Controller
The Geography of Financial Misconduct
Christopher Parsons, Johan Sulaeman & Sheridan Titman
Journal of Finance, forthcoming
Abstract:
Financial misconduct (FM) rates differ widely between major U.S. cities, up to a factor of three. Although spatial differences in enforcement and firm characteristics do not account for these patterns, city‐level norms appear to be very important. For example, FM rates are strongly related to other unethical behavior, involving politicians, doctors, and (potentially unfaithful) spouses, in the city.
CEO Political Preference and Corporate Innovation
Syungjin Han
Finance Research Letters, forthcoming
Abstract:
I demonstrate that CEOs’ personal political preferences influence corporate innovation. Firms managed by Republican CEOs tend to adopt more flexible employment policies exhibiting higher employment elasticity with respect to sales. They also tend to have a lower level of corporate innovation, as measured by the number of patents and subsequent citations. The results suggest that firms with Republican CEOs who provide less job security have a negative impact on employees’ innovation incentives.
Union Concessions Following Asset Sales and Takeovers
Erik Lie & Tingting Que
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We document that the likelihood of asset sales increases with union presence and union wages. Furthermore, acquiring firms gain significant concessions from the incumbent union following asset sales. Finally, the anticipation of union concessions helps explain the excess stock returns around asset sale announcements. We find no comparable effects for takeovers. We conclude that asset sales, but not takeovers, are partially motivated by the potential to extract concessions from unions.
Analyst coverage and the quality of corporate investment decisions
Thomas To, Marco Navone & Eliza Wu
Journal of Corporate Finance, August 2018, Pages 164-181
Abstract:
In this paper we examine the effect of financial analysts on the quality of corporate investment decisions. We show that greater analyst coverage leads to higher total factor productivity within firms, a finding that is robust after using both an instrumental variable approach and an experimental design that exploits exogenous reductions in analyst coverage due to broker mergers and closures. We further identify that the positive effect of analysts on firm-level productivity emanates from their critical role in information distribution and external monitoring within more opaque and financially constrained firms and also firms with weaker investor protection.
The effects of internal board networks: Evidence from closed-end funds
Matthew Souther
Journal of Accounting and Economics, forthcoming
Abstract:
Recent literature emphasizes the importance of a director's external network of social connections. I use a sample of closed-end funds to show that internal, within-board connections are also significant determinants of shareholder value. I find that boards with shared education, employment, and family backgrounds exhibit lower market values, higher expense ratios, higher director compensation levels, and an increased likelihood of financial misrepresentation. Director turnover is lower within these boards, and new director appointments are more likely to share connections with incumbent directors. I conclude that internal board networks negatively impact a firm's governance environment and overall monitoring quality.
Corporate charitable foundations, executive entrenchment, and shareholder distributions
Nicolas Duquette & Eric Ohrn
Journal of Economic Behavior & Organization, forthcoming
Abstract:
We show that firms with corporate charitable foundations increased shareholder distributions by less than one half as much as similar firms without foundations following the 2003 capital income tax cut, even after controlling for common explanatory factors such as executive shareholding. The findings are robust to alternative explanations and to common threats to causal identification. Further exploration reveals that our estimates capture a greater reluctance of foundation firms to initiate or rapidly increase shareholder payouts, but not a greater tendency to reduce or eliminate shareholder payouts. Additional analyses suggest managers direct funds that would have been paid out toward executive compensation and capital investment. In light of the fact that firms with foundations are more likely to exhibit a high degree of managerial entrenchment, we interpret these findings as evidence that foundations are both a sign of and vehicle for managerial self-dealing.
Signal Incongruence and Its Consequences: A Study of Media Disapproval and CEO Overcompensation
JP Vergne, Georg Wernicke & Steffen Brenner
Organization Science, forthcoming
Abstract:
We draw on the signaling and infomediary literature to examine how media evaluations of CEO overcompensation (a negative cue associated with selfishness and greed) are affected by the presence of corporate philanthropy (a positive cue associated with altruism and generosity). In line with our theory on signal incongruence, we find that firms engaged in philanthropy receive more media disapproval when they overcompensate their CEO, but they are also more likely to decrease CEO overcompensation as a response. Our study contributes to the signaling literature by theorizing about signal incongruence and to infomediary and corporate governance research by showing that media disapproval can lead to lower executive compensation. We also reconcile two conflicting views on firm prosocial behavior by showing that, in the presence of incongruent cues, philanthropy can simultaneously enhance and damage media evaluations of firms and CEOs. Taken together, these findings shed new light on the media as agents of external corporate governance for firms and open new avenues for research on executive compensation.
