Directors and agents

Kevin Lewis

December 03, 2019

Do board gender quotas affect firm value? Evidence from California Senate Bill No. 826
Daniel Greene, Vincent Intintoli & Kathleen Kahle
Journal of Corporate Finance, forthcoming


We examine stock market reactions, direct costs of compliance, and board adjustments to California Senate Bill No. 826 (SB 826), the first mandated board gender diversity quota in the United States. Announcement returns average −1.2% and are robust to the use of multiple methodologies. Returns are more negative when the gap between the mandated number and the pre-SB 826 number of female directors is larger. These negative effects are less severe for firms with a greater supply of female candidates, and for those that can more easily replace male directors or attract female directors. For small firms, the annual direct cost of compliance through board expansion is non-trivial, representing 0.76% of market value. Following SB 826, firms significantly increase female board representation, and the increase is greater for firms in California than control firms in other states.

That Could Have Been Me: Director Deaths, CEO Mortality Salience, and Corporate Prosocial Behavior
Guoli Chen, Craig Crossland & Sterling Huang
Management Science, forthcoming


Mortality salience — the awareness of the inevitability of death — is often traumatic. However, it can also be associated with a range of positive, self-transcendent cognitive responses, such as a greater desire to help others, contribute to society, and make a more meaningful contribution in one’s life and career. In this study, we provide evidence of a link between chief executive officer (CEO) mortality salience — triggered by the death of a director at the same firm — and a subsequent increase in firm-level prosocial behavior or corporate social responsibility (CSR). We further show that this core relationship is amplified in situations where the death of the director is likely to have been especially salient (i.e., the director was appointed within the CEO’s tenure, or the death was sudden/expected). In supplementary analyses, we find suggestive evidence of increased CEO prosociality in other professional domains as well as evidence that prosociality seems to be preferentially directed toward ingroups.

Corporate Purpose and Firm Ownership
Claudine Gartenberg & George Serafeim
Harvard Working Paper, August 2019


Analyzing data from approximately 1.5 million employees across 1,100 established public and private US companies, we find that the strength of employee beliefs about their firm’s purpose is lower in public companies. This difference is most pronounced within the salaried middle and hourly ranks, rather than senior executives. Among public companies, purpose becomes progressively lower with more concentrated shareholders, especially among firms with high hedge fund ownership. These patterns can be partly explained by differences in CEO backgrounds and compensation: public firms, particularly those with strong shareholders, choose outsider CEOs at higher rates and pay them more relative to their employees. Our analyses suggest that these results are not driven solely by sorting effects, but appear attributable in part to the impact that firm owners have on their employees. In summary, shareholders appear to influence the strength of corporate purpose deep within organizations via the leadership and corporate practices they enable at the top.

Love or money: The effect of CEO divorce on firm risk and compensation
Jordan Neyland
Journal of Corporate Finance, forthcoming


I find lower firm risk in the year of a CEO divorce. This lower volatility is consistent with a reduction in risk incentives, as CEOs pay large divorce settlements and are less able to diversify firm-specific risk from their portfolios. Divorce has a larger impact on firms with cash-poor CEOs who lack diversification. Cash flow and accruals have lower volatility in the year of divorce, which is likely due to smoother discretionary expenses. The sensitivity of compensation to both price and volatility is significantly higher after divorce, suggesting compensation incentives adjust to portfolio incentives, with total compensation increasing by over $2 million on average. I find no evidence the results relate to increased distraction or alternative explanations.

The Insignificance of Clear-Day Poison Pills
Emiliano Catan
Journal of Legal Studies, January 2019, Pages 1-44


Exploiting a hand-collected database with almost 2,200 firms during 1996–2014, I analyze the relationship between the presence of poison pills and firm value. Consistent with earlier results, I document a strong negative association between pills and firm value cross-sectionally and within firm. However, I document that all the within-firm association is driven by pill adoptions (and none by the dropping of pills), all the drop in value associated with adoptions precedes the pills’ adoption, and firms adopted their pills after experiencing drops in their operating performance. These results indicate that the ostensive negative effect of pills on firm value is due to a spurious correlation and that prior analyses were incorrect in concluding that pill adoptions are harmful and indicative of bad governance. Moreover, the results question the usefulness of the dramatic drop in the incidence of pills that took place during the last decade.

Wolves at the Door: A Closer Look at Hedge Fund Activism
Yu Ting Forester Wong
Management Science, forthcoming


Most investor coordination remains undisclosed. I provide empirical evidence on the extent and consequences of investor coordination in the context of hedge fund activism, in which potential benefits and costs from coordination are especially pronounced. In particular, I examine whether hedge fund activists orchestrate “wolf packs” — that is, groups of investors willing to acquire shares in the target firm before the activist’s campaign is publicly disclosed via a 13D filing — as a way to support the campaign and strengthen the activist’s bargaining position. Using a novel hand-collected data set, I develop a method to identify the formation of wolf packs before the 13D filing. I investigate two competing hypotheses: the Coordinated Effort Hypothesis (wolf packs are orchestrated by lead activists to circumvent securities regulations about “groups” of investors) and the Spontaneous Formation Hypothesis (wolf packs spontaneously arise because investors independently monitor and target the same firms at about the same time). A number of tests rule out the Spontaneous Formation Hypothesis and provide support for the Coordinated Effort Hypothesis. Finally, the presence of a wolf pack is associated with various measures of the campaign’s success.

