Findings

From the top

Kevin Lewis

September 18, 2017

Do Managers Give Hometown Labor an Edge?
Scott Yonker
Review of Financial Studies, October 2017, Pages 3581-3604

Abstract:

In line with the psychological theory of place attachments, managers favor hometown workers over others. Consistent with this prediction, I find that following periods of industry distress, establishments located near CEOs' childhood homes experience fewer employment and pay reductions and are less likely to be divested relative to other firm establishments. While it is not possible to directly test whether this employment bias destroys firm value, managers only implement these policies when governance is weak, suggesting that this favoritism is suboptimal. Together, these results provide direct evidence of employee favoritism and show that idiosyncratic manager styles impact corporate employment decisions.


CEO social capital, risk-taking and corporate policies
Stephen Ferris, David Javakhadze & Tijana Rajkovic
Journal of Corporate Finance, forthcoming

Abstract:

We provide the first direct empirical evidence of the effect of CEO social capital on aggregate corporate risk-taking. Our theory predicts that CEOs with high social capital display higher levels of risk-seeking behavior. Consistent with this prediction, we find a positive association between CEO social capital and aggregate corporate risk-taking. Examining the channel, we show that social ties cause corporate policy actions, and these actions lead to greater volatilities in stock returns and earnings. In addition, we uncover a number of factors that significantly moderate the effects of social capital on risk-taking. We also show that this increase in risk-taking is value-enhancing to the firm. Our results are robust to alternative proxies for risk-taking, alternative model specifications, and tests for endogeneity.


"See You in Court": How CEO narcissism increases firms' vulnerability to lawsuits
Charles O'Reilly, Bernadette Doerr & Jennifer Chatman
Leadership Quarterly, forthcoming

Abstract:

Although some researchers have suggested that narcissistic CEOs may have a positive influence on organizational performance (e.g., Maccoby, 2007; Patel & Cooper, 2014), a growing body of evidence suggests that organizations led by narcissistic CEOs experience considerable downsides, including evidence of increased risk taking, overpaying for acquisitions, manipulating accounting data, and even fraud. In the current study we show that narcissistic CEO's subject their organizations to undue legal risk because they are overconfident about their ability to win and less sensitive to the costs to their organizations of such litigation. Using a sample of 32 firms, we find that those led by narcissistic CEOs are more likely to be involved in litigation and that these lawsuits are more protracted. In two follow-up experimental studies, we examine the mechanism underlying the relationship between narcissism and lawsuits and find that narcissists are less sensitive to objective assessments of risk when making decisions about whether to settle a lawsuit and less willing to take advice from experts. We discuss the implications of our research for advancing theories of narcissism and CEO influence on organizational performance.


Insider Tainting: Strategic Tipping of Material Non-Public Information
Andrew Verstein
Northwestern University Law Review, forthcoming

Abstract:

Insider trading law is meant to be a shield, protecting the market and investors from connected traders, but it can also be a sword. Insofar as we penalize trading on the basis of material non-public information, it becomes possible to share information strategically in order to disable or constrain innocent investors. A hostile takeover can be averted, or a bidding war curtailed, because information recipients must then refrain from trading. This article offers the first general account of "insider tainting," an increasingly pervasive phenomenon of weaponizing insider trading law.


The Effects of Hedge Fund Interventions on Strategic Firm Behavior
Inder Khurana, Yinghua Li & Wei Wang
Management Science, forthcoming

Abstract:

We examine the impact of hedge fund interventions on target firms' strategic behavior, specifically their voluntary disclosure and earnings management strategies. We find a decrease in both the likelihood and the frequency of management earnings forecasts conveying bad news and an increase in the level of real earnings management following interventions by hedge fund activists. Additional evidence suggests that managers substitute between voluntary disclosure and earnings management strategies in resisting hedge fund attacks. We also find that withholding of bad news is more pronounced when hedge fund activists pose greater threats to the target firm's management and when the intervention lasts for a relatively short time period. Our results are consistent with firms behaving strategically in response to heightened career/reputation concerns and endangered corporate control arising from hedge fund activism.


Hedge funds in M&A deals: Is there exploitation of insider information?
Rui Dai et al.
Journal of Corporate Finance, December 2017, Pages 23-45

Abstract:

This paper investigates trading patterns in target and acquirer firms prior to public announcement of M&A deals, a corporate event in which group based co-offence has been anecdotally documented. Our analysis differentiates whether such trading is primarily conducted by hedge funds with short-term investment horizons as opposed to other short horizon investors or hedge funds and institutional investors with long-term horizons, in both the equity and derivatives markets. Our results are consistent with exploitation of M&A deal related information prior to the deal's public announcement. In particular we find that the greater the likelihood of insider information leakage, the greater the short-term hedge fund holdings. We consider several alternative explanations, such as those related to the short-term hedge fund's skill in identifying profitable trades' ex-ante; our results seem inconsistent with such alternative explanations.


CEO managerial ability and the marginal value of cash
Huiqi Gan & Myung Park
Advances in Accounting, September 2017, Pages 126-135

Abstract:

This study examines whether the managerial ability of a chief executive officer (CEO) is associated with a marginal value of cash. We predict that more talented CEOs make better use of cash, creating the marginal value of cash. Using the managerial ability measures of Demerjian et al. (2012) and the cash value model developed by Faulkender and Wang (2006), we find that CEO managerial ability significantly increases the marginal value of cash. We also find that the effect of managerial ability on the marginal value of cash is generally greater for financially constrained firms. We further show that that the positive impact of managerial ability on the marginal value of cash is more evident for firms with higher levels of free cash flows and lower management entrenchment. Overall, our findings suggest that the market places a higher value on cash if the cash is managed by more able CEOs, which is consistent with the view that shareholders consider the ability of a CEO when they evaluate cash.


