Corporate Shell

Kevin Lewis

August 31, 2020

Corporate Sociopolitical Activism and Firm Value
Yashoda Bhagwat et al.
Journal of Marketing, September 2020, Pages 1-21


Stakeholders have long pressured firms to provide societal benefits in addition to generating shareholder wealth. Such benefits have traditionally come in the form of corporate social responsibility. However, many stakeholders now expect firms to demonstrate their values by expressing public support for or opposition to one side of a partisan sociopolitical issue, a phenomenon the authors call “corporate sociopolitical activism” (CSA). Such activities differ from commonly favored corporate social responsibility and have the potential to both strengthen and sever stakeholder relationships, thus making their impact on firm value uncertain. Using signaling and screening theories, the authors analyze 293 CSA events initiated by 149 firms across 39 industries, and find that, on average, CSA elicits an adverse reaction from investors. Investors evaluate CSA as a signal of a firm’s allocation of resources away from profit-oriented objectives and toward a risky activity with uncertain outcomes. The authors further identify two sets of moderators: (1) CSA’s deviation from key stakeholders’ values and brand image and (2) characteristics of CSA’s resource implementation, which affect investor and customer responses. The findings provide new and important implications for marketing theory and practice.

CEO political ideologies and auditor-client contracting
Avishek Bhandari, Joanna Golden & Maya Thevenot
Journal of Accounting and Public Policy, forthcoming


We investigate whether CEOs’ political ideology, as captured by their political contributions, is related to audit risk and, consequently, to audit pricing. We find that Republican CEOs are associated with lower inherent risk and control risk, which represent the two components of audit risk related to the firm, while their Democratic counterparts are seen to have higher risks. Consequently, Republican (Democratic) CEOs are associated with lower (higher) audit fees. The results are robust to controlling for religiosity, executive incentives and ability, obtaining alternative measures of inherent and control risk, and to using propensity score matching and entropy balancing. We further show that changes in political ideology are associated with changes in audit risk and fees. In sum, the evidence implies that auditors view the political ideology of CEOs as an important determinant of engagement risk, which may have important implications for disclosure policy.

Conservative TV and Corporate Social Responsibility
Mahsa Kaviani, Lily Li & Hosein Maleki
Temple University Working Paper, July 2020


We study the impact of exposure to conservative media on firms' CSR activities using the quasi-natural expansion of Sinclair Broadcast Group: the largest conservative broadcasting network in the U.S. local TV markets. In a difference-in-differences setting, we find that firms significantly reduce CSR activities after exposure to Sinclair TV in all three dimension: environmental, social, and governance. Consistent with ideology as a driver of our results, the effect is stronger when there is more propensity for the audience to accept Sinclair messaging: for example, for firms belonging to gun, tobacco and gambling industries, when Sinclair acquires more Fox-affiliated TV stations, and for those headquartered in Republican-leaning counties. Cross-sectional evidence also suggests stronger effects associated with lower institutional ownership, higher litigation risk, younger CEOs, or a higher percentage of female executives. Related, we find no impact of Sinclair exposure on firms' accounting performance measured by ROA, but a negative impact on their Tobin's Q and stock returns.

Beauty is wealth: CEO attractiveness and firm value
Joseph Halford & Hung‐Chia Hsu
Financial Review, forthcoming


This paper examines whether and how CEO attractiveness relates to firm value. We construct a Facial Attractiveness Index of 667 CEOs based on their facial geometry. More attractive CEOs are associated with better stock returns surrounding their job announcements and around earnings‐announcement news with CEOs' images. Further, more attractive CEOs are related to higher acquirer returns following acquisition announcements and higher Tobin's Q . Finally, consistent with the existing literature documenting the beauty premium in pay, more attractive CEOs receive higher compensation.

CEO Stress, Aging, and Death
Mark Borgschulte et al.
University of California Working Paper, July 2020


We show that increased job demands due to takeover threats and industry crises have significant adverse consequences for managers’ long-term health. Using hand-collected data on the dates of birth and death for more than 1,600 CEOs of large, publicly-listed U.S. firms, we estimate that CEOs’ lifespan increases by around two years when insulated from market discipline via anti-takeover laws. Longevity diminishes when job demands increase because of industry-wide downturns during a CEO’s tenure. These estimates are not driven by differences in tenure. We then utilize machine-learning age-estimation methods to detect visible signs of aging in pictures of CEOs. We estimate that exposure to a distress shock during the Great Recession increases CEOs’ apparent age by roughly one year over the next decade.

Implicit Communication and Enforcement of Corporate Disclosure Regulation
Ashiq Ali et al.
University of Pennsylvania Working Paper, August 2020


This study examines the challenge of implicit communication -- qualitative statements, tone, and non-verbal cues -- to the effectiveness of enforcing corporate disclosure regulation. We use a Regulation Fair Disclosure (Reg FD) setting, given that the SEC adopted the regulation recognizing that managers can convey non-public information privately not just through explicit quantitative disclosures but also through implicit communication. In a high-profile enforcement action, however, the court focused on a literal examination of the manager’s language rather than his positive spin to conclude that the SEC had been “too demanding” in examining the manager’s statements and that its enforcement policy was “overly aggressive.” We provide empirical evidence suggesting that selective disclosure from managers to financial analysts increased significantly after the court’s ruling. We also report survey responses from 60 securities lawyers with Reg FD expertise which support the proposition that this increase in disclosure is more likely due to an increase in implicit communication than in explicit communication or any other reason. Our results highlight the challenges associated with enforcing corporate disclosure regulation in the context of implicit communication.