Do Firms Use Corporate Social Responsibility to Insure Against Stock Price Risk? Evidence from a Natural Experiment
Yonghong Jia, Xinghua Gao & Scott Julian
Strategic Management Journal, forthcoming


To examine whether firms use corporate social responsibility (CSR) to insure against stock price risk, we exploit an exogenous shock in stock price risk associated with Regulation SHO whereby the SEC randomly selected pilot firms for which the uptick restriction on short sales no longer applied. A difference‐in‐differences test reveals that pilot firms increased CSR more than non‐pilot firms and that in particular they reduced CSR concerns and increased CSR that impacts stakeholders involved in direct resource exchange. We also find that pilot firm CSR reduced short positions against them and that the effect is stronger for CSR concerns and CSR that impacts directly‐connected stakeholders. Overall, we document a causal effect of stock price risk on managerial incentives to invest in CSR for risk mitigation.

Securities litigation and corporate tax avoidance
Matteo Arena, Bin Wang & Rong Yang
Journal of Corporate Finance, forthcoming


We examine whether litigation risk is systematically related to corporate tax avoidance. We find that the exogeneous reduction in the threat of securities class action litigation due to the 1999 ruling of the Ninth Circuit Court of Appeals effectively increases corporate tax avoidance, which is consistent with the notion that the threat of shareholder litigation plays a disciplinary role in curbing managerial rent extraction from tax avoidance activities. This finding is robust to alternative model specifications including two placebo tests and propensity score matching. We further find that labor union and alternative external governance mechanisms such as analyst coverage and institutional ownership mitigate this effect. Overall, our paper provides a significant contribution to the understanding of the relation between corporate governance and tax avoidance.

Expectation Management in Mergers and Acquisitions
Jie (Jack) He et al.
Management Science, forthcoming


Takeover bidders in stock-for-stock mergers have strong incentives to increase their own premerger stock prices to lower their acquisition costs. We find that before announcements of stock mergers, bidders manage down analyst earnings forecasts prior to earnings releases. Such expectation management benefits bidders by increasing their own stock prices and saving on acquisition costs. Additionally, analysts who have close relations with stock bidders are more likely to participate in expectation management. For identification, we use an instrumental variable analysis, a pseudo-event analysis, and a propensity score-matching approach. Our paper provides evidence on expectation management as a previously underexplored opportunistic behavior by takeover bidders.

CEOs and the Product Market: When Are Powerful CEOs Beneficial?
Minwen Li, Yao Lu & Gordon Phillips
Journal of Financial and Quantitative Analysis, December 2019, Pages 2295-2326


We examine whether industry product market conditions are important in assessing the benefits and costs of chief executive officer (CEO) power. We find that firms are more likely to have powerful CEOs in high demand product markets where firms are facing entry threats. In these markets, investors react favorably to announcements granting more power to CEOs, and CEO power is associated with higher market value, sales growth, investment, advertising, and the introduction of more new products. Our results remain significant when addressing the endogeneity of CEO power by instrumenting CEO power with past non-CEO executive and director sudden deaths.

What do insiders know? Evidence from insider trading around share repurchases and SEOs
Peter Cziraki, Evgeny Lyandres & Roni Michaely
Journal of Corporate Finance, forthcoming


We examine the nature of information contained in insider trades prior to corporate events. Insiders' net buying increases before open market share repurchase announcements and decreases before seasoned equity offers. Higher insider net buying is associated with better post-event operating performance, a reduction in undervaluation, and, for repurchases, lower post-event cost of capital. Insider trading also predicts announcement returns and long-term stock price drift following events. Overall, our results suggest that insider trades before corporate events contain information about changes both in fundamentals and in investor sentiment.

Managerial Reliance on the Retail Shareholder Vote: Evidence from Proxy Delivery Methods
Choonsik Lee & Matthew Souther
Management Science, forthcoming


Recent studies document the increasing effectiveness of shareholder voting as a monitoring mechanism. Because both directors and the market respond to shareholder votes, management has stronger incentives to influence voting outcomes. We identify one channel through which management can affect voting outcomes: increasing the turnout of (typically management-friendly) retail shareholders. Our study focuses on an observable managerial choice of how to deliver proxy materials to maximize retail turnout. Management can opt to send a full set of proxy materials to all shareholders, which increases retail turnout but also increases printing and mailing costs, or they can send a notice directing shareholders to proxy materials available online, which reduces costs but also decreases retail turnout. We find that managers are more likely to choose to deliver a full set of proxy materials when there are contentious items on the ballot for which they need additional voting support; and, indeed, the resulting support increases the likelihood that voting outcomes will align with management recommendations.

The powers that be: Concentration of authority within the board of directors and variability in firm performance
Hai Tran & Jason Turkiela
Journal of Corporate Finance, forthcoming


In this study, we examine how the concentration of authority within the board of directors affects the variability of firm performance. Using directors' committee assignments as a proxy for decision-making power, we develop two unique measures of board concentration of authority. We find that firms with greater concentration of power within their boards have higher variability in firm performance. In additional tests, we demonstrate that our results are not driven by endogeneity bias. Finally, we also show concentrated boards adopt more extreme corporate strategies, providing several different mechanisms through which board concentration of power affects firm performance volatility.


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