Company policy
Elroy Dimson, Oğuzhan Karakaş & Xi Li
Review of Financial Studies, forthcoming
Abstract:
We analyze an extensive proprietary database of corporate social responsibility engagements with U.S. public companies from 1999-2009. Engagements address environmental, social, and governance concerns. Successful (unsuccessful) engagements are followed by positive (zero) abnormal returns. Companies with inferior governance and socially conscious institutional investors are more likely to be engaged. Success in engagements is more probable if the engaged firm has reputational concerns and higher capacity to implement changes. Collaboration among activists is instrumental in increasing the success rate of environmental/social engagements. After successful engagements, particularly on environmental/social issues, companies experience improved accounting performance and governance and increased institutional ownership.
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Shareholder Activism of Public Pension Funds: The Political Facet
Yong Wang & Connie Mao
Journal of Banking & Finance, November 2015, Pages 138-152
Abstract:
This paper studies the political incentive of public pension funds in shareholder activism. Using a sample of shareholder proposals from 1993-2013 and a hand-collected data set of the political variables of public pension funds, we document evidence consistent with the "political attention hypothesis." We find that the number of politicians on public pension fund boards is significantly positively related to the frequency with which portfolio firms are targeted. Moreover, the frequency of social-responsibility proposals by public pension funds increases significantly, as the funds have a greater number of board members running for election to public office. However the frequency of corporate governance proposals is not related to the number of board members running for elections to public office. Furthermore, we document that political connection between a portfolio firm and a public pension fund mitigates the firm's likelihood of being targeted by the fund with social-responsibility proposals. This result supports the "political contribution hypothesis." The paper provides direct evidence that public pension-fund board members employ shareholder proposals to enhance their political capital.
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Come Aboard! Exploring the Effects of Directorships in the Executive Labor Market
Steven Boivie et al.
Academy of Management Journal, forthcoming
Abstract:
In this study, we examine the question: What do executives gain from serving on boards? We propose that board service will benefit non-CEO level executives in the executive labor market by acting as a certification mechanism and also by providing access to unique knowledge, skills, and connections. We argue that non-CEO executives who gain directorships will be more likely to be promoted to CEO both inside and outside their home firm, will be more likely to be promoted internally, and will receive higher pay from their home firms. To test our ideas, we employ propensity score matching to construct a longitudinal sample of 2,104 top executives of large, publicly traded companies in the United States over the period 1996 to 2012. Results provide consistent support for our theory.
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Reassessing board member allegiance: CEO replacement following financial misconduct
David Gomulya & Warren Boeker
Strategic Management Journal, forthcoming
Abstract:
We examine how board members' reactions following financial misconduct differ from those following other adverse organizational events, such as poor performance. We hypothesize that inside directors and directors appointed by the CEO may be particularly concerned about their reputation following deceptive financial practices. We demonstrate that directors more closely affiliated with the CEO are more likely to reduce their support for the CEO following financial misconduct, increasing the likelihood of CEO replacement. Enactment of the Sarbanes-Oxley Act similarly alters governance dynamics by creating a greater expectation for sound corporate governance. We demonstrate our findings in U.S. public firms that restated their financial earnings during a twelve-year period before and after the passage of Sarbanes-Oxley.
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Competition of the Informed: Does the Presence of Short Sellers Affect Insider Selling?
Massimo Massa et al.
Journal of Financial Economics, forthcoming
Abstract:
We study how the presence of short sellers affects the incentives of the insiders to trade on negative information. We show it induces insiders to sell more (shares from their existing stakes) and trade faster to preempt the potential competition from short sellers. An experiment and instrumental variable analysis confirm this causal relationship. The effects are stronger for "opportunistic" (i.e., more informed) insider trades and when short sellers' attention is high. Return predictability of insider sales only occurs in stocks with high short-selling potential, suggesting that short sellers indirectly enhance the speed of information dissemination by accelerating trading by insiders.
