Top down
The consequences of managerial indiscretions: Sex, lies, and firm value
Brandon Cline, Ralph Walkling & Adam Yore
Journal of Financial Economics, forthcoming
Abstract:
Personal managerial indiscretions are separate from a firm's business activities but provide information about the manager's integrity. Consequently, they could affect counterparties’ trust in the firm and the firm's value and operations. We find that companies of accused executives experience significant wealth deterioration, reduced operating margins, and lost business partners. Indiscretions are also associated with an increased probability of unrelated shareholder-initiated lawsuits, Department of Justice and Securities and Exchange Commission investigations, and managed earnings. Further, chief executive officers and boards face labor market consequences, including forced turnover, pay cuts, and lower shareholder votes at re-election. Indiscretions occur more often at poorly governed firms where disciplinary turnover is less likely.
Are all perks solely perks? Evidence from corporate jets
Lian Fen Lee, Michelle Lowry & Susan Shu
Journal of Corporate Finance, forthcoming
Abstract:
While shareholders have strong incentives to limit value-destroying perquisite consumption, it is challenging to identify such perquisites. Many corporate assets that enable forms of perquisite consumption also provide operational benefits. Corporate jets represent a potent example. We find business-related flights increase firm performance. Our results also highlight the channels through which jet use can either enhance or destroy firm value. Consistent with the benefits of information gathering and monitoring, firms with soft and complex information that is difficult to transmit remotely are more likely to fly to company subsidiaries and plants, and these flights positively affect firm value. In contrast, among firms with weak governance structures where flights are more likely motivated by agency factors, jet use is more likely to be value-decreasing. The ability to differentiate has important implications in today's activism environment.
Does the Stock Market Make Firms More Productive?
Benjamin Bennett, René Stulz & Zexi Wang
NBER Working Paper, December 2017
Abstract:
We test the hypothesis that greater stock price informativeness (SPI) leads to higher firm-level productivity (TFP). Management, directly or indirectly, learns more from more informative stock prices, so that more informative stock prices should make firms more productive. We find a positive relation between SPI and TFP. The relation is stronger for smaller, younger, riskier, less capital-intensive, and financially-constrained firms. Product market competition and better governance amplify the relation, while diversification weakens it. We address endogeneity concerns with fixed effects, instrumental variables, and the use of brokerage house research department closures and S&P 500 additions as plausibly exogenous events.
Do Public Firms Respond to Investment Opportunities More than Private Firms? The Impact of Initial Firm Quality
Vojislav Maksimovic, Gordon Phillips & Liu Yang
NBER Working Paper, December 2017
Abstract:
Using U.S. Census data, we track firms at birth and compare the growth pattern of IPO firms and their matched always-private counterparts over their life cycle. Firms that are larger at birth with faster initial growth are more likely to attain a larger size and to subsequently go public. We estimate a model to predict the propensity to become public (“public quality”) using initial conditions. Firms in the top percentile of public quality grow 29 times larger than the remaining firms fifteen years later if they actually become public and 14 times larger if they stay private, showing a large selection effect for IPO status. Public firms respond more to demand shocks after their IPO and are more productive than their matched private counterparts. This effect is stronger in industries that are capital intensive and dependent on external financing. Overall, initial conditions predict firm growth trajectories, selection into public status and responsiveness to demand shocks. We find no evidence of public market myopia when matching by initial conditions.
