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Friday, November 1, 2013

Executive branch

 

Are Red or Blue Companies More Likely to go Green? Politics and Corporate Social Responsibility

Alberta Di Giuli & Leonard Kostovetsky
Journal of Financial Economics, forthcoming

Abstract:
Using the firm-level corporate social responsibility (CSR) ratings of Kinder, Lydenberg, Domini, we find that firms score higher on CSR when they have Democratic rather than Republican founders, CEOs, and directors, and when they are headquartered in Democratic rather than Republican-leaning states. Democratic-leaning firms spend $20 million more on CSR than Republican-leaning firms ($80 million more within the sample of S&P 500 firms), or roughly 10% of net income. We find no evidence that firms recover these expenditures through increased sales. Indeed, increases in firm CSR ratings are associated with negative future stock returns and declines in firm ROA, suggesting that any benefits to stakeholders from social responsibility come at the direct expense of firm value.

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Corporate Lobbying and CEO Pay

Hollis Ashbaugh Skaife, David Veenman & Timothy Werner
University of Wisconsin Working Paper, October 2013

Abstract:
This study examines the agency costs of corporate lobbying by exploring the relation between lobbying and excess CEO compensation. We show that CEOs of firms engaged in lobbying earn significantly greater compensation levels compared to CEOs in non-lobbying firms, after controlling for standard economic determinants of pay. The relation between lobbying and CEO pay increases with the intensity of firms' lobbying. Although lobbying is positively associated future sales growth, we find no evidence suggesting it culminates in shareholder wealth creation. Additional tests reveal that for a subset of firms with available data, governance attributes mediate the relation between lobbying and firms' decision to lobby. Lastly, a difference-in-difference, propensity-score matched analysis suggests significant increases in CEO pay levels around firms' initial lobbying engagements. Overall, we conclude that corporate lobbying introduces agency costs borne by shareholders.

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Gaining Access by Doing Good: The Effect of Corporate Social Responsibility on Firm Participation in Public Policymaking

Timothy Werner
University of Texas Working Paper, October 2013

Abstract:
This article explores how organizational commitments to corporate social responsibility (CSR) affect firms' access to public policymakers. I argue that when firms adopt other-regarding or social CSR practices, they enhance their reputations among policymakers, who then view them as more credible representatives of their shared policy goals. Adopting social CSR practices differentiates a firm reputationally and reduces the risk to politicians of being associated with the firm. I hypothesize that (i) as firms engage in social CSR at higher rates, they will be granted greater access; (ii) the access-related benefits of social CSR will be greater when Democratic politicians, who run greater risks in associating with business, have greater power; and (iii) the access-related benefits of social CSR will be greater if they compliment existing political strategies. I test these hypotheses using an 11-year-long panel on congressional appearances, CSR, and political and financial characteristics for the S&P 500 and find support for all three. These findings demonstrate a significant non-financial consequence of CSR, and more broadly, this paper extends existing theory by demonstrating that the strategic utility perspective on corporate social behavior applies to how firms employ CSR proactively to manage their relationships with the state.

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Citizens United, Independent Expenditures, and Agency Costs: Reexamining the Political Economy of State Antitakeover Statutes

Timothy Werner
University of Texas Working Paper, July 2013

Abstract:
We test the agency theory of corporate political activity by examining the association between the legality of independent expenditures and antitakeover lawmaking in the U.S. states. Exploiting changes in state campaign finance law regarding the use of corporate independent expenditures in the pre-Citizens United era, we estimate that a state is more likely to pass antitakeover statutes that entrench management when firms are allowed to make independent expenditures to influence electoral campaigns. We also find that this relationship is conditional on the competitiveness of a state's electoral environment, suggesting that the threat of independent expenditures may move vulnerable legislators' votes on less salient issues, such as corporate governance. These findings are robust to competing public interest and political economy explanations for antitakeover law adoption, and they reveal that allowing independent expenditures may create additional agency costs for owners through public policy. Finally, these results strongly challenge the claim that state-level antitakeover laws are exogenous to firms' activities.

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Fortune Favors the Bold

Costanza Meneghetti & Ryan Williams
University of Arizona Working Paper, March 2013

Abstract:
We investigate whether prestige generated from inclusion in the annual Fortune 500 ranking affects corporate decision making. We find that firms near the 500th spot on the Fortune 500 list are more likely to engage in size/revenue-increasing behavior, potentially in an attempt to join or remain in the list. Specifically, these firms are more likely to make M&A bids, pay higher takeover premiums in these bids, appear to "over-advertise", and are more likely to restate earnings due to revenue recognition problems. Additionally, stock market reactions to bids are worse when bidders are close to Fortune's cutoff. Our results suggest that managers respond to non-monetary incentives such as the prestige associated with the Fortune 500, but such actions adversely affect shareholders.

