It starts at the top

Kevin Lewis

October 31, 2017

Shaped by Their Daughters: Executives, Female Socialization, and Corporate Social Responsibility
Henrik Cronqvist & Frank Yu
Journal of Financial Economics, forthcoming


Corporate executives managing some of the largest public companies in the U.S. are shaped by their daughters. When a firm’s chief executive officer (CEO) has a daughter, the corporate social responsibility rating (CSR) is about 9.1% higher, compared to a median firm. The results are robust to confronting several sources of endogeneity, e.g., examining first-born CEO daughters and CEO changes. The relation is strongest for diversity, but significant also for broader pro-social practices related to the environment and employee relations. Our study contributes to research on female socialization, heterogeneity in CSR policies, and plausibly exogenous determinants of CEOs’ styles.

It is Easy to Be Brave from a Safe Distance: Proximity to the SEC and Insider Trading
Trung Nguyen & Quoc Nguyen
University of Illinois Working Paper, October 2017


We use hand-collected data from SEC's litigation releases for insider trading violations to examine the effect of geographic distance on its enforcement activities and insider trading activities. First, we find that the SEC is more likely to investigate companies that are closer to its offices. Second, we find that illegal insider trading increases with a company's distance from an SEC office. Lastly, we utilize the closure of SEC offices as exogenous shocks to geographic proximity and find that insider trading at nearby companies increase significantly compared with trading at otherwise similar companies not affected by the closures. Overall, our findings suggest that information asymmetry and resource constraints prevent regulators from monitoring effectively.

Silver Bullet or Ricochet? CEOs' Use of Metaphorical Communication and Infomediaries' Evaluations
Andreas König et al.
Academy of Management Journal, forthcoming


We combine literature on rhetoric and socially situated sensemaking to illuminate the challenges that emerge when chief executive officers (CEOs) try to influence infomediaries by using metaphorical communication — figurative linguistic expressions that convey thoughts and feelings by describing one domain, A, through another domain, B. Specifically, we theorize that, because different infomediaries are situated in different thought worlds, CEOs' use of metaphorical communication has contradictory effects on journalists' and securities analysts' evaluations: While it triggers more favorable statements from journalists, it prompts more unfavorable assessments from analysts. Moreover, we integrate findings from cognitive psychology to argue that these contradictory effects increase the more a firm's performance falls behind market expectations. Our hypotheses find support in an extensive analysis of 937 quarterly earnings calls in the U.S. pharmaceutical, hardware, and software industries, and of journalists' statements and analysts' earnings forecasts and recommendations. Our novel theorizing and findings suggest that the use of discursive frames, especially in the form of metaphorical communication, in firms' interactions with critical audiences creates thought-provoking and thus far neglected dilemmas. In developing and testing these thoughts, we contribute to and link ongoing conversations in management science, especially discussions of organizational reputation, executive communication, and impression management.

Opportunism as a firm and managerial trait: Predicting insider trading profits and misconduct
Usman Ali & David Hirshleifer
Journal of Financial Economics, forthcoming


We show that opportunistic insiders can be identified through the profitability of their trades prior to quarterly earnings announcements (QEAs) and that opportunistic trading is associated with various kinds of firm or managerial misconduct. A value-weighted trading strategy based on (not necessarily pre-QEA) trades of opportunistic insiders earns monthly four-factor alphas of over 1%, which is much higher than in past insider trading literature and substantial and significant even on the short side. Firms with opportunistic insiders have higher levels of earnings management, restatements, US Securities and Exchange Commission enforcement actions, shareholder litigation, and executive compensation. These findings suggest that opportunism is a domain-general trait.

Do long-term investors improve corporate decision making?
Jarrad Harford, Ambrus Kecskés & Sattar Mansi
Journal of Corporate Finance, forthcoming


We study the effect of investor horizons on a comprehensive set of corporate decisions. We argue that monitoring by long-term investors generates decision making that maximizes shareholder value. We find that long-term investors strengthen governance and restrain managerial misbehaviors such as earnings management and financial fraud. They discourage a range of investment and financing activities but encourage payouts. Innovation increases, in quantity and quality. Shareholders benefit through higher profitability that the stock market does not fully anticipate, and lower risk.

