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Tuesday, November 20, 2012

An officer and a corporation

 

Corporate Politics, Governance, and Value Before and After Citizens United

John Coates
Journal of Empirical Legal Studies, December 2012, Pages 657-696

Abstract:
How did corporate politics, governance, and value relate to each other in the S&P 500 before and after Citizens United? In regulated and government-dependent industries, politics is nearly universal, and uncorrelated with shareholder power, agency costs, or value. However, 11 percent of CEOs in 2000 who retired by 2011 obtained political positions after retiring and, in most industries, political activity correlates negatively with measures of shareholder power, positively with signs of agency costs, and negatively with shareholder value. The politics-value relationship interacts with capital expenditures, and is stronger in regressions with firm and time fixed effects, which absorb many omitted variables. After the shock of Citizens United, corporate lobbying and PAC activity jumped, in both frequency and amount, and firms politically active in 2008 had lower value in 2010 than other firms, consistent with politics at least partly causing and not merely correlating with lower value. Overall, the results are inconsistent with politics generally serving shareholder interests, and support proposals to require disclosure of political activity to shareholders.

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CEO compensation contagion: Evidence from an exogenous shock

Frederick Bereskin & David Cicero
Journal of Financial Economics, forthcoming

Abstract:
We examine how Chief Executive Officer (CEO) compensation increased at a subset of firms in response to a governance shock that affected compensation levels at other firms in the economy. We first show that Delaware-incorporated firms with staggered boards and no outside blockholders increased CEO compensation following the mid-1990 s Delaware legal cases that strengthened their ability to resist hostile takeovers. Consistent with the Gabaix and Landier (2008) contagion hypothesis, non-Delaware firms subsequently increased CEO compensation when the rulings affected a substantial number of firms in their industries. We further show how these legal developments contributed significantly to the rapid increase in CEO compensation in the late 1990s.

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Corporate Policies of Republican Managers

Irena Hutton, Danling Jiang & Alok Kumar
University of Miami Working Paper, December 2011

Abstract:
This paper examines the relation between the personal political orientation of firm managers and corporate policies. Motivated by the theory of behavioral consistency, we conjecture that Republican managers who are more likely to follow conservative personal ideologies would choose more conservative corporate policies. Consistent with our conjecture, we find that firms with Republican managers have lower levels of corporate debt, lower capital and R&D expenditures, less risky investments, but higher levels of dividend payouts, higher retained earnings, and higher profitability. Republican managers are matched with firms that have conservative political environments, but even among those firms, higher levels of managerial conservatism are associated with more conservative policies. Further, around managerial turnover including CEO deaths, corporate policies become more conservative as managerial conservatism increases. In addition, following the 9/11 terrorist attacks, corporate policies of Republican managers become more conservative as aggregate uncertainty increases. Overall, we show that Republican managers maintain and implement less risky and more profitable policies but the choice of lower R&D expenditures may dampen innovation.

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Executive Turnover In The Stock Option Backdating Wave: The Impact Of Social Context

Margarethe Wiersema & Yan Anthea Zhang
Strategic Management Journal, forthcoming

Abstract:
While boards are known to react to corporate misconduct by removing the executives responsible, little is known about whether the board's response is shaped by the firm's social context. Using the 2006 stock option backdating scandal, in which firms manipulated stock option grant dates, we examine the impact of two dimensions of social context - the pervasiveness of the misconduct and the media attention to the misconduct. We find that firms implicated later in the backdating scandal are less likely to experience executive turnover than those implicated earlier. We also find that the amount of media attention to backdating at the time a firm is implicated in the scandal increases the likelihood that the firm experiences executive turnover.

