Board of Influencers

Kevin Lewis

April 06, 2022

Do Equity Markets Care about Income Inequality? Evidence from Pay Ratio Disclosure
Yihui Pan et al.
Journal of Finance, April 2022, Pages 1371-1411

We examine equity markets' reaction to the first-time disclosure of the CEO-worker pay ratio by U.S. public companies in 2018. We find that firms disclosing higher pay ratios experience significantly lower abnormal announcement returns. Firms whose shareholders are more inequality-averse experience a more negative market response to high pay ratios. Furthermore, during 2018 more inequality-averse investors rebalance their portfolios away from stocks with a high pay ratio relative to other investors. Our results suggest that equity markets are concerned about high within-firm pay dispersion, and investors' inequality aversion is a channel through which high pay ratios negatively affect firm value. 

Too much of a good thing? Corporate social responsibility and the takeover market
Douglas Fairhurst & Daniel Greene
Journal of Corporate Finance, April 2022

We examine the relation between corporate social responsibility (CSR) and firm value using the takeover market as an empirical setting. Firms with high or low CSR scores experience a greater likelihood of takeover and lower wealth gains in takeovers relative to firms with moderate policies. These findings indicate that the takeover market acts as a corrective mechanism for firms that over- or under-invest in CSR. Our results are robust to controlling for governance and alternative motivations for mergers and are evident in sub-samples where CSR is arguably more important. Our findings are not driven by poor management of target firms. Overall, the evidence suggests that CSR generally benefits shareholders, however, very high or low CSR scores appear to be harmful. 

Proprietary Costs and Corporate Lobbying Against Changes in Mandatory Disclosure
Ying Zhou
Management Science, forthcoming

The mandated increase in segment disaggregation under SFAS 131 could have harmed shareholders by revealing proprietary information or benefited them by reducing agency problems. Using a sample of firms that lobbied against SFAS 131 on the grounds of competitive harm, I examine whether concerns about proprietary costs, a much-cited reason for nondisclosure, motivate firms to lobby against reporting mandates to protect firms' competitive position or are used as an excuse to disguise managers' self-interest. Consistent with the proprietary cost hypothesis, I find that these lobbying firms experienced a decrease in operating performance upon adoption of SFAS 131. I find similar results for nonlobbying firms whose industry associations voiced concern of competitive harm, suggesting that associations are motivated by member concerns to lobby in accounting standard setting. The effect is more pronounced for firms that were forced to increase the number of reportable segments to a greater extent. Moreover, the reduced operating performance arises from lower sales growth and smaller profit margins. These findings shed light on lobbying motives and suggest that concerns about the competitive harm of reporting mandates were warranted. 

Short-Selling Pressure and Workplace Safety: Curbing Short-Termism Through Stakeholder Interdependencies
Cuili Qian et al.
Organization Science, forthcoming

We advance a multistakeholder framework that highlights the influence of stakeholders in tempering short-termist responses to capital market pressures. When firms face pressure from short sellers in the capital market, they sometimes shift attention to short-term stock performance and neglect critical investments that pay off in the long run. Relying on a quasi-natural experiment and establishment-level data on workplace injuries, we find that short-selling pressure causes an increase in employee injuries. Critically, however, the degree to which the response is short-termist depends on the salience of multiple stakeholders (analysts, shareholders, employees, and managers). We discuss the implications for understanding firms' relations with their stakeholders and, particularly, how these stakeholders influence corporate responses to capital market pressures in ways that matter for long-term value creation. This study also contributes to strategy research by highlighting the downside of capital market deregulation. 

Powerful CEOs and Corporate Governance
Mark Humphery-Jenner et al.
Journal of Empirical Legal Studies, March 2022, Pages 135-188

Excessive CEO power is often regarded as value-destroying. We use a quasi-exogenous regulatory shock to analyze whether improved governance helps to channel firms with powerful CEOs toward more value-enhancing corporate policies. We use the Sarbanes-Oxley Act and NYSE/NASDAQ listing rules and focus on firms that were required to improve governance. We find that postregulation firms led by powerful CEOs increase innovation inputs (Research and Development expenditures) and produce more innovation outputs (patents) that are scientifically more important (citations) and economically more valuable (market value of patents). Investment quality also improves, manifesting in better takeover performance and improvements in firm performance and corporate value. Our results suggest that improved governance can mitigate value destruction in powerful CEO-managed firms. We take steps to mitigate econometric concerns and ensure our results are robust to various combinations of fixed effects and control variables. 

Transferable Skills? Founders as Venture Capitalists
Paul Gompers & Vladimir Mukharlyamov
NBER Working Paper, April 2022

In this paper we explore whether or not the experience as a founder of a venture capital-backed startup influences the performance of founders who become venture capitalists (VCs). We find that nearly 7% of VCs were previously founders of a venture-backed startup. Having a successful exit and being male and white increase the probability that a founder transitions into a venture capital career. Successful founder-VCs have investment success rates that are 6.5 percentage points higher than professional VCs while unsuccessful founder-VCs have investment success rates that are 4 percentage points lower than professional VCs. While successful founder-VCs do get higher quality deal flow than professional or unsuccessful founder-VCs, observably higher deal quality does not explain the entire difference in performance. Using an instrumental variables approach to separate unobservable deal quality from value-add, we find that the outperformance of successful founder-VCs is consistent with them adding more value post-investment. 