Innovation, Short‐termism, and the Cost of Strong Corporate Governance
Daniel Keum
Strategic Management Journal, forthcoming


Do the performance pressures of the capital market exacerbate short‐termism and stifle innovation? This longstanding question has doggedly eluded a conclusive answer due to conflicting empirical findings. We revisit two studies that have been central to rejecting short‐termism: Atanassov (2013) and its replication by Karpoff and Wittry (2018). After revising some of the empirical choices by Atanassov (2013), we find the opposite result: antitakeover laws that insulate managers from the market for corporate control enhance innovation, driven by firms with significant ownership by short‐term oriented investors. However, antitakeover laws do exacerbate the pursuit of value‐destroying acquisitions. Our findings highlight corporate governance as a strategic variable that imposes a tradeoff in disciplining different agency conflicts and weak governance as a necessary evil to stimulate innovation.

On the SEC’s 2010 Enforcement Cooperation Program
Andrew Leone, Edward Xuejun Li & Michelle Liu
Journal of Accounting and Economics, forthcoming


This study examines changes in SEC enforcement and firm cooperation after the SEC introduced its new cooperation program in 2010. While previous research shows that the SEC penalized cooperative firms prior to 2010, our results suggest that after that year, it rewarded cooperation, especially good faith actions. We also find that after 2010, the SEC increased mentions of cooperation in public speeches and publicized more details about firm cooperative activities in AAERs. Finally, we find some evidence that misconduct firms increased good faith cooperation after the SEC revised its cooperation program in 2010. Our findings suggest that having a more explicit leniency program improves its effectiveness.

The Effect of Managers on Systematic Risk
Antoinette Schoar, Kelvin Yeung & Luo Zuo
NBER Working Paper, July 2020


Tracking the movement of top managers across firms, we document the importance of manager-specific fixed effects in explaining heterogeneity in firm exposures to systematic risk. These differences in systematic risk are partially explained by managers’ corporate strategies, such as their preferences for internal growth and financial conservatism. Managers’ early-career experiences of starting their first job in a recession also contribute to differential loadings on systematic risk. These effects are more pronounced for smaller firms. Overall, our results suggest that managerial styles have important implications for asset prices.

CEO dismissal: Consequences for the strategic risk taking of competitor CEOs
Brian Connelly et al.
Strategic Management Journal, forthcoming


We propose that CEO dismissal can change the strategic decision‐making of CEOs at competing firms. Competitor CEOs will experience an increase in job insecurity, which motivates them to refrain from strategic risk taking. We also identify two key boundary conditions that shape the influence of CEO dismissal on competitor CEOs’ risk taking. We test our ideas on a sample of CEO dismissals among S&P 1500 firms using a novel synthetic control method approach to matching. We also test the underlying theoretical mechanism using a complementary experiment on top executives. Taken together, these studies advance CEO dismissal research by investigating the spillover effect of CEO dismissal on competitor CEOs’ behaviors.

Board Networks and Corporate Innovation
Ching-Hung Chang & Qingqing Wu
Management Science, forthcoming


This paper studies whether board connectedness affects corporate innovation. We find that well-connected boards have a positive effect on innovation activities and quality. The effect is stronger when firms have higher demand for advising or face more severe agency problems. Firms with greater needs for external finance benefit more from board connections with bankers. We show that the positive relation is causal and robust based on a battery of empirical tests including exogenous variation in board connectedness resulting from death and retirement of directors and from a regulatory shock under new exchange listing rules. Evidence indicates that types and relatedness of connections as well as director characteristics contribute to cross-sectional heterogeneity of the positive effect.

How do auditors respond to low annual report readability?
Belen Blanco et al.
Journal of Accounting and Public Policy, forthcoming


We show that increased audit effort is associated with lower annual report readability to compensate for a perceived increase in the risk of financial misstatement for United States (US) firms. In particular, we find that lower annual report readability is associated with longer audit delays and higher audit fees for Form 10-K for US auditors, suggesting that auditors spend more effort auditing clients when annual reports have lower readability. We also find that low readability increases the likelihood of auditors using more explanatory language in unqualified audit reports.

Performance-Induced CEO Turnover
Dirk Jenter & Katharina Lewellen
Review of Financial Studies, forthcoming


This paper revisits the relationship between firm performance and CEO turnover. Instead of classifying turnovers into forced and voluntary, we introduce performance-induced turnover, defined as turnover that would not have occurred had performance been “good.” We document a close turnover-performance link and estimate that 38%-55% of turnovers are performance induced. This is significantly more than the number of forced turnovers, though the two types of turnovers are highly correlated. Compared to the predictions of Bayesian learning models, learning about CEO ability appears to be slow, and boards act as if CEO ability (or match quality) was subject to frequent shocks.

The Economic Effects of Expanded Compensation Disclosures
Brandon Gipper
Journal of Accounting and Economics, forthcoming


This paper analyzes the effects of expanded compensation disclosures on manager pay. For identification, I use the introduction of the Compensation Discussion and Analysis (CD&A) in the 2007 proxy season, a significant expansion in required compensation disclosures, to compare manager pay at firms with and without the disclosure in a difference-in-differences analysis. These disclosures are associated with increasing pay, contrary to the conventional wisdom that pay disclosures reduce pay levels via better shareholder monitoring. I hypothesize that enhanced ex ante disclosures of incentive plans reduce boards’ flexibility to make ex post adjustments or to use subjectivity and pressure boards toward more formulaic plans. Both effects impose higher payout risk on managers, leading to increased pay levels. Consistent with this hypothesis, the CD&A introduction is associated with lower likelihood to earn variable cash pay, greater use of formula-based pay, and higher pay at firms with more volatile measures of performance.


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