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Sleight of Hand? Practice Opacity, Third-party Responses, and the Interorganizational Diffusion of Controversial Practices

Forrest Briscoe & Chad Murphy
Administrative Science Quarterly, December 2012, Pages 553-584

Abstract:
We examine the role of a practice's opacity (versus transparency) in the interorganizational diffusion of organizational practices. Though the opacity of a practice is typically thought to impede diffusion, a political-cultural approach to institutions suggests that opacity can sometimes play a positive role. Given that adoption decisions are embedded in a web of conflicting interests, transparency may bring negative attention that, when observed by prospective adopters, inhibits them from following suit. Opacity, in contrast, helps avoid that cycle. Using the curtailment of health benefits for retirees among large U.S. employers (1989 to 2009), we compare the diffusion of transparent adoptions (i.e., partial or complete benefit cuts) with opaque adoptions (i.e., spending caps that trigger disenrollment). We find that transparent adoptions reduce subsequent diffusion of the practice to other organizations. This effect is fully mediated by negative media coverage, which is itself conditioned by the presence of opposition from interest groups. Opaque adoptions, in contrast, increase subsequent diffusion to other organizations and are facilitated by the involvement of professional experts. Thus, in addition to providing findings on practice opacity, our study contributes insight into how organizational fields shape diffusion by illuminating the role of third parties in the spread of controversial practices.

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Peer Choice in CEO Compensation

Ana Albuquerque, Gus De Franco & Rodrigo Verdi
Journal of Financial Economics, forthcoming

Abstract:
Current research shows that firms are more likely to benchmark against peers that pay their Chief Executive Officers (CEOs) higher compensation, reflecting self-serving behavior. We propose an alternative explanation: the choice of highly paid peers represents a reward for unobserved CEO talent. We test this hypothesis by decomposing the effect of peer selection into talent and self-serving components. Consistent with our prediction, we find that the association between a firm's selection of highly paid peers and CEO pay mostly represents compensation for CEO talent.

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Is Delaware Losing its Cases?

John Armour, Bernard Black & Brian Cheffins
Journal of Empirical Legal Studies, December 2012, Pages 605-656

Abstract:
Delaware's expert courts are seen as an integral part of the state's success in attracting incorporation by public companies. However, the benefit that Delaware companies derive from this expertise depends on whether corporate lawsuits against Delaware companies are brought before the Delaware courts. We report evidence that these suits are increasingly brought outside Delaware. We investigate changes in where suits are brought using four hand-collected data sets capturing different types of suits: class action lawsuits filed in (1) large M&A and (2) leveraged buyout transactions over 1994-2010; (3) derivative suits alleging option backdating; and (4) cases against public company directors that generate one or more publicly available opinions between 1995 and 2009. We find a secular increase in litigation rates for all companies in large M&A transactions and for Delaware companies in LBO transactions. We also see trends toward (1) suits being filed outside Delaware in both large M&A and LBO transactions and in cases generating opinions; and (2) suits being filed both in Delaware and elsewhere in large M&A transactions. Overall, Delaware courts are losing market share in lawsuits, and Delaware companies are gaining lawsuits, often filed elsewhere. We find some evidence that the timing of specific Delaware court decisions that affect plaintiffs' firms coincides with the movement of cases out of Delaware. Our evidence suggests that serious as well as nuisance cases are leaving Delaware. The trends we report potentially present a challenge to Delaware's competitiveness in the market for incorporations.

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Venture Capitalists on Boards of Mature Public Firms

Ugur Celikyurt, Merih Sevilir & Anil Shivdasani
Review of Financial Studies, forthcoming

Abstract:
Venture capitalists (VCs) often serve on the board of mature public firms long after their initial public offering (IPO), even for companies that were not VC-backed at the IPO. Board appointments of VC directors are followed by increases in research and development intensity, innovation output, and greater deal activity with other VC-backed firms. VC director appointments are associated with positive announcement returns and are followed by an improvement in operating performance. Firms experience higher announcement returns from acquisitions of VC-backed targets following the appointment of a VC director to the board. Hence, in addition to providing finance, monitoring and advice for small private firms, VCs play a significant role in mature public firms and have a broader influence in promoting innovation than has been established in the literature.

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Why are US firms using more short-term debt?

