In good company
Political Ideologies of CEOs: The Influence of Executives' Values on Corporate Social Responsibility
M.K. Chin, Donald Hambrick & Linda Treviño
Administrative Science Quarterly, June 2013, Pages 197-232
Abstract:
This article examines the influence on organizational outcomes of CEOs' political ideology, specifically political conservatism vs. liberalism. We propose that CEOs' political ideologies will influence their firms' corporate social responsibility (CSR) practices, hypothesizing that (1) liberal CEOs will emphasize CSR more than will conservative CEOs; (2) the association between a CEO's political ideology and CSR will be amplified by a CEO's relative power; and (3) liberal CEOs will emphasize CSR even when recent financial performance is low, whereas conservative CEOs will pursue CSR initiatives only as performance allows. We test our ideas with a sample of 249 CEOs, measuring their ideologies by coding their political donations over the ten years prior to their becoming CEOs. Results indicate that the political ideologies of CEOs are manifested in their firms' CSR profiles. Compared with conservative CEOs, liberal CEOs exhibit greater advances in CSR; the influence of CEOs' political liberalism on CSR is amplified when they have more power; and liberal CEOs' CSR initiatives are less contingent on recent performance than are those of conservative CEOs. In a corroborative exploration, we find that CEOs' political ideologies are significantly related to their corporate political action committee (PAC) allocations, indicating that this largely unexplored executive attribute might be more widely consequential.
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David Zhu & James Westphal
Academy of Management Journal, forthcoming
Abstract:
In recent years, new director appointments have increasingly posed a dilemma for corporate leaders: while CEOs prefer individuals who have similar backgrounds to them, they face increased pressure to appoint new directors who have a different demographic profile. We suggest that CEOs may resolve this dilemma by appointing new directors who have prior experiences working with other demographically similar CEOs. We then explain why this tendency is stronger when new directors are demographically more different from CEOs. Moreover, we posit that new directors' prior experiences with other similar CEOs will reduce the negative effect of their demographic differences from the CEO on CEO compensation. Longitudinal analysis of Fortune 500 companies' new director appointments and subsequent CEO compensation provided support for our theoretical expectations. This study identifies an important new role that interlock ties to other CEOs can play in corporate governance and leadership. In particular, we suggest that such ties are a means by which CEOs evaluate whether a new director will support their leadership and decision making. In explaining the role of directors' ties to other CEOs in influencing director appointments and CEO compensation, this study also highlights the important influence of triads on CEO-director dyadic relations.
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Narcissism is a Bad Sign: CEO Signature Size, Investment, and Performance
Charles Ham, Nicholas Seybert & Sean Wang
University of Maryland Working Paper, March 2013
Abstract:
Using the size of the CEO signature on annual SEC filings to measure CEO narcissism, we find that narcissism is positively associated with several measures of firm overinvestment, yet lower patent count and patent citation frequency. Abnormally high investment by narcissists predicts lower future revenues and lower sales growth. Narcissistic CEOs also deliver worse current performance as measured by return on assets, particularly for firms in early life-cycle stages and with uncertain operating environments, where a CEO's decisions are most likely to impact the firm's future value. Despite these negative performance indicators, more narcissistic CEOs enjoy higher compensation, both unconditionally and relative to the next highest paid executive at their firm.
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CEO Narcissism, Audience Engagement, and Organizational Adoption of Technological Discontinuities
Wolf-Christian Gerstner et al.
Administrative Science Quarterly, June 2013, Pages 257-291
Abstract:
We examine the responses of major pharmaceutical firms to the advent of biotechnology over the period 1980 to 2008 to explain why established firms vary in their adoption of technological discontinuities. Combining insights from upper echelons theory, personality theory, and research on organizational responses to new technologies, we posit that narcissistic chief executive officers (CEOs) of established firms will be relatively aggressive in their adoption of technological discontinuities. We propose, however, that the effect of a CEO's narcissism on organizational outcomes will be moderated by audience engagement - the degree to which observers view a phenomenon as noteworthy and provocative - which varies over time. When audience engagement is high, narcissistic CEOs will anticipate widespread admiration for their bold actions and thus will invest especially aggressively in a discontinuous technology. Drawing from work on managerial cognition, we further hypothesize that CEOs' narcissism will influence their top managers' attention to a discontinuous technology, an association that will also be moderated by audience engagement. Finally, we suggest that managerial attention to the discontinuous technology will subsequently be reflected in company investments in the new technological domain. Results provide considerable support for our hypotheses and highlight the role of narcissism in the context of radical organizational change, the influence of audience engagement on executive behavior, and the effect of executive personality on managerial attention.