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Ryan Krause, Igor Filatotchev & Garry Bruton
Academy of Management Journal, forthcoming
Abstract:
Agency theory-grounded research on boards of directors and firm legitimacy has historically viewed CEO power as de-legitimating, often taking this fact for granted in theorizing about external assessors' evaluations of a firm. With few exceptions, this literature has focused exclusively on capital market participants (e.g., investors, securities analysts) as the arbiters of a firm's legitimacy and has accordingly assumed that legitimate governance arrangements are those derived from the shareholder-oriented prescriptions of agency theory. We extend this line of research in new ways by arguing that customers also externally assess firm legitimacy, and that firms potentially adjust their governance characteristics to meet customers' norms and expectations. We argue that the cultural-cognitive institutions prevalent in customers' home countries influence their judgments regarding a firm's legitimacy, such that firms competing heavily in high-power distance cultures are more likely to have powerful CEOs, with CEO power a source of legitimacy - rather than illegitimacy - among customers. We also argue that the more dependent a firm is on its customers and the more salient cultural power distance is as a demand-side institutional norm, the greater this relationship will be. Data from 151 U.S. semiconductor and pharmaceutical firms over a 10-year period generally support our predictions.
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Corporate Governance and the Firm's Workforce
Inessa Liskovich
Princeton Working Paper, May 2015
Abstract:
This paper uses matched employer-employee data to study the effects of corporate governance on the earnings and composition of the firm's workforce. I build a new dataset that links over 2,000 public companies to their employees in Texas. Focusing on shareholder-sponsored proposals, I measure stronger corporate governance using the passage of proposals to declassify the board of directors. I find that vote passage lowers firm's average employee earnings by 11%, directionally consistent with the previous literature. This has often been interpreted as wage decreases for individual workers. However, I show that this decrease is driven in a large part by the changing composition of the workforce. Firms shift from higher-trajectory to more stable, lower-trajectory employees. This evidence suggests that stronger corporate governance does not simply cause a wealth transfer from employees to shareholders. Instead, it causes real changes in the types of employees selected and retained by the firm.
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The Compensation Benefits of Corporate Cash Holdings
Yingmei Cheng et al.
Florida State University Working Paper, July 2015
Abstract:
We show that corporate cash holdings have a significantly positive impact on executive compensation, distinct from the well-documented relation between performance and compensation. An increase of cash holdings by 10% of assets corresponds to about $2.7 million additional CEO total compensation. This relation is driven primarily by discretionary compensation components such as bonus and option-based compensation. In companies with weaker governance, the relation between cash holdings and executive compensation is even stronger. Using awards and losses associated with corporate litigation as exogenous shocks to the firms' cash, we show that CEO compensation readily responds to these changes in cash holdings.
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Insider Trading: Does Being a Neighbor of the Securities and Exchange Commission Matter?
Xuesong Hu, Xin Wang & Baohua Xin
Managerial and Decision Economics, forthcoming
Abstract:
Using a perception-based crime deterrence approach, we present evidence that corporate insiders located closer to the Securities and Exchange Commission regional offices trade less frequently on their own company's stocks, while they earn higher abnormal returns from such insider transactions. These results are robust to several additional tests. Our further analysis indicates that such differences in trading profitability are mitigated during the periods of a high level of legal jeopardy such as the periods around earnings announcements and mergers and acquisitions. These findings are consistent with the view that Securities and Exchange Commission oversight has an impact on insiders' trading behavior by influencing their perceptions of sanctions risk.
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Tournament incentives and corporate fraud
Lars Helge Haß, Maximilian Müller & Skrålan Vergauwe
Journal of Corporate Finance, forthcoming
Abstract:
This paper identifies a new incentive for managers to engage in corporate fraud stemming from the relative performance evaluation feature of CEO promotion tournaments. We document higher propensities to engage in fraud for firms with strong tournament incentives (as proxied for by the CEO pay gap). We posit that the relative performance evaluation feature of CEO promotion tournaments creates incentives to manipulate performance, while the option-like character can motivate managers to engage in risky activities. We thereby extend previous corporate fraud literature that focuses mainly on equity-based incentives and reports mixed findings. Our results are robust to using different fraud samples, and controlling for other known determinants of fraud as well as manager skills.