Cláudia Custódio, Miguel Ferreira & Luís Laureano
Journal of Financial Economics, forthcoming

Abstract:
We show that corporate use of long-term debt has decreased in the US over the past three decades and that this trend is heterogeneous across firms. The median percentage of debt maturing in more than three years decreased from 53% in 1976 to 6% in 2008 for the smallest firms but did not decrease for the largest firms. The decrease in debt maturity was generated by firms with higher information asymmetry and new firms issuing public equity in the 1980s and 1990s. Finally, we show that demand-side factors do not fully explain this trend and that public debt markets' supply-side factors play an important role. Our findings suggest that the shortening of debt maturity has increased the exposure of firms to credit and liquidity shocks.

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Ironing out the kinks in executive compensation: Linking incentive pay to average stock prices

Yisong Tian
Journal of Banking & Finance, forthcoming

Abstract:
Traditional stock option grant is the most common form of incentive pay in executive compensation. Applying a principal-agent analysis, we find this common practice suboptimal and firms are better off linking incentive pay to average stock prices. Among other benefits, averaging reduces volatility by about 42%, making the incentive pay more attractive to risk-averse executives. Holding the cost of the option grant to the firm constant, Asian stock options are more cost effective than traditional stock options and provide stronger incentives to increase stock price. More importantly, the improvement is achieved with little impact on the option grant's risk incentives (after adjusting for option cost). Finally, averaging also improves the value and incentive effects of indexed stock options.

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Are CFOs' Trades More Informative Than CEOs' Trades?

Weimin Wang, Yong-Chul Shin & Bill Francis
Journal of Financial and Quantitative Analysis, August 2012, Pages 743-762

Abstract:
We investigate whether trades made by chief financial officers (CFOs) reveal more information about future stock returns than those by chief executive officers (CEOs). We find that CFOs earn statistically and economically higher abnormal returns following their purchases of company shares than CEOs. During 1992-2002, CFOs earned an average 12-month excess return that is 5% higher than that by CEOs. The superior performance by CFOs occurs notwithstanding controls for risk factors and persists even after their trades are publicly disclosed. Further analysis shows that CFO purchases are associated with more positive future earnings surprises than CEO purchases, suggesting that CFOs incorporate better information about future earnings.

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MicroHoo: Deal failure, industry rivalry, and sources of overbidding

Nihat Aktas, Eric de Bodt & Richard Roll
Journal of Corporate Finance, February 2013, Pages 20-35

Abstract:
On February 1, 2008, Microsoft offered $43.7 billion for Yahoo. This offer was a milestone in the battle between Microsoft and Google to control the Internet search industry. The announcement accompanied a substantial decrease in Microsoft's stock price. Investors apparently considered the bid too high and doubted Microsoft's ability to create value with Yahoo's assets (the announcement combined returns implied a total value destruction of $13.29 billion). Using the abnormal returns pattern of industry firms and customers, this article examines the sources of overbidding. Our analyses indicate that Microsoft's aggressive move is rooted in its rivalry with Google, but the personality traits of the involved CEOs might explain also a portion of the overbidding.

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Is Corporate Governance Relevant during the Financial Crisis?

Kartick Gupta, Chandrasekhar Krishnamurti & Alireza Tourani-Rad
Journal of International Financial Markets, Institutions and Money, February 2013, Pages 85-110

Abstract:
We study the impact of internal corporate governance on performance during the current financial crisis for a comprehensive cross-country sample of 4046 publicly traded non-financial firms from the U.S. and 22 developed countries. Using a broad-based index of corporate governance quality, we find that well governed firms do not outperform poorly governed firms. We explore three potential explanations for the lack of significant impact of corporate governance quality on performance. First, we examine whether cross-country differences in institutional development have an impact on the effect of corporate governance on performance. Second, we investigate whether a narrowing down of the informationally efficient segment of the stock markets during the crisis can explain the results. We do not find support for either of these conjectures. Finally, we examine whether stock markets generally became less efficient in incorporating firm-specific information into stock prices during the crisis. Our empirical evidence is consistent with the latter view that during the crisis stock markets in developed countries became less efficient in incorporating firm-specific information into prices.