Director Networks and Learning from Stock Prices
Ferhat Akbas et al.
University of Maryland Working Paper, August 2017

Abstract:

We examine how board connections affect managerial learning from stock prices. We find that investment-to-price sensitivity is significantly lower for firms with more connected boards. This effect is stronger when stock prices are less informative, and it extends to the sensitivity of investment to peers' stock prices. When we decompose stock prices into their fundamental and noise components, we find that well-connected firms reduce their reliance only on the noise component. Our findings suggest that board connections facilitate access to other information sources that can help managers filter out the noise in prices, thereby improving learning from financial markets.


Private Equity and Financial Fragility during the Crisis
Shai Bernstein, Josh Lerner & Filippo Mezzanotti
NBER Working Paper, July 2017

Abstract:

Do private equity firms contribute to financial fragility during economic crises? We find that during the 2008 financial crisis, PE-backed companies increased investments relative to their peers, while also experiencing greater equity and debt inflows. The effects are stronger among financially constrained companies and those whose private equity investors had more resources at the onset of the crisis. PE-backed companies consequentially experienced higher asset growth and increased market share during the crisis.


The Role of Management Talent in the Production of Informative Regulatory Filings
Eric Holzman & Brian Miller
Ohio State University Working Paper, August 2017

Abstract:

This study examines the extent to which managerial talent plays a role in shaping the clarity of regulated financial disclosures. Consistent with the notion that more talented managers are likely to commit to more transparent disclosure policies, we find that more able management teams are associated with the production of more readable regulatory filings. To mitigate potential concerns that our results are driven by firm characteristics or current period performance, we show that our results are robust to the inclusion of firm fixed effects and hold across both high and low partitions of current firm performance. We also take advantage of a set of exogenous shock-based analyses (regulatory and death) that provide better identification that our results are driven by underlying differences in managerial talent. Finally, we isolate cross-sectional variation in annual report readability attributable to differences in underlying managerial talent and show that this component explains a significant amount of variation in post 10-K filing stock return volatility. In sum, our evidence suggests that managerial talent impacts a firm's financial filing readability and has meaningful stock market implications.


Do corporations learn from mispricing? Evidence from takeovers and corporate performance
Samer Adra & Leonidas Barbopoulos
International Review of Financial Analysis, forthcoming

Abstract:

In this article we form the simple prediction that mispricing encourages traders to collect costly information that guides managerial decisions at corporate level. Our findings support this prediction based on evidence derived from both the US market for corporate control as well as the overall variation in aggregate corporate profits. The trading activity in response to the temporary mispricing of the merging companies provides useful information that leads to the design of high-synergy deals. Such synergies are reflected in an increase in the announcement period acquirer abnormal returns and are not reversed in the long-run. At the market-wide level, our results suggest that the growth in the overall stock trading volume in response to market mispricing is associated with high future corporate profit growth. Overall, after controlling for several economic and financial conditions, the temporary mispricing in a developed and generally efficient stock market stimulates informative trading, ultimately leading to value- and performance-enhancing corporate decisions.


Managerial Self-Interest and Strategic Share Repurchases: Evidence from Equity Vesting Schedules
David Moore
University of Kentucky Working Paper, August 2017

Abstract:

This paper studies the strategic use and timing of share repurchases by insiders for personal gain. Specifically I examine whether firms increase repurchase activity to support stock prices around CEO personal equity sales. Because equity sales are endogenously determined with repurchases, I instrument for equity sales using equity vesting schedules. Using grant level compensation data and a hand-collected sample of monthly repurchases, I find a positive, plausibly causal relationship between CEO equity sales and share repurchases. Equity vesting is strongly positively correlated with equity sales but vesting schedules are established well in advance and thus unrelated to current market and firm conditions. However, executives do not appear to be destroying shareholder value. The results indicate managerial self-interest motivates a subset of share repurchases.


Founder-CEOs and Corporate Turnaround among Declining Firms
Michael Abebe & Chanchai Tangpong
Corporate Governance, forthcoming

Research Question/Issue: Despite the growing interest in leaders' role in the turnaround process, there is a paucity of research on founder-CEOs' role in achieving successful turnaround among declining firms. In this study, using insights from the organizational identification literature, we argue that founder-CEOs play an important role in turnaround attempts due to their strong organizational commitment and psychological attachment to the declining firm as well as the relative absence of agency problem issues common among their non-founder counterparts.

Research Findings/Insights: Using data from a matched pair sample of 142 U.S. firms that experienced performance decline, we found that founder-CEO leadership significantly increases turnaround success in declining firms. We also found that, among turnaround firms, those led by founder-CEOs tend to put more emphasis on market-based turnaround strategies, such as new product introductions, and less emphasis on retrenchment actions, such as divestments.


CEO Confidence and Unreported R&D
Ping-Sheng Koh, David Reeb & Wanli Zhao
Management Science, forthcoming

Abstract:

We investigate whether managerial traits influence corporate decisions to provide mandatory financial disclosures. The results indicate that firms with confident chief executive officers (CEOs) are 24% more likely to report their research and development (R&D) expenditures relative to firms with cautious CEOs. Exploiting staggered, state-level regulatory shocks and changes in CEO type, we find substantial evidence that cautious CEO firms fail to report R&D expenditures. After a plausibly exogenous shock to managerial reporting liability, cautious CEO firms exhibit a 35% larger reduction in unreported R&D relative to confident CEO firms. Interestingly, confident CEO firms do not exhibit more innovation than their cautious CEO counterparts after taking into account their differing propensities to report corporate R&D. Overall, our analysis suggests that the precision or reliability of mandatory disclosures systematically varies with managerial characteristics.


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