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Managerial Overconfidence and Corporate Risk Management
Tim Adam, Chitru Fernando & Evgenia Golubeva
Journal of Banking & Finance, November 2015, Pages 195-208
Abstract:
We examine whether managerial overconfidence can help explain the observed discrepancies between the theory and practice of corporate risk management. We use a unique dataset of corporate derivatives positions that enables us to directly observe managerial reactions to their (speculative) gains and losses from market timing when they use derivatives. We find that managers increase their speculative activities using derivatives following speculative cash flow gains, while they do not reduce their speculative activities following speculative losses. This asymmetric response is consistent with the selective self-attribution associated with overconfidence. Our time series approach to measuring overconfidence complements cross-sectional approaches currently used in the literature. Our results show that managerial overconfidence, which has been found to influence a number of corporate decisions, also affects corporate risk management decisions.
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The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Labor Outcomes
Alon Brav, Wei Jiang & Hyunseob Kim
Review of Financial Studies, forthcoming
Abstract:
This paper studies the long-term effect of hedge fund activism on firm productivity using plant-level information from the U.S. Census Bureau. A typical target firm improves production efficiency in the 3 years after intervention, with stronger improvements in business strategy-oriented interventions. Plants sold after intervention improve productivity significantly under new ownership, suggesting that capital redeployment is an important channel for value creation. Employees of target firms experience stagnation in work hours and wages despite an increase in labor productivity. Additional tests refute alternative explanations attributing the improvement to mean reversion, management's voluntary reforms, industry consolidation shocks, or activists' stock-picking abilities.
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When Experts Become Liabilities: Domain Experts on Boards and Organizational Failure
Juan Almandoz & András Tilcsik
Academy of Management Journal, forthcoming
Abstract:
How does the presence of domain experts on a corporate board - directors whose primary professional experience is within the focal firm's industry - affect organizational outcomes? We argue that under conditions of significant decision uncertainty, a higher proportion of domain experts on a board may detract from effective decision making and thus increase the probability of organizational failure. Building on exploratory interviews with board members and CEOs, we derive hypotheses from this argument in the context of local banks in the United States. We predict that the greater the level of decision uncertainty - due to rapid asset growth or operation in less predictable markets - the stronger the relationship between the proportion of banking expert directors and the probability of bank failure. Longitudinal analyses of 1,307 banks between 1996 and 2012 support this prediction, even after accounting for both the overall level of professional diversity among directors and banks' different propensities to have an expert-heavy board. We discuss implications for the key dimensions of board composition, the conditions under which the professional background of directors is more or less consequential, and the mechanisms whereby board composition affects organizational outcomes.
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Corporate Governance and Executive Compensation for Corporate Social Responsibility
Bryan Hong, Zhichuan Frank Li & Dylan Minor
Harvard Working Paper, August 2015
Abstract:
We link the corporate governance literature in financial economics to the agency cost perspective of Corporate Social Responsibility (CSR) to derive theoretical predictions about the relationship between corporate governance and the existence of executive compensation incentives for CSR. We test our predictions using novel executive compensation contract data, and find that firms with more shareholder-friendly corporate governance are more likely to provide compensation to executives linked to firm social performance outcomes. Also, providing executives with incentives for CSR is associated with a higher level of engagement in CSR activities at the firm level. The findings provide evidence identifying corporate governance as a determinant of managerial incentives for social performance, and suggest that CSR activities are more likely to be beneficial to shareholders, as opposed to an agency cost.
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Corporate Social Responsibility and Social Capital
Anand Jha & James Cox
Journal of Banking & Finance, forthcoming
Abstract:
When corporations make an effort to be socially responsible beyond what is required by the law, this effort is often described as strategic - made mainly for the shareholders' or managers' benefit. A large body of literature corroborates this belief. But, could the incentives for corporate social responsibility (CSR) come from an altruistic inclination fostered by the social capital of the region in which the firm is headquartered? We investigate whether this phenomenon exists by examining the association between the social capital in the region and the firm's CSR. We find that a firm from a high social capital region exhibits higher CSR. This result suggests that the self-interest of shareholders or mangers does not explain all of the firm's CSR, but the altruistic inclination from the region might also play a role.