Evenhandedness in Resource Allocation: Its Relationship with CEO Ideology, Organizational Discretion, and Firm Performance
Abhinav Gupta, Forrest Briscoe & Donald Hambrick
Academy of Management Journal, forthcoming
Abstract:
We develop a new explanation for why some organizations are relatively evenhanded, while others more disparate, in allocating resources to subunits. Recognizing the central role of CEOs in resource allocation, we argue that CEOs' personal values regarding egalitarianism, as manifested in their political ideologies, will lead to different allocation styles. Liberal CEOs will favor evenhandedness, while conservatives will tolerate greater disparities. Placing this primary expectation in a social context, we then argue that the effects of a CEO's values are amplified when aligned with the prevailing ideology among organizational members, and conversely are muted when misaligned. Then, examining how instrumental incentives moderate the enactment of CEO values, we envision motivated cognition as a potent psychological process, leading CEOs to "double down" on their personal values when they have more to gain or lose (when pay is more equity-based or the CEO has larger shareholdings). Finally, we consider the implications of our values-based framework for firm performance, arguing that evenhanded allocations are beneficial when organizational ideology is liberal, but harmful when the organization leans conservative. We test our ideas on a sample of multibusiness firms, using personal political donations to capture ideologies. We find considerable support for our hypotheses.
Marriage and CEO's Concern for Corporate Social Responsibility
Shantaram Hegde & Dev Mishra
University of Connecticut Working Paper, October 2017
Abstract:
Drawing on the evidence from the broad social science and humanities literature, we investigate the hypothesis that married chief executive officers (CEOs) tend to care more for corporate social responsibility (CSR). Based on a sample of 2,163 U.S. firms from 1993 to 2008, we find that firms headed by unmarried CEOs are associated with ower KLD-CSR scores. Further scrutiny indicates that unmarried CEOs score significantly lower on KLD-CSR strengths, particularly related to qualitative issues in diversity and employee relations. Our findings appear to be robust to potential endogeneity bias and indicate a negative externality in CSR introduced by the marital status of CEOs.
The daughter effect: Do CEOs with daughters hire more women to their board?
Ari Dasgupta et al.
Applied Economics Letters, forthcoming
Abstract:
Using a sample of S&P 100 firms, we find that CEOs with a daughter are more likely to hire new women to their board of directors than CEOs without a daughter. Our results provide additional evidence that parents’ attitudes and actions are affected by the gender of their children and that the effect is strong enough to influence important decisions at large corporations.
The Effect of SEC Reviewers on Comment Letters and Financial Reporting Quality
Matthew Baugh, Kyonghee Kim & Kwang Lee
Arizona State University Working Paper, November 2017
Abstract:
We examine whether the idiosyncrasy of individual employees of U.S. financial regulators contributes to inconsistent regulatory outcomes. Using a sample of SEC comment letters, we show that SEC reviewers’ idiosyncratic style plays an economically and statistically significant role in explaining the cross-sectional variation in filing review outcomes, even after holding firm and disclosure attributes constant. We also show that the reviewer style is persistent across firms and time. Finally, we find that reviewers with a stricter style are associated with improved financial reporting quality. These findings suggest that individual SEC reviewers have significant influence on the SEC filing review process.
Employee political affiliation as a driver of corporate social responsibility intensity
Richard Borghesi
Applied Economics, forthcoming
Abstract:
This article explores the connection between corporate social responsibility (CSR) intensity and the political affiliation of elite management and lower-level personnel and offers evidence that CSR initiatives are frequently driven from the bottom-up by employees actively expressing their sociopolitical views. While directors and CEOs play an important role within certain CSR dimensions, results suggest that employees are significantly more influential overall. A one-standard-deviation shift to the political left for directors, CEOs and elite executives yields gains in CSR of 5%, 9% and 3%, respectively, while a one-standard-deviation left-shift for employees produces a 33% increase. Findings may help to explain why similar firms engaging in comparable social initiatives can experience heterogeneous returns to CSR outlays and suggest that a corporate culture approach may be warranted in future studies.
Living through the Great Chinese Famine: Early-life experiences and managerial decisions
Xunan Feng & Anders Johansson
Journal of Corporate Finance, forthcoming
Abstract:
Previous studies have linked personal characteristics of business leaders to corporate decisions and outcomes. We analyze if the traumatic experience of the Chinese Famine has an impact on managerial decisions. By exploiting the exogenous variation in local severity of the famine, we find that having lived through the famine during one's younger years is associated with more conservative financial, investment, and cash holding policies, a lower likelihood of unethical behavior, and better firm performance during economic downturns.