Public Market Information and Venture Capital Investment
Brian Gibbons
Journal of Financial and Quantitative Analysis, forthcoming

I study VCs' use of public market information and how attention to this information relates to private market investment outcomes. I link web traffic to public filings hosted on EDGAR to individual VCs. VCs analyze public information about industry peers before most deals. An increase in industry filing views relates positively to the probability of an exit through acquisition, suggesting that public information helps identify paths to acquisition. The effect is stronger when the VC has less access to private information - especially for low reputation VCs. Policymakers should consider spillover effects on private markets when setting public disclosure requirements. 

Caught in an Expectations Trap: Risks of Giving Securities Analysts What They Expect
Guilhem Bascle & Jiwook Jung
Organization Science, forthcoming

Although recent research shows that there is mounting pressure on firms to achieve earnings expectations of securities analysts, firms are far from being passive conformers; many firms proactively manage such pressure, particularly with earnings management tools. Yet why does the pressure to meet analyst expectations persist despite firms' efforts to reduce it? To address the question, we develop an intertemporal model of the mutually reinforcing relationships between analyst expectations and firms' strategic response, combining the behavioral theory of the firm and the concept of expectations trap. We argue that firms' efforts to meet analyst expectations strengthen their salience as a predominant performance benchmark and, in doing so, ironically put them under greater pressure from analysts in three sequentially related steps - escalating future earnings expectations, imposing more severe penalties for failure to meet heightened expectations, and generating compensatory action for missed expectations. Our analysis, using data on more than 700 of the largest listed U.S. firms between 1986 and 2015, supports our arguments. Our study expands the scope of the behavioral theory of the firm, by demonstrating the increasing importance of performance feedback based on analyst expectations. Our study also contributes to the research on earnings pressure, by illuminating why the pressure persists despite firms' efforts to reduce or evade it, and finally to the literature on strategic management of external expectations, by elaborating its unintended, long-term consequences. 

Enforceability of Noncompetition Agreements and Forced Turnovers of Chief Executive Officers
Yupeng Lin, Florian Peters & Hojun Seo
Journal of Law and Economics, February 2022, Pages 177-209 

We examine whether corporate boards factor the potential cost of competitive harm caused by a departing chief executive officer (CEO) into their forced-turnover decisions. Using staggered changes in the state-level enforceability of a covenant not to compete (CNC) for identification, we find that enhanced enforceability of CNCs increases both the likelihood of forced CEO turnover and the sensitivity of forced CEO turnover to firm performance. We present additional cross-sectional evidence that shows that such effects are more pronounced when firms face more severe product market threats or operate in industries with greater potential threats of predatory hiring. Investors react to turnover announcements more positively when enforceability increases, which indicates that enhanced enforceability of CNCs increases efficiency in decisions to replace CEOs. 

Corporate insecthood
Nina Strohminger & Matthew Jordan
Cognition, forthcoming

Whether the corporation should be considered a person is a matter of active academic and public debate. Here, we examine whether, and in what ways, ordinary citizens conceptualize the corporation as a person. We present evidence that corporations are anthropomorphized, but only to a certain degree. Compared with other entities, the average corporation is considered about as similar to a person as an ant. Corporations differ in the extent to which people are willing to grant them personhood however, and this pattern is predicted by how salient the organization's mental and moral traits are. This process of anthropomorphization has important downstream consequences, increasing support for granting legal rights and responsibilities to corporations. Because our studies show that this relationship also obtains for animals, we conclude that perceptions of corporate personhood draw on a more general set of rules for assessing an entity's personhood. 

The Media Goes Where They're Needed: The Relation between Firms' Investor Base and Media Coverage
Nicholas Guest, Ashish Ochani & Mani Sethuraman
Cornell Working Paper, March 2022 

We provide evidence that a firm's investor base is a key factor in determining its media coverage. Using a large sample of U.S. public companies spanning the period 2000-2019, we find that firm-specific media coverage is negatively associated with leverage. Our results suggest the media caters relatively more to equity investors, who largely rely on public information, than to debt investors, who are often privy to privileged information. We arrive at similar conclusions when we exploit plausibly exogenous changes in investor base and investor access to privileged information. Among debt investors, the media appears to cater to public bond holders more than private banks. Among equity investors, the media appears to cater to quasi-index institutions. Additionally, cross-sectional variation in media coverage based on investment and article types reveals that the media's role is far more nuanced than previously documented. Overall, our findings suggest that financial media coverage is significantly influenced by less sophisticated professional investors' demand for information to help monitor firms. 

Actively Keeping Secrets from Creditors: Evidence from The Uniform Trade Secrets Act
Scott Guernsey, Kose John & Lubomir Litov
Journal of Financial and Quantitative Analysis, forthcoming

We find that an increase in a firm's incentives to use trade secrets to protect its intellectual property results in a more actively managed capital structure. Exploiting U.S. states' adoption of the Uniform Trade Secrets Act as a positive "shock" in the protection afforded to trade secrets, we find that firms covered by the Act reduce debt levels while increasing investments in intangibles. Additional tests suggest that firms fund these financing and investment activities by issuing more equity. Consistent with an increase in overall intangibility magnifying contracting problems with creditors, we find that covered firms experience higher costs of debt.


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.