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Does the director labor market offer ex post settling-up for CEOs? The case of acquisitions
Jarrad Harford & Robert Schonlau
Journal of Financial Economics, forthcoming
Abstract:
We examine the rewards for experience and ability in the director labor market. We show that large acquisitions are associated with significantly higher numbers of subsequent board seats for the acquiring CEO, target CEO, and the directors. We also find that, in the case of acquisitions, experience is more important than ability. Both value-destroying and value-increasing acquisitions have significant and positive effects on a CEO's future prospects in the director labor market. In addition to increasing our understanding of the director labor market, these results suggest that the ex post settling-up incentives thought to exist in the director labor market are weak for acquisitions.
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CEO Pay and Firm Size: An Update after the Crisis
Xavier Gabaix, Augustin Landier & Julien Sauvagnat
NBER Working Paper, May 2013
Abstract:
In the "size of stakes" view quantitatively formalized in Gabaix and Landier (2008), CEO compensation is determined in a competitive talent market, and reflects the size of firms affected by talent. This paper offers an empirical update on this view. The years 2004-2011, which include the recent crisis, were not part of the initial study and offer a laboratory to examine the theory as they include new positive and negative shocks to the size of large firms. Executive compensation at the top (ex ante) did closely track the evolution of average firm value during those years. During the crisis (2007 - 2009), average total firm value decreased by 17%, and CEO pay decreased by 28%. During 2009-2011, we observe a rebound of firm value by 19% and of CEO pay increased by 22%. These fairly proportional changes provide a validity check in favor of the "size of stakes" view.
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When Do Outsider CEOs Generate Strategic Change? The Enabling Role of Corporate Stability
Ayse Karaevli & Edward Zajac
Journal of Management Studies, forthcoming
Abstract:
When academic researchers, business commentators, and boards of directors have debated the merits of hiring new CEOs from outside the firm, the implicit or explicit assumption typically made is that outsider CEOs will provide an advantage in achieving strategic change. In this study, we challenge this assumption by employing a duality perspective on stability/change, and we provide an original conceptual framework to posit that it is the presence of corporate stability (ordinary succession, a long-tenured predecessor CEO, and good firm performance) that allows outsider CEOs to generate a greater degree of post-succession strategic change. We use extensive longitudinal data from U.S. airline and chemical industries between 1972 and 2010 to test our hypotheses, and we discuss how our supportive findings challenge long-standing assumptions regarding the outsider succession-strategic change relationship, and we advocate embracing the non-intuitive notion that stable (unstable) conditions can be enablers (barriers) of strategic change for outsider CEOs.
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Baixiao Liu & John McConnell
Journal of Financial Economics, forthcoming
Abstract:
Using 636 large acquisition attempts that are accompanied by a negative stock price reaction at their announcement ("value-reducing acquisition attempts") from 1990-2010, we find that, in deciding whether to abandon a value-reducing acquisition attempt, managers' sensitivity to the firm's stock price reaction at the announcement is influenced by the level and the tone of media attention to the proposed transaction. We interpret the results to imply that managers have reputational capital at risk in making corporate capital allocation decisions and that the level and tone of media attention heighten the impact of a value-reducing acquisition on the managers' reputational capital. To the extent that value-reducing acquisition attempts are more likely to be abandoned, the media can play a role in aligning managers' and shareholders' interests.
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Insider Trading Restrictions and Top Executive Compensation
David Denis & Jin Xu
Journal of Accounting and Economics, July 2013, Pages 91-112
Abstract:
The use of equity incentives is significantly greater in countries with stronger insider trading restrictions, and these higher incentives are associated with higher total pay. These findings are robust to alternative definitions of insider trading restrictions and enforcement, and to panel regressions with country fixed effects. We also find significant increases in top executive pay and the use of equity-based incentives in the period immediately following the initial enforcement of insider trading laws. We conclude that insider trading laws are one channel through which cross-country differences in pay practices can be explained.
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How insiders traded before rules
Fabio Braggion & Lyndon Moore
Business History, Spring 2013, Pages 562-581
Abstract:
UK company insiders, such as directors, were legally allowed to trade in the shares of their own companies up until the Companies Act of 1980. This article investigates the trading behaviour of directors over the period 1890 to 1909 in the UK. It finds relatively few instances of directors who exploited their informational advantage. However when they did sell their own shares, it tended to be before a period of poor profitability and poor stock market performance.
