Executive time

Kevin Lewis

February 12, 2019

Born to Take Risk? The Effect of CEO Birth Order on Strategic Risk Taking
Robert Campbell, Seung-Hwan Jeong & Scott Graffin
Academy of Management Journal, forthcoming

The importance of birth order has been the subject of debate for centuries and has captured the attention of the general public and researchers alike. Despite this interest, scholars have little understanding of the impact birth order has on CEOs and their strategic decisions. With this in mind, we develop theory that explains how CEO birth order may be associated with strategic risk taking. Drawing from evolutionary theory arguments related to birth order, we theorize that CEO birth order is positively associated with strategic risk taking; that is, earlier born CEOs will take less risk than later-born CEOs. As evolutionary theory proposes that birth order effects are driven by sibling rivalry, we also argue that this relationship is moderated by three factors related to sibling rivalry: age gap between a CEO and the closest born sibling, CEO age, and the presence of a sibling CEO. Our results provide support for our theorizing and suggest that birth order may have important implications for organizations. We believe this study helps advance strategic management research, the broader multi-disciplinary “family science” literature, and the much needed cross-pollination of ideas between the two.

MBA CEOs, Short-Term Management and Performance
Danny Miller & Xiaowei Xu
Journal of Business Ethics, January 2019, Pages 285-300

There is ample discussion of MBA self-serving values in the corporate social responsibility literature, and yet empirical studies regarding the corporate manifestations and consequences of those values are scant. In a comprehensive study of major US public corporations, we find that MBA CEOs are more apt than their non-MBA counterparts to engage in short-term strategic expedients such as positive earnings management and suppression of R&D, which in turn are followed by compromised firm market valuations.

The Effect of CEO Extraversion on Analyst Forecasts: Stereotypes and Similarity Bias
Jochen Becker, Josip Medjedovic & Christoph Merkle
Financial Review, February 2019, Pages 133-164

In an experiment with professional analysts, we study their reliance on CEO personality information when producing financial forecasts. Drawing on social cognition research, we suggest analysts apply a stereotyping heuristic, believing that extraverted CEOs are more successful. The between‐subjects results with CEO extraversion as treatment variable confirm that analysts issue more favorable forecasts (earnings per share, long‐term earnings growth, and target price) for firms led by extraverted CEOs. Increased forecast uncertainty leads to even stronger stereotyping. Additionally, personality similarity between analysts and CEOs has a large effect on financial forecasts. Analysts issue more positive forecasts for CEOs similar to themselves.

Big Bath Accounting Following Natural Disasters
Yingmei Cheng et al.
Florida State University Working Paper, December 2018

Practitioners and academics widely suspect that managers engage in “big bath” reporting behavior as a form of earnings management, but conclusive evidence of this behavior has been difficult to document due to the inherently endogenous nature of reporting the large, non-recurring charges necessary to engage in a big bath. We introduce a novel dataset of natural disasters to address this problem and argue that natural disasters provide an ideal exogenous shock to examine big baths. Consistent with opportunistic reporting, we find that, relative to matched firms unaffected by a natural disaster and matched firms affected by the same natural disaster who do not report large, negative special items, big bath firms experience greater improvements in post-disaster earnings for multiple years and higher future stock returns. We also find that CEOs of bath firms receive relatively larger increases in bonus and cash compensation in the years following the bath.

The Effect of the Say-on-Pay Vote in the United States
Peter Iliev & Svetla Vitanova
Management Science, forthcoming

The Dodd-Frank Act mandated advisory shareholder votes on executive compensation. To isolate the effect of holding a Say-on-Pay vote we use an exemption provided to a group of firms based on their public float. We find that the regulation increased the level of CEO pay and the fraction of performance-linked pay in the companies that had to comply with the new rule. This increase was larger for CEOs with higher ownership and longer tenure. Moreover, the market reacted negatively to the exemption from the Say-on-Pay rule suggesting general support for holding the Say-on-Pay votes. These effects are not present in placebo specifications in previous years or in different groups.

CEO traders and corporate acquisitions
Henry Leung, Jeffrey Tse & Joakim Westerholm
Journal of Corporate Finance, February 2019, Pages 107-127

This paper investigates whether the personal trading decisions of CEOs are related to their corporate acquisition decisions. We find that the personal trading performance of CEOs across all stocks they trade is significantly and positively related to the short-term performance of their mergers, and that CEOs exhibiting greater turnover on their personal common equity portfolios undertake acquisitions more frequently. Hence, a CEO's risk aversion, confidence and capability are consistent across their personal and corporate investment decisions.

Understanding the Rise in Corporate Cash: Precautionary Savings or Foreign Taxes
Michael Faulkender, Kristine Hankins & Mitchell Petersen
Review of Financial Studies, forthcoming

What has driven the dramatic rise in U.S. corporate cash? Using non-public data, we show that the run-up is not uniform across firms but is concentrated in the foreign subsidiaries of multinational firms. Standard precautionary motives explain only domestic cash holdings, not these burgeoning foreign cash balances. Falling foreign tax rates, coupled with relaxed restrictions on income shifting, are the root of the changing foreign cash patterns. Firms with intellectual property have the greatest ability to shift income to low tax jurisdictions, and their foreign subsidiaries are where we observe the largest accumulations of cash.

