Aggregate Confusion: The Divergence of ESG Rating
Florian Berg, Julian Kölbel & Roberto Rigobon
Review of Finance, forthcoming
This paper investigates the divergence of environmental, social, and governance (ESG) ratings based on data from six prominent ESG rating agencies: KLD, Sustainalytics, Moody’s ESG (Vigeo-Eiris), S&P Global (RobecoSAM), Refinitiv (Asset4), and MSCI. We document the rating divergence and map the different methodologies onto a common taxonomy of categories. Using this taxonomy, we decompose the divergence into contributions of scope, measurement, and weight. Measurement contributes 56% of the divergence, scope 38%, and weight 6%. Further analyzing the reasons for measurement divergence, we detect a rater effect where a rater’s overall view of a firm influences the measurement of specific categories. The results call for greater attention to how the data underlying ESG ratings are generated.
CEO Selection and Executive Appearance
Douglas Cook & Shawn Mobbs
Journal of Financial and Quantitative Analysis, forthcoming
Survey assessments have found limited evidence of benefits of executive attractiveness. We use an objective measure of facial attractiveness that is correlated with survey assessments but less noisy and identify several benefits from executive facial attractiveness previously found in the general population but heretofore empirically elusive among executives. We examine the effect of both measures on executive compensation, promotion to CEO and the corresponding shareholder reaction, and promotion to board chair. The objective measure identifies significantly positive labor market effects for executive attractiveness in all outcomes in contrast to survey assessments of attractiveness that do not correlate with any outcome.
The Long-Term Consequences of Short-Term Incentives
Alex Edmans, Vivian Fang & Allen Huang
Journal of Accounting Research, June 2022, Pages 1007-1046
This paper studies the long-term consequences of actions induced by vesting equity, a measure of short-term incentives. Vesting equity is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger and acquisition (M&A). However, it is also associated with more negative long-term returns over two to three years following repurchases and four years following M&A, as well as future M&A goodwill impairment. These results are inconsistent with CEOs buying underpriced stock or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and thus equity sale proceeds. CEOs sell their own stock shortly after using company money to buy the firm's stock, also inconsistent with repurchases being motivated by undervaluation.
Do Board Connections between Product Market Peers Impede Competition?
Radhakrishnan Gopalan, Renping Li & Alminas Zaldokas
Washington University in St. Louis Working Paper, March 2022
Using a treated-control matched sample, we find that after a new direct board connection is formed to a product market peer, a firm's gross margin significantly increases by 0.8%. Gross margin also rises after a new indirect board connection is formed to a product market peer through a third intermediate firm. We see consistent results when the new connections are caused by changes on the board of an intermediate firm. Such third-party initiated changes are unlikely to be related to the economic prospects of the focal firm. Consistent with the anti-competitive mechanism, the effects are stronger when the newly connected peers are located closer to each other or have more similar businesses and when the firms are in industries with greater potential benefits of collusion.
The Origins of the Market for Corporate Law
American Law and Economics Review, Spring 2022, Pages 369-406
I study the origins of the market for corporate charters and the emergence of Delaware as the leader of this market. Specifically, I assemble new data on 19th- and 20th-century corporations to evaluate two widely held beliefs: (1) the U.S. Supreme Court is responsible for enabling a national market for corporate charters in the 19th century and (2) Delaware became the leader in this market only because New Jersey (the initial leader) repealed its extremely liberal corporate laws in 1913. I argue against both claims: The Supreme Court always opposed a national market for corporate charters, and New Jersey’s decline began a decade before its 1913 repeal. It is more likely that the market for corporate charters emerged as a collateral consequence of interstate commerce and that New Jersey declined because Delaware and other states simply copied its laws.
Shining light on corporate political spending: Evidence from shareholder engagements
Bobo Zhang & Zhou Zhang
International Review of Law and Economics, June 2022
With surges in U.S. corporate political spending following the Supreme Court’s decision on Citizens United v. FEC, this paper studies the transparency of corporate political spending. We argue that shareholder engagements aimed at improving such transparency are more successful than previously documented in the literature. Some “voluntary” disclosures by firms are the result of settled engagements. Firms with political action committees, weaker political transparency, more politically connected directors, and higher sensitivity to political uncertainty are more likely to be targeted by activist shareholders. Institutional investors, especially socially responsible investment funds, are more likely to succeed after initiating engagements. Using hand-collected public announcements of engagement outcomes, we find that the stock market reacts positively (negatively) to successful (unsuccessful) engagements in politically active firms. Moreover, increased transparency facilitates the investors’ assessment of firms’ exposure to external political risks, the monitoring of firms’ political expenditure, and tacit coordination among industry peers. Collectively, our results suggest that investors value corporate political transparency, especially in the case of politically active firms.
Which antitakeover provisions deter takeovers?
Jonathan Karpoff, Robert Schonlau & Eric Wehrly
Journal of Corporate Finance, forthcoming
Antitakeover provisions play a central role in corporate governance research. But there is little agreement over which, if any, provisions actually affect takeover likelihoods. In tests that account for the endogenous use of antitakeover provisions, we find that at most 11 of the 24 G-index provisions are negatively related to takeover likelihood. Various indices used in the literature measure takeover deterrence to the extent they include this subset of provisions. In more stringent tests, only four provisions are consistently and negatively related to takeover likelihood throughout the 1995–2020 period, while one provision (golden parachutes) is positively related to takeover likelihood.
Money isn't everything: Compensation of locally educated executives
Patty Bick & Ryan Flugum
Journal of Corporate Finance, June 2022
We identify the location of an executive's undergraduate university education as a proxy for their geographic preference. Executives whose university education took place near a firm's headquarters are paid 4.40% to 11.01% less than their peers, suggesting the transparency of university education allows firms to use the location of their headquarters as a form of intangible compensation. This geographic preference discount persists across all levels of the C-Suite, corporate governance quality, time periods, and after controlling for opaque measures of where the executive grew up. Our study shows the location of an executive's undergraduate university is a consequential component of his or her geographic preference, and that such preference has meaningful implications for his or her compensation.
Relative versus Absolute Performance Evaluation and CEO Decision-Making
Karen Wruck & YiLin Wu
Journal of Financial and Quantitative Analysis, forthcoming
We provide new evidence on how performance-based compensation plans affect CEO decision-making, especially risk-taking. Our main finding is that relative performance evaluation (RPE) plans provide incentives for CEOs to make decisions that generate more idiosyncratic performance outcomes; absolute performance evaluation (APE) plans do not. After switches from APE to RPE, the correlation between firm stock return and industry index return falls and firm idiosyncratic risk increases. Further, switches to RPE are followed by larger deviations in financial, investment, and operating policies from industry norms (i.e., more idiosyncratic strategies). All results are opposite for switches to APE.