Short Seller Influence on Firm Growth: A Threat-Rigidity Perspective
Wei Shi, Brian Connelly & Kubilay Cirik
Academy of Management Journal, forthcoming
Abstract:
Whereas most investors seek to maximize their investment, there are some who profit from downward stock price movement. This is called "short selling," and it has increased considerably among publicly traded North American firms in recent years. This study builds on threat rigidity theory to develop arguments about the behavioral consequences of short sellers. We theorize that, when firms have a high level of short interest, managers adopt a defensive stance by halting new growth initiatives and limiting the range of growth modes in which they participate. We also examine boundary conditions where we expect the effects of threat rigidity will be dampened. We argue that managers will be less reactionary when firms have high absorptive capacity, possess high board centrality, maintain sufficient financial slack, and are well regarded by the media. Results largely support our theory, as we show that short sellers can have a profoundly deleterious effect on firm growth prospects.
Give it to us straight (most of the time): Top managers’ use of concrete language and its effect on investor reactions
Lingling Pan et al.
Strategic Management Journal, forthcoming
Abstract:
Building on the communications and linguistics literatures, we explore the language attributes managers use in interactions with investors and the subsequent reactions of investors. Specifically, we hypothesize that top managers’ use of concrete language attributes in communication with investors broadly associates with positive investor reactions. We further posit that this relationship will be moderated by the level of firm risk. Our results support our hypotheses and, thus, offer important insights to the impression management literature. First, subtle elements of managerial communication can have significant impression management consequences. More specifically, language concreteness is a key language attribute that generally induces positive investor responses. Finally, the effectiveness of language concreteness is conditional on the informational environment of the firm.
Does Financial Misconduct Affect the Future Compensation of Alumni Managers?
Boris Groysberg, Eric Lin & George Serafeim
Harvard Working Paper, November 2017
Abstract:
We explore how an organization’s financial misconduct may affect pay for former employees not implicated in wrongdoing. Drawing on stigma theory we hypothesize that although such alumni did not participate in the financial misconduct and they had left the organization years before the misconduct, they experience a compensation penalty. Our results support this prediction. The stigma effect increases in relation to the job function proximity to the misconduct, recency of the misconduct, and an employee’s seniority. Collectively, our results suggest that the stigma of financial misconduct could reach alumni employees and need not be confined to executives and directors that oversaw the organization during the misconduct.
Cross-Firm Real Earnings Management
Eti Einhorn, Nisan Langberg & Tsahi Versano
Journal of Accounting Research, forthcoming
Abstract:
Our analysis is rooted in the notion that stockholders can learn about the fundamental value of any firm from observing the earnings reports of its rivals. We argue that such intra-industry information transfers, which have been broadly documented in the empirical literature, may motivate managers to alter stockholders’ beliefs about the value of their firm not only by manipulating their own earnings report but also by influencing the earnings reports of rival firms. Managers obviously do not have access to the accounting system of peer firms, but they can nevertheless influence the earnings reports of rival firms by distorting real transactions that relate to the product market competition. We demonstrate such managerial behavior, which we refer to as cross-firm real earnings management, and explore its potential consequences and interrelation with the practice of accounting-based earnings management within an industry setting with imperfect (non-proprietary) accounting information.
New evidence on managerial labor markets: An analysis of CEO retreads
Edward Fee, Charles Hadlock & Joshua Pierce
Journal of Corporate Finance, forthcoming
Abstract:
We examine career outcomes of CEOs subsequent to turnover. CEOs often resurface after turnover, but they secure positions that are inferior to their prior posts. Success in the retread market is unrelated to prior employer performance and board composition. CEOs who were particularly attached to their prior employer tend to have the poorest subsequent job prospects. These results suggest a generally efficient CEO turnover process in which firms dismiss CEOs of low ability. As CEOs acquire specific human capital over time, their outside options and bargaining power appear to diminish, offering a potential explanation for the specialist CEO compensation discount.
