Public Company Takeovers?
Matthew Shaffer
Management Science, forthcoming
Abstract:
In U.S. mergers and acquisitions, target directors are required to consider third-party financial valuations, summarized in a “fairness opinion” before accepting a takeover offer. Critics argue (1) that these valuations are not relevant for public companies, which can assess the desirability of the deal based on the market premium, and (2) that the investment bank providers cater to management by “rationalizing” the deal price rather than providing an independent valuation check. I find that fairness valuations can provide valid information about the target’s value, incremental to its predeal stock price. They can impound expected transaction synergies, unravel rumor-driven stock price runups, and may signal ex ante fundamental mispricing. I also find evidence of the alleged catering, which I distinguish from “legitimate” valuation disagreements. This suggests that third-party fundamental valuation could play a useful role in the governance of public company takeovers, but there are flaws in its current implementation.
Are Financial Statements More Comparable When GAAP Restricts Managers’ Discretion?
Spencer Young
Management Science, forthcoming
Abstract:
I examine whether financial statements are more comparable when accounting standards restrict managers’ discretion. My evidence suggests that restricting managers’ discretion is associated with reduced comparability, on average. This effect is strongest when transactions are dissimilar. To explore this relation, I develop novel measures of two distinct types of incomparability. I find that restricting managers’ discretion is associated with an increase in incomparability stemming from dissimilar transactions appearing overly similar. Together, these findings suggest that restricting managers’ discretion may be more harmful to comparability than is too much diversity in practice. However, I also find evidence that restricting managers’ discretion may enhance comparability in two scenarios. Specifically, I find that restricting managers’ discretion is associated with improved comparability when standards (1) restrict manipulation of financial reports and (2) eliminate dissimilar accounting treatments that do not reflect differences in the underlying transactions. Overall, these findings nuance our understanding of how the requirements imposed by standard setters influence financial statement comparability.