Friday, December 9, 2011
Command and Control
Utpal Bhattacharya & Cassandra Marshall
Journal of Corporate Finance, forthcoming
Abstract:
Using a sample of all top management who were indicted for illegal insider trading in the United States for trades during the period 1989-2002, we explore the economic rationality of this white-collar crime. If this crime is an economically rational activity in the sense of Becker (1968), where a crime is committed if its expected benefits exceed its expected costs, "poorer" top management should be doing the most illegal insider trading. This is because the "poor" have less to lose (present value of foregone future compensation if caught is lower for them.) We find in the data, however, that indictments are concentrated in the "richer" strata after we control for firm size, industry, firm growth opportunities, executive age, the opportunity to commit illegal insider trading, and the possibility that regulators target the "richer" strata. We thus rule out the economic motive for this white-collar crime, and leave open the possibility of other motives.
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Reaching for the stars: The appointment of celebrities to corporate boards
Stephen Ferris et al.
International Review of Economics, December 2011, Pages 337-358
Abstract:
For a sample of over 700 celebrity appointments to corporate boards of directors over the period 1985-2006, we find positive excess market returns at the time of their announcement. The 1-, 2-, and 3-year long-run performance of the appointing firms provide corroborating evidence of the value of these appointments. We conclude that the appointment of celebrities as directors increase a firm's visibility in a fashion consistent with Merton's (J Finance 42:483-510, 1987) investor recognition hypothesis.
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Cory Cassell et al.
Journal of Financial Economics, forthcoming
Abstract:
CEO inside debt holdings (pension benefits and deferred compensation) are generally unsecured and unfunded liabilities of the firm. Because these characteristics of inside debt expose the CEO to default risk similar to that faced by outside creditors, theory predicts that CEOs with large inside debt holdings will display lower levels of risk-seeking behavior (Jensen and Meckling, 1976). Consistent with the theoretical predictions, we find a negative association between CEO inside debt holdings and the volatility of future firm stock returns, R&D expenditures, and financial leverage, and a positive association between CEO inside debt holdings and the extent of diversification and asset liquidity. Collectively, our results provide empirical evidence suggesting that CEOs with large inside debt holdings prefer investment and financial policies that are less risky.
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Does shareholder approval requirement of equity compensation plans matter?
Lilian Ng et al.
Journal of Corporate Finance, December 2011, Pages 1510-1530
Abstract:
This paper studies the impact of the 2003 SEC Regulation requiring shareholder approval of all equity-based executive compensation plans on executive compensation policies and practices at S&P 500 firms. Following the 2003 Regulation, firms with shareholder approved equity plans in place or those with strong performance, while not those with non-approved plans or weak performance, increase their equity compensation proposal submission activity. The quality of equity compensation proposals improves in the after-regulation period, and shareholders exhibit greater scrutiny and monitoring of executive compensation through increased voting rights. We find a decline in the equity pay component while an increase in the cash component of total executive compensation after the 2003 Regulation and also provide evidence that the 2003 Regulation contributes to this change in compensation structure.
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Shaped by Booms and Busts: How the Economy Impacts CEO Careers and Management Style
Antoinette Schoar & Luo Zuo
NBER Working Paper, November 2011
Abstract:
This paper examines how early career experiences affect the career path and promotion of managers as well as the managerial style that they develop when becoming CEOs. We identify the impact of an exogenous shock to managers' careers, in particular the business cycle at the career starting date. Economic conditions at the beginning of a manager's career have lasting effects on the career path and the ultimate outcome as a CEO. CEOs who start in recessions take less time to become CEOs, but end up as CEOs in smaller firms, receive lower compensation, and are more likely to rise through the ranks within a given firm rather than moving across firms and industries. Moreover, managers who start in recessions have more conservative management styles once they become CEOs. These managers spend less in capital expenditures and R&D, have lower leverage, are more diversified across segments, and show more concerns about cost effectiveness. While looking at the role of early job choices on CEO careers is more endogenous, the results support the idea that certain types of starting positions are feeders for successful long-run management careers: Starting in a firm that ranks within the top ten firms from which CEOs come from is associated with favorable outcomes for a manager - they become CEOs in larger companies and receive higher compensation.
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Timothy Quigley & Donald Hambrick
Strategic Management Journal, forthcoming
Abstract:
Prior research on CEO succession has omitted consideration of a critical institutional reality: some exiting CEOs do not fully depart the scene but instead remain as board chairs. We posit that predecessor retention restricts a successor's discretion, thus dampening his or her ability to make strategic changes or deliver performance that deviates from pre-succession levels. In short, a predecessor's continuing presence suppresses a new CEO's influence. Based on analysis of 181 successions in high technology firms, and with extensive controls (for circumstances associated with succession, the firm's need and capacity for change, and for endogeneity), we find substantial support for our hypotheses. In supplementary analyses, we find that retention has a more pronounced effect in preventing a new CEO from making big performance gains than in preventing big drops.