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What do Boards Really Do? Evidence from Minutes of Board Meetings

Miriam Schwartz-Ziv & Michael Weisbach
Journal of Financial Economics, forthcoming

Abstract:
We analyze a unique database from a sample of real-world boardrooms - minutes of board meetings and board-committee meetings of eleven business companies for which the Israeli government holds a substantial equity interest. We use these data to evaluate the underlying assumptions and predictions of models of boards of directors. These models generally fall into two categories: "managerial models" that assume boards play a direct role in managing the firm, and "supervisory models" that assume that boards monitor top management but do not make business decisions themselves. Consistent with the supervisory models, our minutes-based data suggest that boards spend most of their time monitoring management: approximately two-thirds of the issues boards discussed were of a supervisory nature, they were presented with only a single option in 99% of the issues discussed, and they disagreed with the CEO only 2.5% of the time. Nevertheless, at times boards do play a managerial role: Boards requested to receive further information or an update for 8% of the issues discussed, and they took an initiative with respect to 8.1% of them. In 63% of the meetings, boards took at least one of these actions or did not vote in line with the CEO. Taken together our results suggest that boards can be characterized as active monitors.

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Capital Structure, CEO Dominance, and Corporate Performance

Pornsit Jiraporn, Pandej Chintrakarn & Yixin Liu
Journal of Financial Services Research, December 2012, Pages 139-158

Abstract:
We use agency theory to investigate the influence of CEO dominance on variation in capital structure. Due to agency conflicts, managers may not always adopt leverage choices that maximize shareholders' value. Consistent with the prediction of agency theory, the evidence reveals that, when the CEO plays a more dominant role among top executives, the firm adopts significantly lower leverage, probably to evade the disciplinary mechanisms associated with debt financing. Our results are important as they demonstrate that CEO power matters to critical corporate outcomes such as capital structure decisions. In addition, we find that the impact of changes in capital structure on firm performance is more negative for firms with more powerful CEOs. Overall, the results are in agreement with prior literature, suggesting that strong CEO dominance appears to exacerbate agency costs and is thus detrimental to firm value.

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Some unpleasant general equilibrium implications of executive incentive compensation contracts

John Donaldson, Natalia Gershun & Marc Giannoni
Journal of Economic Theory, forthcoming

Abstract:
We consider a simple real business cycle model in which shareholders hire self-interested executives to manage their firm. A generic family of compensation contracts similar to those employed in practice is studied. When compensation is convex in the firm's dividend, an increase in the firm's output results in a more than proportional increase in the managers' income. Incentive contracts of sufficient yet modest convexity are shown to result in an indeterminate general equilibrium, one in which business cycles are driven by self-fulfilling fluctuations in managers' expectations. The proposed family of contracts may yield first-best outcomes for specific parameter choices.

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Customers and Cash: How Relationships Affect Suppliers' Cash Holdings

Jennifer Itzkowitz
Journal of Corporate Finance, forthcoming

Abstract:
If one customer accounts for a large portion of a supplier's sales, then the loss of that one customer can cripple the supplier's financial health. As a precaution against the additional operating risk induced by being in an important relationship with a customer, I find that suppliers in such relationships hold more cash on average than suppliers that are not in important relationships. Additionally, suppliers' cash holdings increase proportionately with the importance of their customer relationships. Being in an important relationship affects cash holdings and leverage differently, indicating that firms manage cash and debt for different purposes. I find that suppliers in relationships primarily accrue cash through issuance of stock as opposed to debt or retained earnings. The results highlight the importance of understanding buyer-supplier relationships when evaluating a firm's financing policy.

