Going Public

Kevin Lewis

September 14, 2022

Does Sunlight Kill Germs? Stock Market Listing and Workplace Safety
Claire Liang et al.
Journal of Financial and Quantitative Analysis, forthcoming


This study highlights the positive impact of a stock market listing on workplace safety. We find that workplace injuries in publicly listed firms are lower than those in comparable private firms, and this effect relates to heightened monitoring by the media and regulators. The media pays more attention to public firms' safety issues than to those of private firms, and the reduced media scrutiny due to local newspaper closures leads to greater increases in injuries in public firms. Regulators also monitor public firms more strictly, evidenced by a higher likelihood of nonroutine inspections and larger penalties for detected violations.

How do chief executive officers with pilot status navigate through corporate social responsibility?
Karel Hrazdil, Jeong Bon Kim & Xin Li
Applied Economics, October 2022, Pages 5460-5475


We investigate whether and how managerial risk-tolerance at the individual level affects corporate social responsibility (CSR) performance at company level. We use CEO aviation training as an observable ex-ante measure of CEO risk-tolerance. Contrary to a commonly held view, we show that firms led by CEOs with pilot status exhibit lower CSR performance. This finding holds even after controlling for CEO pay-performance incentives, military experience, overconfidence and other CEO and firm characteristics that prior studies document as affecting CSR performance. In further cross-sectional tests, we show that when a firm is R&D intensive, belongs to a high-tech industry, or faces fiercer product market competition, the negative effect of CEO risk-tolerance on CSR performance is more pronounced, suggesting that CSR may act as an insurance or risk-hedging tool. Overall, we provide evidence that risk-tolerance of CEO plays a significant role in shaping CSR performance.

Tax-Favored Stock Donations by Corporate Insiders and Consequences for Equity Markets
Anil Arya, Brian Mittendorf & Ram Ramanan
Management Science, forthcoming


Although corporate insiders face substantial restrictions on stock sales, securing tax deductions through charitable donations of stock is viewed as an attractive alternative. Recent press coverage and growing empirical evidence confirm that insider donations occur frequently and often precede stock price drops. Securities regulators have also taken note, with a recent push for new rules to require rapid disclosure as with insider trades. This paper develops a model of informed stock trading when disposal of stock by insiders takes the form of tax-favored charitable donations rather than direct trading. We demonstrate that charitable gifts by insiders can reflect nonpublic information about firm value and that they do so in a manner that promotes greater market efficiency. Relative to informed trading, insider donations yield greater market liquidity, more efficient equity prices, and superior investor protection. The results suggest that although insider donations deserve scrutiny, they are not equivalent to insider trades. The results also provide a general framework to examine implications of insider donations for tax policy governing philanthropic behavior.

Political Uncertainty and Firm Investment: Project-level Evidence from M&A Activity
Zhenhua Chen et al.
Journal of Financial and Quantitative Analysis, forthcoming


We study how firms alter investment projects to mitigate exposure to political uncertainty. We examine deal-level merger data and find that, in addition to delaying and forgoing merger announcements, acquirers: shift merger announcements earlier in time to avoid the period between announcement and effective dates overlapping an election, shift targets geographically away from election states, decrease the size of election-year deals, and shift from equity to cash financing for election-year deals. These results are stronger for acquirers with tighter financial constraints and deals more likely to be financed with equity and show financing matters to firms' responses to election uncertainty.

Electronic voting and strategic disclosure before shareholder meetings
Eugenia Lee & Wonsuk Ha
Economics Letters, forthcoming


Electronic voting allows shareholders to participate in shareholder meetings without being physically present. This study examines the effect of electronic voting on firms' disclosure behavior before the meetings. Empirical analyses reveal that firms that adopt electronic voting are more likely than non-adopting firms to provide good-news earnings forecasts before shareholder meetings. Firms with poorer past performance are more likely to increase disclosure. The positive returns associated with disclosure in the pre-meeting period reverse after the meeting. Overall, the results suggest that electronic voting induces strategic disclosure by managers, significantly altering the corporate information environment.

Do IPO Firms Become Myopic?
Vojislav Maksimovic, Gordon Phillips & Liu Yang
Review of Finance, forthcoming


We compare the growth and responsiveness to demand shocks of post-IPO firms and their private counterparts. Using multiple measures of myopia and multiple ways to match IPO firms with private firms, we do not find evidence of myopic behavior by public firms. IPO firms respond more to investment opportunities and have higher productivity in their early public years. Our results on public firms' sensitivity to growth opportunities hold under several robustness tests, including when we consider firms' total growth including acquisitions. The results show the importance of matching public to private firms early in their life.

Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers
Ugur Lel, Gerald Martin & Zhongling Qin
Journal of Financial and Quantitative Analysis, forthcoming


Upon the revelation of corporate misconduct by firms in their portfolios, institutional investors experience a significant discount in the market value of their portfolios, excluding misconduct firms, creating a short-term spillover that averages $92.7 billion losses per year. We examine an expansive set of channels under which this spillover to non-target firms can occur, and find that it reflects the loss of the embedded value of monitoring by a common institutional owner, enforcement wave activity, and industry peer and business relationships. Institutional investors also experience significant abnormal outflow of funds in the year following the misconduct event.

Managerial Duties and Managerial Biases
Ulrike Malmendier, Vincenzo Pezone & Hui Zheng
Management Science, forthcoming


Much of the evidence on managerial biases in corporate finance focuses on the CEO and, in particular, CEO overconfidence. This singular focus can lead to misattribution as it ignores the roles of other managers who are responsible for a given corporate outcome. We evaluate the influence of the CFO and other C-suite executives as compared with the CEO. Mirroring the widely used Longholder CEO measure of CEO overconfidence, we construct Longholder CFO and Longholder Other measures. For financing decisions, we find that CEO overconfidence becomes an insignificant predictor of most decisions when included jointly with the CFO proxy, whereas CFO overconfidence has strong predictive power. The reverse holds for nonfinancing decisions: CEO beliefs predict the risk and return of investment projects and, thus, their cost of financing as well as acquisitions. Other C-suite managers' overconfidence is not significant in either of these two realms. CEO overconfidence does remain significant even for financing decisions in the subsample of firms with "powerful" (entrenched) CEOs. We also show that overconfident CEOs tend to hire overconfident CFOs, which generates a multiplier effect and explains the misattribution to the CEO in analyses that do not account for the roles of other managers. Our results imply that analyses of managerial biases need to identify the dominant decision makers and account for their respective influence.

Does writing down goodwill imperil a CEO's job?
Arnold Cowan, Cynthia Jeffrey & Qian Wang
Journal of Accounting and Public Policy, forthcoming


We find that accounting charges for goodwill impairment, which imply a deterioration in the capabilities of acquired assets to generate expected cash flows, provide useful indicators of CEO underperformance. The results show that the size and presence of a goodwill impairment charge are positively associated with forced, but not voluntary, CEO turnovers. This implies that goodwill impairment provides information before CEO changes occur. We also find that goodwill impairment has incremental power to predict forced turnover when it is unexpected based on book value relative to market value of equity and when it runs counter to overall firm performance. The association between goodwill impairment and forced CEO turnover varies with audit quality, consistent with the importance of the perceived reliability of accounting information for its effect on CEO retention decisions. Given that the FASB recently considered eliminating annual goodwill impairment testing (FASB, 2022) whereas the IASB not only prefers impairment testing but is considering requiring additional related disclosures (IASB, 2020), our evidence on the informativeness of goodwill impairment charges is timely.

Does Disclosure of Advertising Spending Help Investors and Analysts?Sungkyun Moon, Kapil Tuli & Anirban Mukherjee
Journal of Marketing, forthcoming


Publicly listed firms have the discretion to disclose (or not) advertising spending in their annual (10-K) reports. The disclosure of advertising spending can provide valuable information because advertising is a leading indicator of future performance. However, estimates of advertising spending are available from data providers, arguably mitigating the need for its formal disclosure. This study argues that firms' disclosure of advertising spending provides more complete and public information and therefore lowers investor uncertainty about future firm performance (idiosyncratic risk). Empirical analyses show this effect is largely driven by the negative effect of disclosure of advertising spending on analyst uncertainty. Consistent with agency theory, the negative effect of the disclosure of advertising spending on analyst uncertainty is stronger for firms with more financial resources, lower disclosure quality, and that are in more competitive industries. Additional analyses show that the disclosure of advertising spending has a significant positive effect on firm value in specific sectors. These results, therefore, identify an avenue for Chief Marketing Officers to play a greater role in managing investor relations. In addition, they suggest strong merit for the Securities and Exchange Commission and the Financial Accounting Standards Board to reconsider current regulations governing advertising spending disclosure.



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