Information Bundling and Securities Litigation
Barbara Bliss, Frank Partnoy & Michael Furchtgott
Journal of Accounting and Economics, forthcoming
Abstract:
We exploit the exogenous shock of a 2005 U.S. Supreme Court decision on securities class action loss causation requirements to examine two ways that firms bundle information with restatements: “positive bundling” of good news and “noise bundling” of additional bad news. We find that positive bundling offsets price declines and results in less litigation. In contrast, noise bundling magnifies price declines, but nevertheless deters litigation by confounding which bad news caused a decline. Non-bundled restatements are 5.94 times more likely to result in litigation. Bundled restatements have 8.17 times higher dismissal rates and $21.17 to $23.45 million lower settlement amounts.
Does Pay Activism Pay Off for Shareholders? Shareholder Democracy and Its Discontents
Sudipto Dasgupta & Thomas Noe
Management Science, forthcoming
Abstract:
Typically, shareholders are not sure whether boards act in their interest or have been captured by management. They are also less well informed than boards about firm investment opportunities and operating conditions. We develop a model, consistent with these observations, in which discretionary compensation payments to managers might increase firm value or might simply enrich managers at the expense of shareholders. After observing the board’s compensation and investment policies, shareholders use Bayes’s rule to update the probability that the board is captured. Shareholders are “outraged” if this updated probability is sufficiently large. Outrage is costly for the board. Shareholder democracy, by enabling outrage to constrain board actions, typically lowers firm value relative to either governance regimes that insulate boards from shareholder outrage or regimes that ban discretionary compensation altogether.
Credit Default Swaps, Agency Problems, and Management Incentives
Jongsub Lee, Junho Oh & David Yermack
NBER Working Paper, November 2017
Abstract:
We show in a theoretical model that credit default swaps induce managerial agency problems through two channels: reducing the opportunity for managers to transfer value to equityholders from creditors via strategic default, and reducing the intensity of monitoring by creditors, which leads to greater CEO diversion of assets as perquisites. We further show that boards can use compensation awards that increase managerial performance incentives (delta) and risk-taking incentives (vega) in order to mitigate these two agency problems, with increases in managerial vega being particularly useful to alleviate the strategic default-related agency problem. We study equity compensation awards to CEOs of S&P 1500 companies during 2001–2015 and find that they occur in patterns consistent with these predictions.
Product Market Competition Shocks, Firm Performance, and Forced CEO Turnover
Sudipto Dasgupta, Xi Li & Albert Wang
Review of Financial Studies, forthcoming
Abstract:
We examine the effect of competition shocks induced by major industry-level tariff cuts on forced CEO turnover. Both the likelihood of forced CEO turnover and its sensitivity to performance increase. These effects are stronger for firms exposed to greater predation risk and with products more similar to those of other firms. CEOs are more likely to be forced out in weak governance firms; however, in good governance firms, CEOs are offered higher incentive pay. New outside CEOs receive higher incentive pay and come from firms with lower cost structures and higher asset sales. Performance and productivity improve after forced turnover.
Financial statement comparability and corporate cash holdings
Ahsan Habib, Mostafa Monzur Hasan & Ahmed Al-Hadi
Journal of Contemporary Accounting & Economics, December 2017, Pages 304-321
Abstract:
This study examines the impact of financial statement comparability on corporate cash holdings. A greater degree of comparability lowers information acquisition costs, reduces the uncertainties associated with performance evaluation, and increases the overall quantity and quality of information available to corporate outsiders which, in turn, helps to ease the external financing constraints of the firm. Using a large US sample from 1981 to 2013, we find consistent evidence that financial statement comparability significantly reduces cash holdings of the firm. We also find that this relation is mediated by financing constraints, financial reporting quality and corporate governance. These findings are robust to alternative specification of comparability, cash holdings and to the alternative regression specifications and endogeneity tests. Our study contributes to the emerging research that stresses the importance of financial statement comparability.