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Jason Zhang, Hong Zhu & Hung-bin Ding
Journal of Business Ethics, May 2013, Pages 381-392
Abstract:
Although the composition of the board of directors has important implications for different aspects of firm performance, prior studies tend to focus on financial performance. The effects of board composition on corporate social responsibility (CSR) performance remain an under-researched area, particularly in the period following the enactment of the Sarbanes-Oxley Act of 2002 (SOX). This article specifically examines two important aspects of board composition (i.e., the presence of outside directors and the presence of women directors) and their relationship with CSR performance in the Post-SOX era. With data covering over 500 of the largest companies listed on the U.S. stock exchanges and spanning 64 different industries, we find empirical evidence showing that greater presence of outside and women directors is linked to better CSR performance within a firm's industry. Treating CSR performance as the reflection of a firm's moral legitimacy, our study suggests that deliberate structuring of corporate boards may be an effective approach to enhance a firm's moral legitimacy.
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Cynthia Devers et al.
Academy of Management Journal, forthcoming
Abstract:
We explore whether acquiring CEOs and directors act consistently with the idea that their newly announced acquisitions will increase long-term firm value. Specifically, we examine post-announcement adjustments to CEOs' equity-based holdings and find acquiring CEOs tend to exercise options and sell firm stock following acquisition announcements. Moreover, positive short-term market performance exacerbates this effect. Further, we find directors tend to grant their acquiring CEOs stock options, post-acquisition announcement, presumably to more tightly align CEO-shareholder interests. These findings suggest CEOs and directors manage acquiring CEOs' equity-based holdings such that they do not appear to anticipate long-term value creation from their acquisitions.
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Corporate Governance and Employee Power in the Boardroom: An Applied Game Theoretic Analysis
Benjamin Balsmeier, Andreas Bermig & Alexander Dilger
Journal of Economic Behavior & Organization, July 2013, Pages 51-74
Abstract:
The debate on employee representation on corporate boards has received considerable attention from scholars and politicians around the world. We provide new insights to this ongoing discussion by applying power indices from game theory to examine the actual voting power of employees on boards and its effect on firm performance. Based on unique panel data on the largest listed companies in Germany, we find an inverse U-shaped relationship between labor power and Tobin's Q. Moderate employee participation in corporate board decision-making can enhance firm value.
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Determinants of Corporate Cash Policy: Insights from Private Firms
Huasheng Gao, Jarrad Harford & Kai Li
Journal of Financial Economics, forthcoming
Abstract:
We provide one of the first large sample comparisons of cash policies in public and private U.S. firms. We first show that despite higher financing frictions, private firms hold, on average, about half as much cash as public firms do. By examining the drivers of cash policies for each group, we are able to attribute the difference to the much higher agency costs in public firms. By combining evidence from across public and private firms as well as within public firms across different qualities of governance, we are able to reconcile existing mixed evidence on the effects of agency problems on cash policies. Specifically, agency problems affect not only the target level of cash, but also how managers react to cash in excess of the target.
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Entrenchment or incentive? CEO employment contracts and acquisition decisions
Jing Zhao
Journal of Corporate Finance, September 2013, Pages 124-152
Abstract:
A long-standing controversy is whether CEO employment contracts insulate inferior managers from discipline leading to shareholder wealth destruction, or whether contracts alleviate managerial risk aversion and encourage value-enhancing decisions. Using a unique dataset on S&P 500 CEO employment contracts during 1993-2005, I find that acquirers with a CEO contract obtain better announcement returns, pay lower premiums for their targets, garner superior long-run post-acquisition operating performance, and undertake riskier deals than acquirers without a contract. Further investigation of individual contract provisions reveals substantial heterogeneity. Specifically, the fixed term rather than at will contract, longer contract duration, long-term equity incentives, accelerated stock and option vesting provisions in severance arrangement, and more refined definitions of just cause (good reason) for CEO termination (resignation) alleviate managerial risk aversion, reduce contracting ambiguity, and motivate value-creating decisions.
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Director Ownership, Governance, and Performance
Sanjai Bhagat & Brian Bolton
Journal of Financial and Quantitative Analysis, February 2013, Pages 105-135
Abstract:
We study the impact of the Sarbanes-Oxley Act on the relationship between corporate governance and company performance. We consider 5 measures of corporate governance during the period 1998-2007. We find a significant negative relationship between board independence and operating performance during the pre-2002 period, but a positive and significant relationship during the post-2002 period. Our most important contribution is a proposal of a governance measure, namely, dollar ownership of the board members, that is simple, intuitive, less prone to measurement error, and not subject to the problem of weighting a multitude of governance provisions in constructing a governance index.
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Liability protection, director compensation, and incentives
Iness Aguir et al.
Journal of Financial Intermediation, forthcoming
Abstract:
We examine the effect of liability protection on the compensation of directors and on takeover outcomes. Consistent with the hypothesis that directors require additional compensation if they bear liability, we find that director compensation is higher for firms that provide less liability protection. Examining takeovers, we find evidence that takeovers of firms with protected directors are less likely to succeed. Moreover, firms with protected directors are more likely to accept a lower bid premium, and this finding is consistent with protected directors having reduced incentives to negotiate for the highest possible price during the acquisition. Overall, the results are consistent with the notion that director liability provisions have a significant impact both on director compensation and director duty.
