Behind the Corporate Veil

Kevin Lewis

April 02, 2024

Holding Foreign Insiders Accountable
Robert Jackson, Bradford Lynch-Levy & Daniel Taylor
Management Science, forthcoming

Whereas corporate insiders at U.S.-listed, U.S.-domiciled companies must disclose their stock sales electronically within two business days on Form 4, the U.S. Securities and Exchange Commission (SEC) exempts insiders at U.S.-listed, foreign-domiciled companies from this requirement. Instead, these “foreign insiders” report their sales on a paper form mail-filed with the SEC. Using a unique data set compiled from digitized versions of thousands of paper forms, we examine the stock sales of foreign insiders and compare their trading to that of their U.S. counterparts. Consistent with a lack of public scrutiny facilitating opportunism, we show that foreign insiders’ stock sales are highly opportunistic and opportunistic trading is concentrated in companies that are domiciled in nonextradition countries beyond the reach of U.S. legal authorities: specifically, Russia and China. The average stock sale by foreign insiders affiliated with companies domiciled in these countries is more than four times larger than that of U.S. insiders and occurs prior to stock price declines of at least −18%. In our sample, we estimate that insiders at these companies have traded to avoid losses of more than $9 billion. Collectively, our results suggest that corporate insiders associated with Chinese and Russian companies listed on U.S. exchanges trade in a highly opportunistic and abusive manner. The SEC’s decision to exempt these insiders from Form 4 reporting requirements prevents much needed public scrutiny of their trading and, in turn, prevents market forces from disciplining their trading.

Have CEOs Changed?
Yann Decressin, Steven Kaplan & Morten Sorensen
University of Chicago Working Paper, September 2023

Using more than 4,900 assessments, we study changes in the characteristics and objectives of CEOs and top executives since 2001. The same four factors explain roughly half of the variation of assessed CEO characteristics in this larger sample of executive assessments as in Kaplan and Sorensen (2021). After the global financial crisis (GFC), the average interviewed CEO candidate has lower overall ability, is more execution oriented / less interpersonal, less charismatic and less creative / strategic than pre-GFC. Except for overall ability, these differences persist in hired CEOs. Interpersonal or “softer” skills, if anything, decline over time for both CEO candidates and hired CEOs. Pre- and post-GFC, we find a positive correlation between the ability of assessed CEOs and other C-level executives assessed at the same company, suggesting that higher ability executives complement each other. Finally, we look at the relation of the objectives for which the CEOs are interviewed to CEO characteristics.

Gender difference in CFO communication: Evidence from earnings calls
Julia Klevak, Joshua Livnat & Kate Suslava
Journal of Accounting and Public Policy, March-April 2024

We examine gender differences in the language of CFOs who participate in quarterly earnings calls. Female executives are more concise and less optimistic, are clearer, use fewer idioms or clichés, and provide more numbers in their speech compared to their male counterparts. These differences are associated with more positive immediate market reactions and correlate with CFOs’ overconfidence, conservatism, and ethical standards.

The proxy advisory industry: Influencing and being influenced
Chong Shu
Journal of Financial Economics, April 2024

This paper develops two new methods to infer a mutual fund's proxy advisors from SEC filings. It then applies these methods to characterize features of the proxy advice industry from 2007 to 2021: (i) As of 2021, ISS and Glass Lewis collectively control approximately 90 percent of the market. During this period, the market share of ISS remains stable, while that of Glass Lewis has increased. (ii) When a proxy advisor issues a recommendation opposing management, its customers are approximately 20 percentage points more likely to also oppose management compared to other investors. (iii) Funds that subscribe to both proxy advisors tend to vote more similarly to the recommendations of the advisor whose voting platform they use. (iv) Proxy advisors often change their advisory stance when investors disagree with their previous advice. I offer suggestive evidence that this adaptation reflects both learning from informed investors and a desire by proxy advisors to align with the preferences of their customers.