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Do Managers Do Good with Other People's Money?

Ing-Haw Cheng, Harrison Hong & Kelly Shue
NBER Working Paper, September 2013

Abstract:
We find support for two key predictions of an agency theory of unproductive corporate social responsibility. First, increasing managerial ownership decreases measures of firm goodness. We use the 2003 Dividend Tax Cut to increase after-tax insider ownership. Firms with moderate levels of insider ownership cut goodness by more than firms with low levels (where the tax cut has no effect) and high levels (where agency is less of an issue). Second, increasing monitoring reduces corporate goodness. A regression discontinuity design of close votes around the 50% cut-off finds that passage of shareholder governance proposals leads to slower growth in goodness.

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License to Ill: The Effects of Corporate Social Responsibility and CEO Moral Identity on Corporate Social Irresponsibility

Margaret Ormiston & Elaine Wong
Personnel Psychology, Winter 2013, Pages 861-893

Abstract:
Although managers and researchers have invested considerable effort into understanding corporate social responsibility (CSR), less is known about corporate social irresponsibility (CSiR). Drawing on strategic leadership and moral licensing research, we address this gap by considering the relationship between CSR and CSiR. We predict that prior CSR is positively associated with subsequent CSiR because the moral credits achieved through CSR enable leaders to engage in less ethical stakeholder treatment. Further, we hypothesize that leaders' moral identity symbolization, or the degree to which being moral is expressed outwardly to the public through actions and behavior, will moderate the CSR-CSiR relationship, such that the relationship will be stronger when CEOs are high on moral identity symbolization rather than low on moral identity symbolization. Through an archival study of 49 Fortune 500 firms, we find support for our hypotheses.

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Narcissus Enters the Courtroom: CEO Narcissism and Fraud

Antoinette Rijsenbilt & Harry Commandeur
Journal of Business Ethics, October 2013, Pages 413-429

Abstract:
This study explores the aspects of the relationship between possible indicators of CEO narcissism and fraud. Highly narcissistic CEOs undertake challenging or bold actions to obtain frequent praise and admiration. The pursuit of narcissistic supply may result in a stronger likelihood of a CEO to undertake bold actions with potential detrimental consequences for the organization. The sample consists of all S&P 500 CEOs from 1992 till 2008 with more than 3 years of tenure. The measurement of CEO narcissism is based on 15 objective indicators and fits the main conceptualization of narcissism. This data collection provides a score for all S&P 500 CEOs according to their narcissistic tendencies. The Accounting and Auditing Enforcement Releases on the SEC's website are the indicators of managerial fraud. The findings confirm the expected influence of plausible proxies for CEO narcissism on fraud by showing a positive relationship. This confirms the psychologic perspective of CEO narcissism as a potential cause of fraud.

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Minding the Gap: Antecedents and Consequences of Top Management-To-Worker Pay Dispersion

Brian Connelly et al.
Journal of Management, forthcoming

Abstract:
Management researchers have long been concerned with the antecedents and consequences of managerial compensation. More recently, scholarly and popular attention has turned to the gap in pay between workers at the highest and lowest levels of the organization, or "pay dispersion." This study investigates the performance implications of pay dispersion on a longitudinal (10-year) sample of publicly traded firms from multiple industries. We combine explanations based on tournament theory and equity theory to develop a model wherein pay dispersion has opposing effects on a firm's short-term performance and their trend in performance over time. We also show that ownership is a key antecedent of pay dispersion. Specifically, transient institutional investors (who have short time horizons and equity stakes in a wide variety of firms) positively influence pay dispersion whereas dedicated institutional investors (who have longer investment time horizons and equity stakes in fewer firms) negatively influence pay dispersion. We discuss the wide-ranging implications of these findings for scholars, managers, and policy makers alike.

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Personally tax aggressive executives and corporate tax sheltering

James Chyz
Journal of Accounting and Economics, November-December 2013, Pages 311-328

Abstract:
This paper investigates whether executives who evidence a propensity for personal tax evasion (suspect executives) are associated with tax sheltering at the firm level. I adapt recent research to identify the presence of these executives and examine associations between suspect executive presence and firm-level measures of tax sheltering. The results indicate that the presence of suspect executives is positively associated with proxies for corporate tax sheltering. In addition, firm-years with suspect executive presence have significantly higher cash tax savings relative to firm-years without suspect executive presence. I also investigate the firm value implications of suspect executive presence and find that increases in tax sheltering are incrementally more valuable for firms that have suspect executives than similar increments made by firms that do not have suspect executives.

