Trusting the Director
Can We Trust the Trust Words in 10-Ks?
Myojung Cho, Gopal Krishnan & Hyunkwon Cho
Journal of Business Ethics, April 2024, Pages 975-992
Abstract:
We examine the relation between earnings information content and the use of trust words, such as “character,” “ethics,” and “honest,” in the MD&A section of 10-K. We find that earnings announcements of firms using trust words have lower information content than earnings announcements of firms that do not use trust words. We also find that the value relevance of earnings is lower for firms using trust words than those not using trust words. Further, firms using trust words are more likely to receive a comment letter from the SEC, pay higher audit fees, and have lower corporate social responsibility scores. Overall, our results suggest that firms that use trust words in the 10-K are associated with negative outcomes, and trust words are an inverse measure of trust.
Do Employee Interests Affect Target Board Decisions About Acquisition Offers? Evidence from Changes in Unemployment Insurance
Lixiong Guo, Jing Kong & Ronald Masulis
Management Science, forthcoming
Abstract:
We explore whether employee interests affect the evaluation of acquisition offers by target boards of directors. Exploiting changes in state unemployment insurance (UI) as sources of exogenous variation in worker unemployment costs, we find that lower unemployment costs increase acquisition activity. The adoption of state constituency statutes strengthens this relation. Boards of target firms having high labor intensity, low short-term institutional ownership, headquartered in low population or high social capital counties, and with female independent directors, more often strongly weight employee interests. Higher UI levels are also associated with larger postacquisition layoffs. Our evidence supports theories rationalizing target boards’ consideration of employee interests.
The Impact of a Short-Selling-Friendly Environment on Board Composition
Ribuga Kang & Jingoo Kang
Organization Science, forthcoming
Abstract:
This study examines how short selling influences board composition following a tradition in the strategy literature emphasizing the role of the external environment on firms’ strategies. We predict that a short-selling-friendly environment has a negative effect on the number of outside directors, which is supported by our firm and year fixed effect difference-in-differences analysis. We find that the negative effect of a short-selling-friendly environment becomes stronger when outside directors have a larger network and are busy. Furthermore, we investigate the moderating effect of chief executive officer (CEO) influence on the board and find that the negative effect is more pronounced when the CEO serves as the board chair and when the nominating committee is more nonindependent. Our research identifies a novel determinant of board composition and addresses the endogeneity issue in board composition literature.
The effect of SEC regulatory oversight on implied cost of equity
Alex Annan Abakah & Hyacinthe Yirlier Somé
Financial Review, forthcoming
Abstract:
We examine the effect of the U.S. Securities and Exchange Commission's (SEC) oversight on the cost of equity. We argue that companies near regulatory oversight by the SEC are subject to increased scrutiny. Such heightened scrutiny, which is associated with enhanced disclosure quality, ultimately leads to a reduction in the cost of equity. We find empirical evidence supporting this hypothesis. Importantly, the cost of equity declines significantly when firms relocate their headquarters close to SEC office. Our results suggest that SEC effective external monitoring lowers the cost of equity for firms with weak governance.
Jumping Ship: Undisclosed SEC Investigations and Quiet CEO Turnover
Eric Holzman et al.
Indiana University Working Paper, April 2024
Abstract:
Prior research finds that the public revelation of misconduct leads to severe career penalties for managers, raising an interesting question about whether managers can avoid career penalties by leaving their employer before accusations become public. We exploit the private nature of SEC investigations to examine this question. We find that the likelihood of CEO quiet turnover is positively related to the presence of an undisclosed SEC investigation, but not to disclosed SEC investigations. Additionally, we find no difference in the future rehire rates between those turnedover CEOs whose firms are under an investigation that is not disclosed and peers at noninvestigated firms, suggesting that there is no evidence of career penalties for managers at firms with undisclosed investigations. Last, we find that hiring a privately investigated CEO increases the subsequent employer’s likelihood of being investigated by the SEC.
Awe of the blue minds: Location, corporate social responsibility, and firm value
Ghada Ismail
Financial Review, forthcoming
Abstract:
Neuropsychologists claim that exposure to a massive water scene triggers the feeling of Awe which causes more prosocial behavior. I find that coastal firms have significantly higher corporate social responsibility (CSR) scores than non-coastal firms. The difference-in-difference test shows that CSR engagement erodes when firms relocate away from coasts. These results are robust to the use of propensity score matching and entropy balancing to address selection bias, Oster's test to address omitted variable bias, and control for institutional ownership, social capital, religiosity, CEO and local political orientation, and natural disaster risk. Further analysis shows that CSR creates value only for coastal firms.
Loss-Driven Activism
Marco Elia
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
I show that hedge funds react to unrealized losses on their passive positions by engaging with the management. The hedge fund managers’ psychological response is consistent with cognitive dissonance: they blame the firms’ management and switch to activism. The loss, which is hedge fund-investment specific, is distinct from economic factors such as the firm’s industry-adjusted performance. Loss-driven activism is more likely to be unfocused on specific issues, and results in worse firm performance. This study shows that an overlooked consequence of unrealized losses is to trigger an active engagement with the firm.
Disclosure, Materiality Thresholds, and the Cost of Capital: Evidence from Federal Open Market Committee Announcements
Michael Dambra, Mihail Velikov & Joseph Weber
Management Science, forthcoming
Abstract:
We examine how managers’ disclosure decisions vary in response to monetary policy shocks. Specifically, we examine the extent to which firms issue Forms 8-K, press releases, and management forecasts following unexpected changes to the target federal funds rate. We find consistent evidence that unexpected decreases (increases) in the Federal Open Market Committee target rate lead to larger increases (decreases) in disclosure by firms that are more sensitive to monetary policy shocks. Furthermore, the disclosure response to target rate surprises is concentrated in Form 8-K items that require a materiality-based decision and hold when we examine a sample of M&A-participating firms. Extended tests show that our results are not attributable to changes in the cost of capital leading to increased disclosure because firms are simultaneously raising capital or hyping their stock. Overall, our results are consistent with arguments raised in recent research papers that changes in cost of capital influence firms’ materiality thresholds, which can affect their decision to disclose.