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Backdated Stock Options and Boards of Directors: An Examination of Committees, Structure, and Process

Steven Frankforter et al.
Corporate Governance, November 2012, Pages 562-574

Research Question/Issue: In this study, we investigated the effects of several factors related to nominating and compensation committee structure and process on the likelihood of employing backdated stock options.

Research Findings/Insights: To test our hypotheses, we selected a sample of US firms that had been investigated for backdating stock options and a control group of similar sized US firms from the same industry that had not been investigated for backdating. Using an agency perspective, we found that when compared to companies within the same industries, firms using backdated stock options did not tend to utilize nominating committees, and structured their compensation committees so that they are smaller, and meet less frequently. We also found that their CEOs are more generously compensated. Consistent with agency theory, these findings indicate that companies using backdated stock option may possess compromised monitoring and incentive alignment mechanisms.

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Social Comparison and Reciprocity in Director Compensation

Steven Boivie, Michael Bednar & Steven Barker
Journal of Management, forthcoming

Abstract:
In this article, we develop theory regarding one set of mechanisms through which increases in the compensation of directors are transmitted throughout the director labor market. In a longitudinal study using director compensation data from 1996 to 2005, we test hypotheses about how directors' use of social comparison processes, and reciprocity between CEOs and the board, drive up the compensation level for boards of directors. Specifically, we argue and find that directors' home firms and interlocked boards serve as salient comparison groups for board members.

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Defensive Practice Adoption in the Face of Organizational Stigma: Impression Management and the Diffusion of Stock Option Expensing

Edward Carberry & Brayden King
Journal of Management Studies, November 2012, Pages 1137-1167

Abstract:
Although most diffusion research focuses on firms adopting new practices to maintain their legitimacy, this paper examines a setting in which firms adopted a controversial practice to defend themselves against challenges relating to corporate deviance. We argue that understanding defensive adoption requires attending to both the dynamics of organizational stigma and impression management, and test our theoretical claims by analysing the diffusion of an accounting practice, stock option expensing (SOPEX), following the Enron scandal. We first provide evidence that the media and shareholder activists transformed the practice into a defensive device by theorizing it as a solution to problems relating to corporate fraud and corporate governance. Using event history analysis, we then show that corporations that became targets of stigma-inducing threats were more likely to adopt SOPEX and that the media were a key force channelling these threats.

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Corporate Diversification, Information Asymmetry and Insider Trading

Ali Ataullah et al.
British Journal of Management, forthcoming

Abstract:
The literature suggests that corporate diversification destroys firm value. This value destruction is usually considered to be a consequence of managers' pursuing diversification strategies to benefit themselves rather than to increase firm value. This paper provides evidence that casts doubt on this agency theory-based explanation for corporate diversification. Evidence based on insider trading suggests that managers themselves consider their diversification strategies to be value-increasing. Specifically, it is documented that corporate insiders (directors) purchase more of their firms' shares in the open market when corporate diversification is high. Moreover, insiders purchase more when the level of diversification discount is high, suggesting that they disagree with outside investors' undervaluation due to diversification. It is also found that the market reaction to insiders' purchases is positively related to corporate diversification. This result suggests that outsiders consider the amount of favourable information contained in insiders' purchases to increase with the extent of corporate diversification.

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Common Membership and Effective Corporate Governance: Evidence from Audit and Compensation Committees

Chih-Hsien Liao & Audrey Wen-Hsin Hsu
Corporate Governance, forthcoming

Research Question/Issue: This study examines the factors associated with the presence of the same directors across the compensation committee and the audit committee in US firms, and whether such common membership enhances or undermines effective governance.

Research Findings/Insights: Using 4,572 firm-year observations in the US during fiscal years 2004-2008, the results show that common membership is more likely to occur in firms with weak corporate governance and in firms lacking financial and committee resources, and is not associated with firms having a high demand for coordination between compensation and audit committees. We also find that firms with common membership have poorer earnings quality and weaker pay-performance sensitivity than other firms.

By KEVIN LEWIS | 09:00:00 AM