Geographic concentration of institutions, corporate governance, and firm value
Xiaoran Huang & Jun-Koo Kang
Journal of Corporate Finance, December 2017, Pages 191-218


We examine the impact of geographic concentration of institutional investors on corporate governance and firm value. We find that firms whose large institutions are closely located to each other experience more shareholder-coordinated activities before Schedule 13D filings, more concerted proxy votes against management proposals, higher forced CEO turnover-performance sensitivity, higher returns around CEO turnover announcements and Schedule 13D filings, and larger increases in Tobin's q. These results are robust to using the introduction of new direct airline routes as an exogenous source of variation in proximity. Our results suggest that geographic concentration of investors increases monitoring effectiveness.

Do Executive Compensation Contracts Maximize Firm Value? Evidence from a Quasi-Natural Experiment
Menachem (Meni) Abudy et al.
Columbia University Working Paper, September 2017


There is considerable debate on whether executive compensation contracts are designed to maximize firm value or a result of rent extraction. The endogenous nature of the contracts limits the ability of prior research to answer this question. In this study, we use events surrounding the surprising and quick enactment of a new law restricting executive pay to a binding upper limit in the insurance, investment and banking industries. This quasi-natural experiment enables clear identification. In contrast to the predictions of the value maximization view, we find significantly positive abnormal returns in these industries in a short-term event window around the passage of the law. This effect is concentrated among firms bound by the restriction. We find similar results using a regression discontinuity design, when we restrict our sample to firms with executive payouts that are just below and just above the law’s pay limit. We find that the correlation between the annual expected pay savings and the increase in firm value around the event date is 82%. Ruling out possible alternative explanations, we also find that the increase in firm value is greater for firms with weaker corporate governance and smaller for firms that grant a greater portion of their executive compensation in the form of equity. Lastly, in a series of placebo tests, we find no evidence of significant abnormal returns in the period just before the event window nor in the period just after the event window. These results provide causal evidence that, on average, compensation contracts can be set in a way that does not maximize firm value.

Agency, Firm Growth, and Managerial Turnover
Ronald Anderson et al.
Journal of Finance, forthcoming


We study managerial incentive provision under moral hazard when growth opportunities arrive stochastically and pursuing them requires a change in management. A trade-off arises between the benefit of always having the “right” manager and the cost of incentive provision. The prospect of growth-induced turnover limits the firm's ability to rely on deferred pay, resulting in more front-loaded compensation. The optimal contract may insulate managers from the risk of growth-induced dismissal after periods of good performance. The evidence for the U.S. broadly supports the model's predictions: firms with better growth prospects experience higher CEO turnover and use more front-loaded compensation.

Advising Shareholders in Takeovers
Doron Levit
Journal of Financial Economics, forthcoming


This paper studies the advisory role of the board of directors in takeovers. I develop a model in which the takeover premium and the ability of the target board to resist the takeover are endogenous. The analysis relates the influence of the board on target shareholders and the reaction of the market to its recommendations to various characteristics of the acquirer and the target. I also show that the expected target shareholder value can decrease with the expertise of the board and it is maximized when the board is biased against the takeover. Generally, uninformative and ignored recommendations are not necessarily evidence that the target board has no influence on the outcome of the takeover. Perhaps surprisingly, under the optimal board structure, target shareholders ignore the recommendations of the board, which are never informative in equilibrium.

Market for CEO talent, determinants and consequences
Saif Ullah
International Review of Financial Analysis, forthcoming


This paper investigates the rare situations in which the CEO of one firm (old) is hired by another firm (new). We find that a majority of the new firms have recently experienced an involuntary turnover, and most of the old firms replace a departing CEO with an insider. The market reacts negatively to the departure of these CEOs and positively to their hiring by new firms. Our findings suggest that bigger but less profitable firms are able to hire other firms' CEOs. These CEOs receive increased compensation and media visibility after the turnover. The old firms' operating performance decreases significantly after these CEOs leave, while the operating performance of the new firms changes insignificantly.