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Who Writes the News? Corporate Press Releases During Merger Negotiations

Kenneth Ahern & Denis Sosyura
Journal of Finance, forthcoming

Abstract:
Firms have an incentive to manage media coverage to influence their stock price during important corporate events. Using comprehensive data on media coverage and merger negotiations, we find that bidders in stock mergers originate substantially more news stories after the start of merger negotiations, but before the public announcement. This strategy generates a short-lived run-up in bidders' stock prices during the period when the stock exchange ratio is determined, which substantially impacts the takeover price. Our results demonstrate that the timing and content of financial media coverage may be biased by firms seeking to manipulate their stock price.

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When the role fits: How firm status differentials affect corporate takeovers

Rui Shen, Yi Tang & Guoli Chen
Strategic Management Journal, forthcoming

Abstract:
This study explores the implications of interfirm status differentials for firm behaviors in corporate takeover transactions. We argue that the more the status differential between two firms is aligned with expectations of their roles embedded in the specific economic activity, the easier it is for them to agree on the appropriate means to reach consensus on the transaction. Using the empirical context of the U.S. corporate takeover market, we found that the greater the status differential between an acquirer and a target, the more positively the market reacts to both the acquirer and the target upon the announcement of the acquisition deal, the more likely it is for the deal to be completed, and the more likely the acquirer is to achieve better post-acquisition performance.

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Geography and CEO luck: Where do CEOs tend to be lucky?

Pandej Chintrakarn, Napatsorn Jiraporn & Pornsit Jiraporn
Applied Economics Letters, Winter 2014, Pages 125-128

Abstract:
CEOs are 'lucky' when they receive stock option grants on days when the stock price is the lowest in the month of the grant, implying opportunistic timing (Bebchuk et al., 2010). We extend Bebchuk et al. (2010) by investigating the geographic peer effects of CEO luck. Our evidence shows that a CEO is significantly more likely to be lucky when other CEOs in the surrounding area are not lucky. It appears that a CEO tends to practice opportunistic timing of option grants when such a practice is less prevalent and thus less noticeable in the nearby area, probably in order to avoid detection. We estimate that the marginal geographic effect on a given CEO's luck is 18.36%, which is both statistically and economically significant. Our results suggest that regulators should look for corporate opportunistic behaviour where it is not expected.

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CEO Connectedness and Corporate Frauds

Vikramaditya Khanna, Han Kim & Yao Lu
University of Michigan Working Paper, September 2013

Abstract:
This paper identifies an important factor magnifying the risk of corporate fraud - the connections CEOs develop with top executives and directors through their appointment decisions during their tenure. A sample of publicly listed firms over the period 1996-2006 reveals that appointment-based CEO connectedness within executive suites and boardrooms increases the likelihood of committing frauds and decreases the likelihood of detection. We identify three channels through which the CEO connectedness decreases expected costs of committing fraud - by helping to conceal frauds, by reducing the likelihood of CEO dismissal upon fraud discovery, and by lowering the coordination costs of carrying out illegal activities. Further, except for audit committee independence, standard monitoring mechanisms do not seem to mitigate the adverse effects on frauds. These findings suggest regulators, investors, and governance specialists should pay particular attention to appointment-based CEO connectedness.

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Narcissistic CEOs and executive compensation

Charles O'Reilly et al.
Leadership Quarterly, forthcoming

Abstract:
Narcissism is characterized by traits such as dominance, self-confidence, a sense of entitlement, grandiosity, and low empathy. There is growing evidence that individuals with these characteristics often emerge as leaders, and that narcissistic CEOs may make more impulsive and risky decisions. We suggest that these tendencies may also affect how compensation is allocated among top management teams. Using employee ratings of personality for the CEOs of 32 prominent high-technology firms, we investigate whether more narcissistic CEOs have compensation packages that are systematically different from their less narcissistic peers, and specifically whether these differences increase the longer the CEO stays with the firm. As predicted, we find that more narcissistic CEOs who have been with their firm longer receive more total direct compensation (salary, bonus, and stock options), have more money in their total shareholdings, and have larger discrepancies between their own (higher) compensation and the other members of their team.