Economic resources and corporate social responsibility
Xian Sun & Brian Gunia
Journal of Corporate Finance, August 2018, Pages 332-351
Abstract:
Our research suggests that firms condition their CSR policies on the availability of economic resources. Using the value of a firm's real estate as a measure of exogenous shocks on the firm's economic resources, we show that increases in resources reduce CSR concerns, while decreases in resources increase CSR concerns. The relative impact of resource availability on CSR concerns, however, depends on several organizational variables that influence a firm's preferences for CSR investments. Furthermore, we show that firm reactions to increases and decreases in resources are not symmetric: resource gains reduce CSR concerns, but resource losses increase CSR concerns even more markedly. Overall, these results suggest that firms may treat CSR decisions in much the same way as other investment decisions.
Money held for moving stars: Talent competition and corporate cash holdings
Zhaozhao He
Journal of Corporate Finance, August 2018, Pages 210-234
Abstract:
Exploiting reforms of state covenants-not-to-compete laws to capture exogenous variation in barriers to compete for talent, I show that firms increase cash holdings when talent competition intensifies. The effect is concentrated among firms for which talent is more important and in industries relying more on knowledge-based competitive advantages. Furthermore, greater financial strength enables a firm to gain local talent market share at the expense of rivals, leading to superior product market performance. Supporting the idea that firms build up stronger financial positions to remain competitive in the labor market, these findings highlight corporate liquidity as a strategic variable to retain and attract mobile talent.
Playing Favorites? Industry Expert Directors in Diversified Firms
Jesse Ellis, Edward Fee & Shawn Thomas
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We examine the influence of outside directors’ industry experience on segment investment, segment operating performance, and firm valuation for conglomerates. Given board composition is endogenous, we instrument for the presence of industry expert directors using the supply of experienced executives near conglomerate firms’ headquarters. We find that industry expert representation on the board causes increased segment investment. Consistent with experienced directors playing favorites rather than acting as dispassionate advisors, segment profitability (firm value) is lower for segments (firms) with industry expert outside directors. We do not find analogous negative profitability or valuation effects of director experience for single-segment firms.
Vote Avoidance and Shareholder Voting in Mergers and Acquisitions
Kai Li, Tingting Liu & Juan Julie Wu
Review of Financial Studies, August 2018, Pages 3176-3211
Abstract:
We examine whether, how, and why acquirer shareholder voting matters. We show that acquirers with low institutional ownership, high deal risk, and high agency costs are more likely to bypass shareholder voting. Such acquirers have lower announcement returns and make higher offers than those who do not. To avoid a shareholder vote, acquirers increase equity issuance and cut payouts to raise the portion of cash in mixed-payment deals. Employing a regression discontinuity design, we show a positive effect on acquirer announcement returns concentrated in acquirers with higher institutional ownership. We conclude that shareholder voting mitigates agency problems in corporate acquisitions.
Firm CFO board membership and departures
Shawn Mobbs
Journal of Corporate Finance, August 2018, Pages 316-331
Abstract:
I investigate firm financial management when the CFO has greater authority by being on the board and the corresponding changes when the CFO position leaves the board. After the 2002 regulatory changes to board composition requirements, determinants of CFO board membership shift from being driven by firm financing needs to being driven by managerial transition and the local supply of outside directors. Shareholders react negatively to CFO board departure announcements, especially in the post-Sarbanes-Oxley period and when the firm is expected to have their CFO on the board. When the CFO is on the board, firms have lower cash holdings, exhibit faster adjustment toward their optimal capital structure following shocks and are less financially constrained. These measures of greater financial flexibility diminish when the CFO position leaves the board, particularly for cash management activities. In sum, board membership is an important CFO characteristic affecting firm financial management decisions.