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Optimal CEO Compensation with Search: Theory and Empirical Evidence
Melanie Cao & Rong Wang
Journal of Finance, forthcoming
Abstract:
We integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs' and firms' outside options and captures contracting externalities. We show that the optimal pay-to-performance ratio is less than one even when the CEO is risk neutral. Moreover, the equilibrium pay-to-performance sensitivity depends positively on a firm's idiosyncratic risk and negatively on the systematic risk. Our empirical tests using executive compensation data confirm these results.
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The Prevention of Excess Managerial Risk Taking
Edward Van Wesep & Sean Wang
Journal of Corporate Finance, forthcoming
Abstract:
Executives with poor prior performance may be inclined to take excessive risk in the hope of meeting performance targets, in which case a compensation contract featuring severance pay can be optimal. While prior work has shown that severance can induce managers to take positive NPV risks, we show that it can also keep them from taking negative NPV risks. We show that severance should be contingent on results: complete failure should nullify any payments. We also show that mandating a firm size that is larger than first-best, while costly, can help screen for good managers.
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Some consequences of the early twentieth-century British divorce of ownership from control
James Foreman-Peck & Leslie Hannah
Business History, Spring 2013, Pages 540-561
Abstract:
Because ownership was already more divorced from control in the largest stock market of 1911 (London) than in the largest stock market of 1995 (New York), the consequences for the economy, for good or ill, could have been considerable. Using a large sample of quoted companies with capital of £1 million or more, this article shows that this separation did not generally operate against shareholders' interests, despite the very substantial potential for agency problems. More directors were apparently preferable to fewer over a considerable range, as far as their influence on company share price and return on equity was concerned: company directors were not simply ornamental. A greater number of shareholders was more in shareholders' interest than a smaller, despite the enhanced difficulties of coordinating shareholder ‘voice'. A larger share of votes controlled by the board combined with greater board share ownership was also on average consistent with a greater return on equity. Corporate governance thus appears to have been well adapted to the circumstances of the Edwardian company capital market. Hence the reduction in the cost of capital for such a large proportion of British business conferred a substantial advantage on the economy.
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How do powerful CEOs view corporate social responsibility (CSR)? An empirical note
P. Jiraporn & P. Chintrakarn
Economics Letters, June 2013, Pages 344-347
Abstract:
We explore how powerful CEOs view investments in corporate social responsibility (CSR). The agency view suggests that CEOs invest in CSR to enhance their own private benefits. On the contrary, the conflict resolution view argues that CSR investments are made to resolve the conflicts among various stakeholders. Using Bebchuk et al. (2011) CEO Pay Slice (CPS) to measure CEO power, we show that the association between CEO power and CSR is non-monotonic. When the CEO is relatively less powerful, an increase in CEO power leads to more CSR engagement. However, as the CEO becomes substantially more powerful, he is more entrenched and no longer invests more in CSR. In fact, when CEO power goes beyond a certain threshold, more powerful CEOs significantly reduce CSR investments.
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Seemantini Pathak, Robert Hoskisson & Richard Johnson
Strategic Management Journal, forthcoming
Abstract:
We examine the relationship between strategic change and CEO compensation by studying how a firm's refocusing program influences CEO compensation after completing the change. We contribute to the "settling up" literature by arguing that strategic change is often uncertain for both the CEO and the board of directors responsible for executive compensation. As such the firm is likely to settle up with the CEO by paying for compensation risk and effort undertaken during refocusing after the extent and impact of strategic change are better known. We find that refocusing intensity is positively related to post-refocusing CEO total compensation, suggesting that "settling up" through post-hoc compensation is an important factor in strategic change. We also find that prior firm performance, governance structure and industry dynamism are important moderators of this relationship.
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Nonmonetary Benefits, Quality of Life, and Executive Compensation
Xin Deng & Huasheng Gao
Journal of Financial and Quantitative Analysis, February 2013, Pages 197-218
Abstract:
We examine the effects of nonmonetary benefits on overall executive compensation from the perspective of the living environment at the firm headquarters. Companies in polluted, high crime rate, or otherwise unpleasant locations pay higher compensation to their chief executive officers (CEOs) than companies located in more livable locations. This premium in pay for quality of life is stronger when firms face tougher competition in the managerial labor market, when the CEO is hired from outside, and when the CEO has short-term career concerns. Overall, the geographic desirability of the corporate headquarters is an effective substitute for CEO monetary pay.