Institutional Investor Attention and Demand for Inconsequential Disclosures
Inna Abramova, John Core & Andrew Sutherland
MIT Working Paper, November 2017
Abstract:
We study how exogenous short-term changes in institutional owner attention affect firms’ short-term disclosure choices. Holding institutional ownership constant and controlling for industry-quarter effects, we find that firms respond to attention by increasing the number of forecasts and disclosures but rarely by altering the overall decision to forecast. Although attention explains significant variation in the quantity of disclosure, we find no change in forecast properties, abnormal volume and volatility, the bid-ask spread, or price impact of trades. Overall, our evidence builds on recent work questioning the effectiveness of passive investor monitoring by showing that management placates temporary IO attention by making disclosures that have little effect on information quality or liquidity.
Board Declassification and Firm Value: Have Shareholders and Boards Really Destroyed Billions in Value?
Emiliano Catan & Michael Klausner
NYU Working Paper, September 2017
Abstract:
This paper analyzes the wave of board destaggering that has occurred over the past fifteen years. Other studies have concluded that the result of this phenomenon has been a substantial destruction of firm value, purportedly caused by re-orienting management from a long-term to short-term focus. We conclude that these results reflect a spurious correlation. We find, first, that board destaggering has occurred disproportionately among firms of very large market capitalization and, second, that firms with very large market capitalization also experienced disproportionate and unrelated relative drops in Tobin’s Q over the period in which destaggering has occurred. The association between destaggering and the drop in Tobin’s Q becomes statistically insignificant once one compares destaggering firms with other firms of similar market capitalization. We analyze the claim that board destaggering is especially costly for firms with high R&D, and similarly find that once one takes account of unrelated differential fluctuations in Q among high- and low-R&D firms, there is no evidence that destaggering a board reduces the value of high-R&D firms. From a methodological perspective, our analysis suggests that corporate governance studies using difference-in-differences or within-firm designs should take account of the possibility that differential secular trends in asset prices may confound their results.
Dead Hand Proxy Puts and Shareholder Value
Sean Griffith & Natalia Reisel
University of Chicago Law Review, Summer 2017, Pages 1027-1089
Abstract:
We study the impact of Dead Hand Proxy Puts on shareholder value. Courts and commentators have characterized these terms as defenses against hedge fund activism that threaten to reduce firm value by entrenching underperforming managers and thereby increasing managerial agency costs. Our findings contradict this view. Using three court cases as a natural experiment, we find that shareholders do not react negatively to the inclusion of a Dead Hand Proxy Put in a firm’s loan agreements. Not only do Dead Hand Proxy Puts not destroy firm value, they may even preserve it by deterring activists who would seek to extract wealth from creditors and other nonshareholder constituencies. We develop the policy implications of these findings and offer a direction for the evolution of legal doctrine in this area.
Shareholder Litigation and Corporate Disclosure: Evidence from Derivative Lawsuits
Thomas Bourveau, Yun Lou & Rencheng Wang
Journal of Accounting Research, forthcoming
Abstract:
Using the staggered adoption of universal demand (UD) laws in the United States, we study the effect of shareholder litigation risk on corporate disclosure. We find that disclosure significantly increases after UD laws make it more difficult to file derivative lawsuits. Specifically, firms issue more earnings forecasts and voluntary 8-K filings, and increase the length of management discussion and analysis (MD&A) in their 10-K filings. We further assess the direct and indirect channels through which UD laws affect firms' disclosure policies. We find that the effect of UD laws on corporate disclosure is driven by firms facing relatively higher ex ante derivative litigation risk and higher operating uncertainty, as well as firms for which shareholder litigation is a more important mechanism to discipline managers.