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The Effect of Tougher Enforcement on Foreign Firms: Evidence from the Adelphia Perp Walk

Charles Knoeber & Mark Walker
Journal of Corporate Finance, December 2013, Pages 382-394

Abstract:
The public arrest of Adelphia executives on July 24, 2002 signaled tougher enforcement of laws against corporate crime. On that day and the two following days, foreign firms experienced a cumulative 1.7% decline in value. Relative to domestic firms, the loss was a much larger 4.5%. The expected cost to firms from tougher enforcement suggests three possible reasons. Foreign firms may be targeted more heavily, may face greater penalties, or may find it more costly to react to (deflect) enforcement. We find evidence consistent with foreign firms facing higher costs from tougher enforcement for each of these reasons.

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Nature of the Farm: Revisited

Matthew Elliott & Harvey James
University of Missouri Working Paper, September 2013

Abstract:
This study empirically examines the effects of farm organization, with particular emphasis on separation of ownership and control, on farmer effort and farm success using a structural equation model and data from the 2005-2010 Agriculture Management Resource Survey. Contrary to expectations of existing theory, the results show that farms in which ownership and control are more separated have a higher probability of farm success, and their operators supply more labor effort, than combined ownership and control farms. The results are robust even when controlling for exogenous uncertainty or asymmetric information. The implications are that the evolution to more separated farm ownership may not be limited by agency costs when there is greater exogenous uncertainty or more asymmetric information in principle-agent relationships.

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Executive Pay Disparity and the Cost of Equity Capital

Zhihong Chen, Yuan Huang & John Wei
Journal of Financial and Quantitative Analysis, June 2013, Pages 849-885

Abstract:
Executive pay disparity, as measured by chief executive officer (CEO) pay slice (CPS), is positively associated with the implied cost of equity, even after controlling for other determinants of the cost of equity. The difference in the cost of equity can explain 43% of the difference in the valuation effect attributable to CPS reported by Bebchuk, Cremers, and Peyer (2011). Further analysis shows that the positive association is stronger when agency problems of free cash flow are more severe and when CEO succession planning is more important. Our evidence suggests that a large CPS is associated with CEO entrenchment and high succession risk.

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Investment Busts, Reputation, and the Temptation to Blend in with the Crowd

Steven Grenadier, Andrey Malenko & Ilya Strebulaev
Journal of Financial Economics, forthcoming

Abstract:
We provide a real-options model of an industry in which agents time abandonment of their projects in an effort to protect their reputations. Agents delay abandonment attempting to signal quality. When a public common shock forces abandonment of a small fraction of projects irrespective of agents' quality, many agents abandon their projects strategically even if they are unaffected by the shock. Such "blending in with the crowd" effect creates an additional incentive to delay abandonment ahead of the shock, leading to accumulation of "living dead" projects, which further amplifies the shock. The potential for moderate public common shocks often improves agents' values.

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SOX, Corporate Transparency, and the Cost of Debt

Sandro Andrade, Gennaro Bernile & Frederick Hood
Journal of Banking & Finance, forthcoming

Abstract:
We investigate the impact of the Sarbanes-Oxley (SOX) Act on the cost of debt through its effect on the reliability of financial reporting. Using Credit Default Swap (CDS) spreads and a structural CDS pricing model, we calibrate a firm-level corporate opacity parameter in the pre- and post-SOX periods. Our analysis shows that corporate opacity and the cost of debt decrease significantly after SOX. The median firm in our sample experiences an 18 bp reduction on its five-year CDS spread as a result of lower opacity following SOX, amounting to total annual savings of $ 844 million for the 252 firms in our sample. Furthermore, the reduction in opacity tends to be larger for firms that in the pre-SOX period have lower accrual quality, less conservative earnings, lower number of independent directors, lower S&P Transparency and Disclosure ratings, and are more likely to benefit from SOX-compliance according to Chhaochharia and Grinstein's (2007) criteria.

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Auditor Choice in Politically Connected Firms

Omrane Guedhami, Jeffrey Pittman & Walid Saffar
Journal of Accounting Research, forthcoming

Abstract:
We extend recent research on the links between political connections and financial reporting by examining the role of auditor choice. Our evidence that public firms with political connections are more likely to appoint a Big Four auditor supports the intuition that insiders in these firms are eager to improve accounting transparency to convince outside investors that they refrain from exploiting their connections to divert corporate resources. In evidence consistent with another prediction, we find that this link is stronger for connected firms with ownership structures conducive to insiders seizing private benefits at the expense of minority investors. We also find that the relation between political connections and auditor choice is stronger for firms operating in countries with relatively poor institutional infrastructure, implying that tough external monitoring by Big Four auditors becomes more valuable for preventing diversion in these situations. Finally, we report that connected firms with Big Four auditors exhibit less earnings management and enjoy greater transparency, higher valuations, and cheaper equity financing.

