Corporate Society

Kevin Lewis

November 22, 2021

Twitter Presence and Experience Improve Corporate Social Responsibility Outcomes
Siva Balasubramanian, Yiwei Fang & Zihao Yang
Journal of Business Ethics, November 2021, Pages 737-757

We investigate the role of social-media-triggered public pressure on corporate social responsibility (CSR) that includes expectations of transparency and accountability on the firm's part, and participative/evaluative inputs on the public's part. Using the date when S&P 500 firms established corporate Twitter accounts, we investigate the impact of corporate social media exposure on CSR outcomes. Results from baseline regressions indicate that firms with Twitter accounts significantly outperform industry peers in CSR rating, after controlling for firm and industry characteristics. To test potential reverse causality, we use a dynamic treatment effect model to explore within firm changes of CSR, and find that firms' CSR rating improves in year one- and year two after establishing a Twitter account, while no difference emerged in similar comparisons with peers prior to the Twitter account establishment. Additionally, Granger causality tests results show that corporate Twitter presence improves CSR performance; it is also shown that CSR outcomes do not motivate corporations to establish a social media presence on Twitter. Finally, firms with more experience (number of years) on Twitter, and those with more followers, tweets or Twitter accounts are associated with improved CSR outcomes. We draw on two theories and qualitative interviews with senior CSR executives to explain why social media influences CSR firm behaviors. 

Do Social Networks Facilitate Informed Option Trading? Evidence from Alumni Reunion Networks
Harvey Cheong et al.
Journal of Financial and Quantitative Analysis, forthcoming

Material private information transmits through social networks. Using manually collected information on networks of alumni reunion cohorts, we show that hedge fund managers connected to directors of firms engaged in merger deals increase call option holdings on target firms before deal announcements. Effects are larger when reunion events for connected cohorts occur just before announcements. Independent directors, directors with short tenure, and directors with low stock ownership are more likely to transmit information. Our results are robust to confounding factors and alternative specifications. These findings highlight the role of social networks as channels of private information dissemination. 

Firm partisan positioning, polarization, and risk communication: Examining voluntary disclosures on COVID-19
Richard Benton, Adam Cobb & Timothy Werner
Strategic Management Journal, forthcoming

The COVID-19 pandemic will rank among the greatest challenges many executives will have faced and not only due to the operational challenges it posed. Upon entering the U.S. context, the disease was immediately politically polarized, with clear partisan splits forming in risk perceptions of the disease unrelated to science. We exploit this context to examine whether firms' partisan positioning affects whether and how they communicate risk to their investors on a polarized public policy issue. To do so, we examine the covariation between firms' disclosure of COVID-19 risks and the partisanship of their political giving. Our analysis of earnings call and campaign contribution data for the S&P 500 reveals a positive association between a firm's contributions to Democrats and its disclosure of COVID-19 risks. 

Choosing sides: CEO gender and investor support for activist campaigns
Amanda Cowen, Nicole Votolato Montgomery & Christine Shropshire
Journal of Applied Psychology, forthcoming

Recent evidence suggests that female-led firms are more likely to be targeted by activist investors. We examine how Chief Executive Officer (CEO) gender influences retail investors' responses to proxy contests. We find that these investors are more likely to support - through their proxy voting behavior - campaigns that target female-led versus male-led firms, despite the fact that retail investors evaluate female and male CEOs similarly. We show that this apparent discrepancy is a function of how subjective ratings mask stereotype-influenced judgments, consistent with the shifting standards model (SSM). Respondents use lower standards to evaluate female versus male CEOs. This difference becomes apparent when externally-anchored judgments are employed, such as when investors are asked to choose sides in a proxy contest. Correspondingly, activists are judged as relatively more competent when targeting female-led firms. Our findings contribute to research on CEO gender and activism. In doing so, our research also introduces the SSM to the investor decision-making literature, thereby enriching the discussion about what mechanisms underpin the less favorable investment outcomes female-led firms can experience. 