Are Audit Committees Overloaded? Evidence from the Effect of Financial Risk Management Oversight on Financial Reporting Quality
Musaib Ashraf, Preeti Choudhary & Jacob Jaggi
Management Science, forthcoming

Audit committee (AC) responsibilities have increased over time, prompting concerns that overloading the AC with too many duties may impair the AC’s ability to oversee financial reporting. Using new AC charter-based proxies to measure AC responsibilities, we find that an emphasis on the AC overseeing financial risk management (which is a noncore AC duty) is associated with worse financial reporting quality, as proxied by restatements -- consistent with the argument of AC overload by distraction. This overload effect is attenuated when an AC has more directors to share duties or when the AC retains an expert auditor who can serve as a substitute for AC oversight. This overload effect is accentuated when AC members are busy with multiple board appointments or when the external auditor is busy with other audits. We also find that AC financial risk oversight is associated with more AC meetings and greater turnover of AC directors, consistent with the notion of overload. In sharp contrast, we find that greater AC oversight over internal controls (which is a core AC duty) is associated with improved financial reporting quality. Overall, we document that the nature of AC duties impacts the AC’s ability to promote financial reporting quality and that noncore duties may overload ACs.

Accounting Rules and Accountants
Anthony Le
Columbia University Working Paper, March 2024

I explore the role that accounting rules, in particular the restrictiveness of GAAP, have played in the declining supply of accountants. I find that when exposure to restrictiveness is high, there are fewer students majoring in accounting, fewer CPA exam candidates, and fewer accountants and auditors overall. The overall demand for accountants does not decrease when exposure to restrictiveness is higher -- however, the nature of the demand for accountants changes. There is less focus on tasks such as applying judgment, thinking creatively, and thinking critically, and more focus on determining compliance. Despite the decrease in the number of accountants, earnings for accountants do not increase, and the wage distribution becomes more compressed. I supplement these analyses with a survey-based field experiment. Consistent with the archival results, the salience of restrictiveness deters students from entering the profession due to their inability to use creative and critical thinking. Overall, the findings suggest that restrictive regulation can shift the task content of occupations and reduce the pool of individuals interested in the profession.

Access to capital and investment composition: Evidence from fracking in North Dakota
Zack Liu, Avishai Schiff & Nathan Swem
Journal of Banking & Finance, April 2024

We investigate how access to capital relates to the firms' investment decisions and project characteristics. We use project-level hydraulic fracturing (fracking) data from the energy industry to show that privately held firms more intensely invest in newer, non-proven areas while publicly-traded firms tilt investment toward well-established, proven areas. Furthermore, we find that exogenous improvements in private firms' access to finance decrease the investment wedge between private and public firms. Our results suggest that private firms minimize their financial disadvantages by targeting investment opportunities that have greater uncertainty.

Takeover Protections and Asset Prices
Assaf Eisdorfer, Erwan Morellec & Alexei Zhdanov
Management Science, forthcoming

We study the effects of takeover feasibility on asset prices and returns in a unified framework. We show theoretically that takeover protections increase equity risk, stock returns, and bond yields by removing a valuable put option to sell the firm, notably for firms approaching distress. We investigate these claims empirically and find that distressed firms experience a significant decrease in value and increase in returns and market betas after the passage of antitakeover laws, in line with our predictions. At issue bond yields are also higher when an antitakeover law is in effect. Consistent with the model, the effects of antitakeover laws on stock returns, respectively, bond yields, are greater when shareholders, respectively, bondholders, have greater bargaining power.

Does CFO Board Membership Benefit Shareholders? The Case of Corporate Acquisitions
Zhong Chen, Zicheng Lei & Chunling Xia
Journal of Financial and Quantitative Analysis, forthcoming

We investigate whether CFOs serving on U.S. corporate boards benefit shareholders in M&A transactions. We find that acquisitions made by firms with CFOs on boards have significantly better acquirer announcement returns. This is due to the CFO directors’ ability to select targets with better strategic and financial fit. CFO board membership can create shareholder value if there are effective governance regimes restraining managerial entrenchment and CFOs’ interests are closely aligned with those of shareholders through equity ownership. Furthermore, sitting on boards enables CFOs to secure more and cheaper financing for their acquisitions.


from the


A weekly newsletter with free essays from past issues of National Affairs and The Public Interest that shed light on the week's pressing issues.


to your National Affairs subscriber account.

Already a subscriber? Activate your account.


Unlimited access to intelligent essays on the nation’s affairs.

Subscribe to National Affairs.