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CEO Entrenchment and Corporate Hedging: Evidence from the Oil and Gas Industry

Praveen Kumar & Ramon Rabinovitch
Journal of Financial and Quantitative Analysis, June 2013, Pages 887-917

Abstract:
Using a unique data set with detailed information on the derivative positions of upstream oil and gas firms during 1996-2008, we find that hedging intensity is positively related to factors that amplify chief executive officer (CEO) entrenchment and free cash flow agency costs. There is also robust evidence that hedging is motivated by the reduction of financial distress and borrowing costs, and that it is influenced by both intrinsic cash flow risk and temporary spikes in commodity price volatility. We present a comprehensive perspective on the determinants of corporate hedging, and the results are consistent with the predictions of the risk management and agency costs literatures.

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Underperformance of Founder-Led Firms: An Examination of Compensation Contracting Theories during the Executive Stock Options Backdating Scandal

Brian Carver, Brandon Cline & Matthew Hoag
Journal of Corporate Finance, December 2013, Pages 294-310

Abstract:
Using the executive stock option (ESO) backdating scandal as a backdrop, this paper examines whether compensation committees can effectively set executive compensation contracts in the presence of a founding CEO. Analyzing a sample of firms accused of backdating ESO grant dates and a control sample of non-backdating firms, we find evidence suggesting that managerial power influences the decision to backdate. Specifically, our analysis indicates the presence of a founder CEO increases the likelihood that ESOs are backdated by 22%. We further find that founder-led firms strongly underperform a matched sample of non-backdating firms. This finding contrasts a number of studies that document superior operating and stock return performance for founder-led firms.

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Peer group ties and executive compensation networks

Matthew Pittinsky & Thomas DiPrete
Social Science Research, November 2013, Pages 1675-1692

Abstract:
Publicly traded firms in the US typically determine C.E.O. compensation by benchmarking the pay of their C.E.O.s against the pay of C.E.O.s in "peer" firms. Consequently, executive compensation is influenced not only by firm-level characteristics, but also by the selection and actions of the firm's immediate peers as well as by the structure of the executive compensation network overall. Analyzing compensation peer group choices made by the same 1183 firms for F.Y. 2007, 2008 and 2009, we find that while the typical compensation peer is similar in size and industry to the firm that chose it, deviations from this norm are common, especially among larger firms, and tend to be towards larger firms with better paid CEOs. Further analysis shows that firms who pay CEOs well relative to the pay that would be predicted from their revenues, return on assets, and industry tend to have greater aspiration bias in their group of named peers.

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CEOs Under Fire: The Effects of Competition from Inside Directors on Forced CEO Turnover and CEO Compensation

Shawn Mobbs
Journal of Financial and Quantitative Analysis, June 2013, Pages 669-698

Abstract:
This study examines board monitoring when a credible chief executive officer (CEO) replacement is on the board. Inside directors whose talents are in greater demand externally, as reflected by their holding outside directorships, are more likely to become CEOs, and their presence is associated with greater forced CEO turnover sensitivity to accounting performance and CEO compensation sensitivity to stock performance. These results reveal that certain insiders strengthen board monitoring by serving as a readily available CEO replacement and contradict the presumption that all insiders are under CEO control. Furthermore, the results persist when accounting for the endogenous firm selection of talented inside directors.

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External COO/presidents as expert directors: A new look at the service role of boards

Ryan Krause, Matthew Semadeni & Albert Cannella
Strategic Management Journal, December 2013, Pages 1628-1641

Abstract:
Much of the scholarship on boards of directors has examined either the control (i.e., monitoring) role or the resource dependence role that boards fill. Relatively little has examined the service role, wherein directors provide advice and guidance to management. This study builds on recent work exploring director expertise by asking how operational expertise on boards impacts firm performance. We find that having external COO/presidents on a board of directors positively impacts firm performance when the firm's operational efficiency is declining, but negatively impacts performance when the firm's operational efficiency is improving. We also find that other types of external executives serving as directors exhibit the opposite relationship, suggesting that the value of director expertise is context-dependent. We discuss the implications of these findings for director selection.

By KEVIN LEWIS | 09:00:00 AM