CEO Partisan Bias and Management Earnings Forecast Bias
Michael Stuart, Jing Wang & Richard Willis
Oklahoma State University Working Paper, October 2021

Political science research finds that individuals exhibit partisan bias, which results in unduly favorable economic expectations when their partisanship aligns with that of the US president. We examine whether partisan bias is present in management earnings forecasts, where CEOs have strong incentives to provide high-quality forecasts. We find that firms with CEOs whose partisanship aligns with that of the US president issue more optimistically biased management earnings forecasts than CEOs whose partisanship is unknown or not aligned with that of the US president. Our results suggest that CEOs fall prey to partisan bias, which results in suboptimal forecasting behavior. In cross-sectional analyses, we find that this forecast over-optimism is attenuated when CEOs are of higher ability. Additionally, we find that investors fail to discount the news in forecasts issued by CEOs whose partisanship aligns with that of the US president and that post-forecast abnormal returns are lower for these firms. 

The Impact of Impact Investing
Jonathan Berk & Jules van Binsbergen
George Mason University Working Paper, October 2021 

We evaluate the quantitative impact of ESG divestitures. For divestitures to have impact they must change the cost of capital of affected firms. We derive a simple expression for the change in the cost of capital as a function of three inputs: (1) the fraction of socially conscious capital, (2) the fraction of targeted firms in the economy and (3) the correlation between the targeted firms and the rest of the stock market. Given the current state of ESG investment we find that the impact on the cost of capital is too small to meaningfully affect real investment decisions. We empirically corroborate these small estimates by studying firm changes in ESG status. When firms are either included or excluded from the leading socially conscious US index (FTSE USA 4Good) we find no detectable effect on the cost of capital. We conclude that current ESG divesture strategies have had little impact and will likely have little impact in the future. Our results suggest that to have impact, instead of divesting, socially conscious investors should invest and exercise their rights of control to change corporate policy.

Local Journalism under Private Equity Ownership
Michael Ewens, Arpit Gupta & Sabrina Howell
NYU Working Paper, October 2021

Local daily newspapers have historically played an important role in U.S. democracy by providing citizens with information about local policy issues. However, in recent decades local newspapers have struggled to compete with new online platforms for readers' attention. Private equity investors - who specialize in reorganizing struggling firms in distressed sectors - have entered the industry. How do these new owners affect newspaper content, survival, and local civic engagement? We document nuanced effects, contrasting with the polarized debate on this topic in the media and political discourse. On one hand, we find that private equity ownership leads to higher digital circulation and lower chances of newspaper exit. On the other hand, we document a change in news composition away from information about local governance, and lower employment of reporters and editors. Finally, we find declines in participation in local elections, consistent with local newspaper content being relevant for civic engagement. The results have implications for knowledge about local policy issues and highlight trade-offs surrounding media ownership. 

The Sound of Silence: What Do We Know When Insiders Do Not Trade?
George Gao et al.
Management Science, forthcoming 

This paper examines the information content of insider silence, periods of no insider trading. We hypothesize that, to avoid litigation risk, rational insiders do not sell own-company shares when they anticipate bad news; neither would they buy, given unfavorable prospects. Thus, they keep silent. By contrast, insiders sell shares when they do not anticipate significant bad news. Future stock returns are significantly lower following insider silence than following insider net selling, especially among firms with higher litigation risk. We examine two quasinatural experiments where new laws result in changes in shareholder litigation risks for insiders. In both cases, with higher shareholder litigation risks, stocks where insiders stay silent earn significantly lower returns than other stocks. 

Corporate complexity, managerial myopia, and hostile takeover exposure: Evidence from textual analysis
Pattanaporn Chatjuthamard, Viput Ongsakul & Pornsit Jiraporn
Journal of Behavioral and Experimental Finance, forthcoming

Exploiting a novel measure of firm complexity based on textual analysis (Loughran and McDonald, 2020), we explore the effect of hostile takeover exposure on firm complexity. Our results demonstrate that more takeover vulnerability leads to less complex firms. Hostile takeover threats diminish managers' job security and thus exacerbates managerial myopia. Short-sighted managers focus on short-term investments at the expense of more complex, long-term, projects, resulting in lower corporate complexity. Our measure of takeover susceptibility is principally based on state legislation, which is plausibly exogenous. Therefore, our results are more likely to reflect causality than merely an association. Further analysis corroborates the results including propensity score matching, entropy balancing, an instrumental-variable analysis, and using Oster's (2017) method for testing coefficient stability. 