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Disproportionate Insider Control and Board of Director Characteristics
Lindsay Baran & Arno Forst
Journal of Corporate Finance, forthcoming
Abstract:
We comprehensively examine characteristics of the board of directors in firms characterized by disproportionate insider control. Specifically, we investigate whether board of director characteristics contribute to, or attenuate, the known negative association between a divergence of insider voting and cash flow rights and firm value. Using a new hand-collected sample of U.S. dual-class firms between 2000 and 2012, we find that disproportionate insider control is negatively associated with board experience, independence and the tenure/age of directors. These findings support an entrenchment, rather than a substitution explanation, which would require stronger board monitoring as the extent of agency conflicts increases. Moreover, mediation analyses reveal that negative board characteristics act as one channel for the previously established negative association between disproportionate insider control and firm value.
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Segment Disclosure Transparency and Internal Capital Market Efficiency: Evidence from SFAS No. 131
Young Jun Cho
Journal of Accounting Research, September 2015, Pages 669-723
Abstract:
Using the adoption of SFAS 131, I examine the effect of segment disclosure transparency on internal capital market efficiency. SFAS 131 requires firms to define segments as internally viewed by managers, thereby improving the transparency of managerial actions in internal capital allocation. I find that diversified firms that improved segment disclosure transparency by changing segment definitions upon adoption of SFAS 131 experienced an improvement in capital allocation efficiency in internal capital markets after the adoption of SFAS 131. In addition, I find that the improvement in internal capital market efficiency was greater for firms that suffered more severe agency problems before the adoption of SFAS 131 and also for firms whose managers faced stronger incentives to improve efficiency after the adoption of SFAS 131. My results suggest that more transparent segment information can help resolve agency conflicts in the internal capital markets of diversified firms, thus improving investment efficiency.
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Yingmei Cheng, Jarrad Harford & Tianming (Tim) Zhang
Journal of Financial and Quantitative Analysis, June 2015, Pages 447-475
Abstract:
Using a large hand-collected database of chief executive officer (CEO) bonus structures, we find that when a CEO's bonus is directly tied to earnings per share (EPS), his company is more likely to conduct a buyback. This effect is especially pronounced when a company's EPS is right below the threshold for a bonus award. Share repurchasing increases the probability the CEO receives a bonus and the magnitude of that bonus, but only when bonus pay is EPS based. Bonus-driven repurchasing firms do not exhibit positive long-run abnormal returns.
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Corporate Litigation and Executive Turnover
Joseph Aharony, Chelsea Liu & Alfred Yawson
Journal of Corporate Finance, forthcoming
Abstract:
We examine executive turnover following environmental, antitrust, intellectual property (IP), and contractual lawsuits filed against their companies. We find that companies' responses to lawsuits depend on the nature of the allegations. In particular, contractual lawsuits are followed by increased turnover of CEOs and inside directors, whereas following environmental and IP lawsuits, only outside directors tend to depart. Antitrust lawsuits are followed by increased appointments of inside directors. We also find that lawsuit merit and pecuniary demands for damages play a role in determining executive turnover. In addition, we find some evidence of reduced CEO compensation following lawsuits. Overall, we provide insights into the effectiveness of the executive labor market in responding to alleged corporate wrongdoing.
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Board Structure and Monitoring: New Evidence from CEO Turnovers
Lixiong Guo & Ronald Masulis
Review of Financial Studies, forthcoming
Abstract:
We use the 2003 NYSE and NASDAQ listing rules for board and committee independence as a quasinatural experiment to examine the causal relations between board structure and CEO monitoring. Noncompliant firms forced to raise board independence or adopt a fully independent nominating committee significantly increased their forced CEO turnover sensitivity to performance relative to compliant firms. Nominating committee independence is important even when firms had an independent board, and the effect is stronger when the CEO is on the committee. We conclude that greater board independence and full independence of nominating committees lead to more rigorous CEO monitoring and discipline.
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The Effects of Securities Class Action Litigation on Corporate Liquidity and Investment Policy
Matteo Arena & Brandon Julio
Journal of Financial and Quantitative Analysis, April 2015, Pages 251-275
Abstract:
The risk of securities class action litigation alters corporate savings and investment policy. Firms with greater exposure to securities litigation hold significantly more cash in anticipation of future settlements and other related costs. The result is due to firms accumulating cash in anticipation of lawsuits and not a consequence of plaintiffs targeting firms with high cash levels. The market value of cash is lower for firms exposed to litigation risk. Corporate investment decisions are also affected by litigation risk, as firms reduce capital expenditures in response. Our results are robust to endogeneity concerns and possible spurious temporal effects.