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Behind the Iron Cage: An Institutional Perspective on ISO 9000 Adoption and CEO Compensation
Andy Yeung, Chris Lo & T.C.E. Cheng
Organization Science, November/December 2011, Pages 1600-1612
Abstract:
Although institutional theorists maintain that the widespread diffusion of ISO 9000 is the result of institutional forces, they have neglected the potential gains to top management in the perpetuation of the standard. Based on a long-horizon event study with control firms to detect long-term abnormal financial gains, we investigate the impact of ISO 9000 adoption on CEO compensation in the U.S. manufacturing industry from 1994 to 2006. We find that the CEOs' total cash compensation was positively adjusted when their firms received ISO 9000 certification, and they received higher-value stock options when their firms embarked on ISO 9000 certification. However, the performance of the ISO 9000 certified firms was not improved throughout this period. Our further analyses suggest that it is likely that the CEO influences the board to obtain higher compensation under an institutionalized environment. Contrary to the traditional institutional theory-based view, we argue that a highly institutionalized environment does provide political opportunities for organizational actors to garner personal advantages.
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Deregulation and earnings management: The case of the U.S. airline industry
Yoon-Suk Baik, Byungjin Kwak & Jaywon Lee
Journal of Accounting and Public Policy, November-December 2011, Pages 589-606
Abstract:
This paper examines earnings management dynamics in the airline industry during the airline industry deregulation of 1978. We expect that earnings management would increase after deregulation, since industry deregulation generally increases managerial discretion, whereas internal corporate governance systems are sluggish in adapting to newly changed environments. As corporate governance structures become more effective in tempering highly discretionary managers, and as capital markets learn more about how to design better management incentive systems, managers' incentives and capacity to engage in earnings management will diminish. Based on industry data, we find that the magnitude of absolute values of discretionary accruals increase significantly in the post-deregulation period. Managers in the airline industry were inclined to engage in income increasing earnings management after deregulation. However, the increased level of earnings management then decreased to return close to the level seen during the regulation period. The findings support the predicted deregulation impact on earnings management dynamics.
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Vice or Virtue? The Impact of Corporate Social Responsibility on Executive Compensation
Ye Cai, Hoje Jo & Carrie Pan
Journal of Business Ethics, December 2011, Pages 159-173
Abstract:
We empirically examine the impact of corporate social responsibility (CSR) on CEO compensation using a large sample of the US firms from 1996 to 2010. We develop and test two hypotheses, the overinvestment hypothesis based on agency theory and the conflict-resolution hypothesis based on stakeholder theory. We find that the lag of CSR adversely affects both total compensation and cash compensation, after controlling for various firm and board characteristics. Our estimates show that an interquartile increase in CSR is followed by a 4.35% (2.78%) decrease in total (cash) compensation. We also find an inverse association between lagged employee relations and CEO compensation. Our results are robust to the correction for endogeneity using instrumental variable approach. Taken together, our results support the conflict-resolution hypothesis, but not the CSR overinvestment argument.
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Voting with their Feet or Activism? Institutional Investors' Impact on CEO Turnover
Jean Helwege, Vincent Intintoli & Andrew Zhang
Journal of Corporate Finance, February 2012, Pages 22-37
Abstract:
We examine the relation between institutional investors and management discipline over the last several decades to better understand how CEO turnover has increased. Using a sample of forced and voluntary turnovers, we investigate the changing roles of activism and exit among institutional investors between 1982-1994 and 1995-2006. We find evidence of activist investors throughout the sample period and their impact is consistently significant in multivariate analysis. In contrast, voting with their feet has declined to the point where it no longer affects turnover outcomes. Nonetheless, activism is fairly uncommon and does not explain the higher turnover observed over time. Block holdings of known activists have increased and are linked to improving target firms. However, other blocks merely reflect the increasing size of institutional money managers. Going forward, the increasing size of institutional investors seems likely to inhibit voting with their feet while activism remains an important vehicle for change.
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Extreme divorce: The managerial revolution in UK companies before 1914
James Foreman-Peck & Leslie Hannah
Economic History Review, forthcoming
Abstract:
We present the first broadly representative study for any early twentieth-century economy of the extent to which quoted company ownership was already divorced from managerial control. In the 337 largest, independent, UK companies in the Investor's year book (those with £1 million or more quoted share capital in 1911), the generality of public shareholders were a narrower group than today, but directors personally owned only 3.4 per cent of the shares. This indicates a lower level of personal ownership (and board voting control) in the largest securities market of the early twentieth century than in any of the world's major securities markets toward the end of that century. Berle, Means, Gordon, and others subsequently quantified the US's later and (on this dimension) less advanced managerial ‘revolution'. Their evidence was widely misinterpreted: some erroneously concluded that the US pioneered this aspect of ‘modernity' and that the ‘divorce' of ownership from control, globally, was a new and continuing trend.