Executive stock options and systemic risk
Christopher Armstrong, Allison Nicoletti & Frank Zhou
Journal of Financial Economics, forthcoming

Employing a novel control function regression method that accounts for the endogenous matching of banks and executives, we find that equity portfolio vega, the sensitivity of executives' equity portfolio value to their firms' stock return volatility, leads to systemic risk that manifests during subsequent economic contractions but not expansions. We further find that vega encourages systemically risky policies, including maintaining lower common equity Tier 1 capital ratios, relying on more run-prone debt financing, and making more procyclical investments. Collectively, our evidence suggests that executives' incentive-compensation contracts promote systemic risk-taking through banks' lending, investing, and financing practices. 

Who did it Matters: Executive Equity Compensation and Financial Reporting Fraud
Robert Davidson
Journal of Accounting and Economics, forthcoming

In within-firm analysis of 1,805 executives, executives implicated in financial reporting fraud cases have significantly stronger equity incentives than their within-firm peers who are not implicated in the fraud. Executives implicated in fraud cases also have significantly stronger equity incentives than executives at non-fraud firms in similar roles. However, the equity incentives of non-implicated executives at fraud firms are no different than those for executives at non-fraud firms. The results are significant across executive roles and for equity incentives measured as wealth sensitivity to changes in stock price or stock price volatility. Executive-level analysis that considers which executives are implicated in the fraud may provide more precise measurement of the association and statistical significance of the relationship between equity incentives and fraud. Finally, firm-level measures that consider the equity incentives of all members of the top management team may better identify fraud firms than do measures focusing on one executive.

Do Images Provide Relevant Information to Investors? An Exploratory Study
Azi Ben-Rephael et al.
Rutgers Working Paper, November 2021

We introduce the concept of "visual-readability" in annual reports and use novel machine-learning algorithms to construct visual-readability metrics: visual use and information-content-reinforcement (the degree to which information content in images reinforces text). We find that increased news coverage and asset growth are associated with increased visual use. In turn, increased visual use is associated with subsequent-year realizations: lower risk and cost-of-capital, increased institutional holdings, and higher bond ratings, market share, and ROA. Further, the degree of information-content-reinforcement is associated with subsequent lower analyst disagreement and greater forecast accuracy. By and large, our results are consistent with an information-based story. 

Academic Directors and Corporate Innovation
Yutong Xie, Jin Xu & Ruiyao Zhu
Virginia Tech Working Paper, November 2021

We show that academic directors significantly increase firms' R&D investment and innovation outputs. Following an academic director's death and relative to a non-academic director's death, the average firm reduces R&D by 2.0% of total assets and its market value of innovations declines by 4.4%. The results are not driven by PhD CEOs or non-academic PhD directors. Consistent with an advising channel, academic directors in STEM disciplines are particularly pro-innovation. Firms with academic directors are more likely to dismiss the CEOs if they spend less in R&D, suggesting a monitoring channel at work as well. Academic directors are associated with higher firm value at firms where innovation is more important but not at other firms. Overall, our results highlight the vital advising and monitoring roles academic directors play in corporate innovation. 

What matters more in board independence? Form or substance: Evidence from influential CEO-directors
Arun Upadhyay & Ozde Oztekin
Journal of Corporate Finance, forthcoming

We exploit heterogeneities among CEO-directors and find that influential CEO-directors (ICDs) provide value through advising and monitoring. To expansively capture their relative influence, we identify CEO-directors who command more pay than the appointing firm's CEO. We find ICDs are more (less) likely to serve on the compensation (audit) committee. ICDs serve on more board seats and benefit more by serving on these seats. ICDs improve the performance of their appointing firm by increasing CEO pay-performance sensitivities and by helping with R&D and M&A activities. Alternatively, uninfluential CEO-directors are largely inconsequential or even detrimental to the appointing firm.


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