The Economic Consequences of Audit Market Competition: Evidence from Cost of Bank Financing
Heng Geng, Cheng Zhang & Frank Zhou
University of Pennsylvania Working Paper, October 2018

This paper studies the effect of audit market competition on the clients' cost of bank loans. Exploiting the demise of Arthur Andersen that differently reduced local audit market competition of metropolitan statistical areas (MSAs), we find that local competition among auditors increases the cost of bank loans of auditors' client firms. Further analysis indicates that the effect of competition on loan pricing is more pronounced when external monitoring with respect to financial reporting is weaker and when a client is more economically important to its auditor. A model that allows clients to shop for favorable audit opinions can explain our findings.

Emotional Expressions Predict Risky Decisions by S&P 500 Executives
Anoop Menon, Gideon Nave & Sudeep Bhatia
University of Pennsylvania Working Paper, December 2018

Laboratory experiments conducted on college students suggest that emotions influence risk-taking during decisions-making. As the capacity to measure emotions in the field has been limited, however, it is unclear whether findings can be generalized to real world situations such as high-stakes managerial decisions. We examine the relationship between emotional expressions of executives of the world’s largest firms and subsequent high-stake risky decisions about whether to conduct mergers and acquisitions (M&A). By performing text-based sentiment analysis on the quarterly earnings conference calls of these firms (N=15,555), we reveal that the negative emotional expressions predicts less risk taking (i.e., fewer M&A deals), above fundamental financial variables. The effect is driven by the expression of sadness and fear, emotions that involve appraisals of uncertainty and lack of control, in line with the predictions of exiting theories of emotion and risk taking. We discuss the implications of our findings for managerial practice.

The Information Content of CEOs' Personal Social Media: Evidence from Stock Returns and Earnings Surprise
Xing Gao
University of Illinois Working Paper, October 2018

I study the personal Twitter accounts of 226 CEOs, and examine whether the content across 127,916 Tweets hold information about future firm performance. The content of these Tweets mostly deals with CEOs' personal activities and opinions, and the analysis further employs machine learning algorithms to identify and exclude Tweets that have relevance for firm operation. The results show that a high proportion of positive words in the CEOs' Tweets predict positive future abnormal returns. This pattern is especially strong before earnings announcement. Furthermore, the cumulative proportion of positive words in the CEOs Tweets before an earnings announcement can predict the firm's earnings surprise. These results suggest that the content of personal Tweets can elicit the moods of CEOs, and that executives tend to spend time doing enjoyable activities when they are confident and satisfied with their firm' s performance. Furthermore, I find that CEOs include a higher proportion of positive words in their Tweets before option exercises and stock sales; this result is consistent with executives being aware that investors pay attention to their Tweets, and CEOs thus strategically use their personal social media in an effort to shape investors belief.

Corporate Control Activism
Adrian Aycan Corum & Doron Levit
Journal of Financial Economics, forthcoming

This paper studies the role of activist investors in the market for corporate control. Our theory proposes that activist investors have an inherent advantage relative to bidders in pressuring entrenched incumbents to sell. As counterparties to the acquisition, bidders have a fundamental conflict of interests with target shareholders from which activist investors are immune. Therefore, unlike activists, the ability of bidders to win proxy fights is very limited. This result is consistent with the large number of activist campaigns that have resulted with the target’s sale to a third party and the evidence that most proxy fights are launched by activists, not by bidders.

Valuation Effects of Overconfident CEOs on Corporate Diversification and Refocusing Decisions
Panayiotis Andreou et al.
Journal of Banking & Finance, March 2019, Pages 182-204

This study presents a theoretical model that links chief executive officer (CEO) overconfidence to the value loss of corporate diversification. Consistent with the model's prediction, the findings show that diversified firms run by overconfident CEOs experience value loss compared to diversified firms run by their rational counterparts. Empirically, the value loss is economically significant and ranges between 12.5% and 14.1%. In addition, the model predicts heightened corporate refocusing activity by overconfident CEOs who pursued diversified investments in the past once realized returns fail to match initial expectations. The empirical odds of corporate refocusing decisions are 67% to 98% higher when past diversifications are undertaken by overconfident rather than rational CEOs. Another prediction of the model is that overconfident CEOs exhibit preference for diversified investments, especially in the presence of ample internal funds. This prediction is also strongly supported by the data. Overall, this study proposes CEO overconfidence as a unified and consistent explanation of why firms pursue value-destructive corporate diversification policies and later adopt refocusing policies aiming to restore value.

Does CDS trading affect risk-taking incentives in managerial compensation?
Jie Chen et al.
Journal of Banking & Finance, forthcoming

We find that managers receive more risk-taking incentives in their compensation packages once their firms are referenced by credit default swap (CDS) trading, particularly when institutional ownership is high and when firms are in financial distress. These findings provide suggestive evidence that boards offer pay packages that encourage greater risk taking to take advantage of the reduced creditor monitoring after CDS introduction. Further, we show that the onset of CDS trading attenuates the effect of vega on leverage, consistent with the threat of exacting creditors restraining managerial risk appetite.

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