Corporate Decisions
In Too Deep: The Effect of Sunk Costs on Corporate Investment
Marius Guenzel
Journal of Finance, June 2025, Pages 1593-1646
Abstract:
Sunk costs are unrecoverable costs that should not affect decision making. I provide evidence that firms systematically fail to ignore sunk costs and that this leads to significant investment distortions. In fixed-exchange-ratio stock mergers, aggregate market fluctuations after parties enter into a binding merger agreement induce plausibly exogenous variation in the final acquisition cost. These quasi-random cost shocks strongly predict firms' commitment to an acquired business following deal completion, with an interquartile cost increase reducing subsequent divestiture rates by 8% to 9%. Consistent with an intrapersonal sunk cost channel, distortions are concentrated in firm-years in which the acquiring CEO is still in office.
What are the Costs of Weakening Shareholder Primacy? Evidence from a U.S. Quasi-Natural Experiment
Benjamin Bennett, René Stulz & Zexi Wang
NBER Working Paper, May 2025
Abstract:
We study the consequences of weakening shareholder primacy using Nevada Senate Bill 203 as a quasi-natural experiment. A difference-in-differences analysis shows that, instead of improving their governance in response to the Bill to reassure capital providers, affected firms experience a governance deterioration. As a result, the law’s adoption causes a drop in the valuation of firms incorporated in Nevada. These firms decrease the performance sensitivity of CEO pay, make more but worse acquisitions, and reduce the efficiency of their capital expenditures and R&D. Reducing shareholder primacy does not improve how stakeholders are treated, as ESG performance worsens.
The Effect of Uncertainty About Future Accounting Standards on Financial Reporting Quality
Ben Van Landuyt & Brian White
Management Science, forthcoming
Abstract:
Financial statement preparers frequently trade off the benefit of reporting biased estimates with potential penalties for misreporting. In making this trade-off, preparers often face uncertainty about potential changes to accounting standards (“standard-setting uncertainty”) that could affect the future benefits of biased reporting. Our experiment documents two novel behavioral effects of standard-setting uncertainty on preparers’ estimates. First, standard-setting uncertainty causes preparers to make less biased estimates, even though reduced bias conflicts with their financial incentives in our setting. Second, standard-setting uncertainty increases preparers’ sensitivity to measurement imprecision, which is important for high-quality financial reporting. Although standard-setting uncertainty is often criticized, our theory and results suggest that increased financial reporting quality can be an unanticipated benefit of the uncertainty that naturally arises from a measured and deliberative standard-setting process.
Executive incentives under common ownership
Thomas Schneider
Journal of Corporate Finance, July 2025
Abstract:
Relative performance evaluation (RPE) increases competition and limits pay-for-luck by rewarding executives for outperforming rivals. This study tests whether institutional investors reduce RPE use when they own stakes in competing firms. Contrary to this, the Big Three asset managers -- BlackRock, Vanguard, and State Street -- demonstrate strong preferences for RPE, reflected in portfolio firms' RPE adoptions, say-on-pay vote support, and peer group selections. No evidence suggests that common ownership by these or other institutional investors reduces RPE, as confidence bounds and point estimates are near zero. Overall, the rising prevalence of RPE challenges concerns about anticompetitive effects from common ownership.
Dual-Class Shares and Firm Valuation: Market-Wide Evidence from Regulatory Events
Ugur Lel et al.
Financial Review, forthcoming
Abstract:
The motivations and impacts of dual-class voting structures are controversial and have been extensively studied. In this paper, we apply a new methodology to study the impact of dual-class voting that avoids the endogeneity issues of other studies. Specifically, we rely on market-wide stock market reactions to multiple regulatory events to show that risk-adjusted stock returns rise (fall) in response to events that decrease (increase) the probability of adopting dual-class shares. Across firms, this reaction varies systematically and sensibly with proxies for managerial flexibility or entrenchment and overall suggests that investors favor dual-class shares in research-intensive and well-governed firms. The improved method of analysis strengthens the results of prior studies and reconciles the theories of managerial flexibility versus entrenchment. We conclude by arguing that a one-size-fits-all policy that bans dual-class shares would reduce research output, firm value, and profitability.
Revisiting the CEO Effect Through a Machine Learning Lens
Hajime Shimao et al.
Management Science, June 2025, Pages 5396-5408
Abstract:
An important debated topic in strategic management concerns the so-called “chief executive officer (CEO) effect,” which quantifies the impact that CEOs have on the performance of the firms that they lead. Prior literature has empirically investigated the CEO effect and found support for both theses: a significant effect and no effect at all. We note, however, that virtually all prior studies have relied on an empirical specification that leverages in-sample data, which could be unreliable in certain circumstances. In this paper, we utilize machine learning models and predictive analytics based on out-of-sample data to revisit the CEO effect. In particular, we operationalize the CEO effect as the gain in the out-of-sample predictive accuracy by adding the CEO information to the model input in addition to the firm information. By analyzing 1,245 firms and 1,779 CEOs over 20 years, we demonstrate that the results of the approach from the literature have limited external validity. More specifically, we convey that the analyses are purely based on in-sample data and that the predictive effects of CEOs are not substantive when out-of-sample test data sets are used. Although our main analysis relies on optimized distributed gradient boosting, we also conduct extensive robustness tests spanning close to 100 models with alternative algorithms and specifications, all of which yield consistent results.
Freedom of Expression and Stock Price Crash Risk: Evidence from a Natural Experiment
Zhihong Chen, Qingyuan Li & Yongbo Li
Journal of Law and Economics, May 2025, Pages 387-430
Abstract:
Strategic lawsuits against public participation (SLAPPs) are abused to suppress legitimate free expression and have significant chilling effects. Anti-SLAPP statutes weaken the chilling effects by enabling the courts to quickly dismiss frivolous suits and recover legal costs for defendants. The improved protection of free expression reduces the public’s concerns about revealing bad news about firms, which decreases managers’ abilities and incentives to hide bad news. Using a difference-in-differences approach, we find that the anti-SLAPP statute of a state reduces stock price crash risk for firms headquartered in that state. The effect is stronger when the local public has more information, discovered bad news can be widely disseminated, and managers face a higher cost if withheld bad news is revealed by a third party. Anti-SLAPP statutes increase negativity in the media and decrease earnings management and overinvestment. Our study has policy implications for legislators considering adopting or improving anti-SLAPP laws.
Do boards learn to hire? The effect of board experience with CEO replacement on CEO performance
Steven Boivie et al.
Strategic Management Journal, forthcoming
Abstract:
We examined whether or not directors' prior experiences with Chief Executive Officer (CEO) selection helps them to choose a higher-performing CEO. Using S&P 1500 firms from 1999 to 2020, we found that boards' prior experiences with hiring CEOs do not improve their ability to choose a higher-performing CEO; rather, their prior CEO selection experience has a small but consistent negative effect. At the same time, we found little evidence that the domain specificity of prior CEO succession experience impacts the performance of subsequently hired CEOs. Overall, we suggest that our pattern of results is suggestive of superstitious learning by directors.
Do Accountants Increase Economic Activity?
Elizabeth Blankespoor, Suresh Nallareddy & Kevin Standridge
University of Washington Working Paper, May 2025
Abstract:
We investigate whether and how increasing the number of accountants affects economic activity using data from over 1.1 million establishments. Employing Bartik's (1991) method to tackle endogeneity, we find that increasing a county's accounting employment leads to higher gross domestic product, employment, business activity, and wages. Furthermore, accountants incrementally contribute to economic growth relative to business or all other occupations. Improved aggregate economic activity is related to increased job creation and establishment entry, increased small business loans, and productivity gains. We further corroborate our findings by using the 150-credit-hour CPA requirement and the H-1B visa lottery as shocks to accountant employment. Our findings highlight the economic benefits of increasing the number of accountants in the economy.
Do Share Repurchases Increase the Value of Non-repurchasing Firms?
Byungwook Kim
University of California Working Paper, May 2025
Abstract:
Share repurchases have increasingly surpassed dividends as the primary means of distributing cash to investors. I show that most cash distributed through share repurchases ultimately flows back into the stock market, particularly into non-repurchasing firms. I provide evidence that these flows increase the value of non-repurchasing firms without subsequent reversals. The impact of share repurchase flows is most pronounced among non-repurchasing firms that share similar characteristics with repurchasing firms (e.g., size, market-to-book ratios). I find that the recent disproportionate increase in share repurchases by growth firms, relative to value firms, has contributed to the decline of the value premium. Inferences based on the fact that aggregate share repurchases are driven by a few large firms support a causal interpretation of the non-fundamental flow-based mechanism.