Social capital and corporate cash holdings
Ahsan Habib & Mostafa Monzur Hasan
International Review of Economics & Finance, November 2017, Pages 1–20


In this paper we investigate the impact of regional social capital on corporate cash holdings. We also examine the possible channels through which social capital may affect cash holdings. Using US data, this study shows that firms from a high social capital county hold significantly less cash than firms from a low social capital county. We also confirm that social capital reduces cash holdings via the financial constraints and financial reporting quality channels, while it increases cash holdings via the systematic and idiosyncratic risk channels. Additional analysis reveals that, the effect of social capital on cash holdings is more pronounced for less geographically dispersed firms. These results are robust to alternative specifications of cash holdings and social capital, and to the use of a two-stage least squares (2SLS) analysis to alleviate the endogeneity concern. Overall, our findings suggest that regional social capital plays an important role in determining corporate cash holdings.

Personal Lending Relationships
Stephen Adam Karolyi
Journal of Finance, forthcoming


I identify the effects of personal relationships on loan contracting using executive deaths and retirements at other firms as a source of exogenous variation in executive turnover. After plausibly exogenous turnover, borrowers choose lenders with which their new executive's have personal relationships 4.1 times as frequently, and loans from these lenders have 20 basis points lower spreads and 12.5% larger amounts. Personal relationships benefit firms across loan terms, especially during macroeconomic downturns. Increased financial flexibility from personal relationships insulated firms from financial shocks during the recent financial crisis: they exhibited less constrained investment and were less likely to layoff employees.

Does Corporate Social Responsibility Create Shareholder Value? The Importance of Long-Term Investors
Ambrus Kecskés, Sattar Mansi & Phuong-Anh Nguyen
Journal of Banking & Finance, forthcoming


We study the effect of corporate social responsibility (CSR) on shareholder value. We argue that long-term investors can ensure that managers choose the amount of CSR that maximizes shareholder value. We find that long-term investors do increase the value to shareholders of CSR activities, not through higher cash flow but rather through lower cash flow risk. Following prior work, we use indexing by investors and state laws on stakeholder orientation for identification. Our findings suggest that CSR activities can create shareholder value as long as managers are properly monitored by long-term investors.

Are CSR activities associated with shareholder voting in director elections and say-on-pay votes?
Charles Cullinan, Lois Mahoney & Pamela Roush
Journal of Contemporary Accounting & Economics, December 2017, Pages 225-243


When making investment decisions, many investors now regularly consider a company’s CSR activities along with traditional financial performance measures (Elliott et al., 2014). Our study considers whether shareholders may also consider CSR activities when voting in director elections and say-on-pay votes. We find that CSR performance is associated with shareholder support in both director elections and say-on-pay votes. In particular, we find higher support for both director elections and executive compensation when there are more CSR strengths. Additionally, we find that the social strength performance aspect of CSR is the most important component in the relationships between CSR and director elections and that the environmental strengths performance aspect is the most important component in the relationship between CSR and executive compensation. Our results suggest that shareholders may value certain types of CSR and are more supportive of boards and management when CSR performance is stronger.

Local Corporate Social Responsibility, Media Coverage, and Shareholder Value
Seong Byun & Jong-Min Oh
Journal of Banking & Finance, forthcoming


Using news articles covering firm's corporate social responsibility (CSR) activities, we find that publicized CSR activities are positively associated with shareholder value and improved future operating performance. Furthermore, we find that media coverage on CSR engagements with local impact on companies’ communities and employees, rather than those with broader social impact on the general public, is the main driver in explaining higher shareholder value and operating performance. We also implement a two-stage least-squares regression (2SLS) and propensity score matching to establish a causal link between publicized local CSR activities and shareholder value. Our evidence is consistent with the notion that shareholders put positive value on locally-oriented CSR when it is also complemented with high level of stakeholder awareness.

Starting, Stopping and Reporting on Corporate Social Responsibility: How Do Investors React When Companies Stop Doing Good?
Shannon Garavaglia, Julie Irwin & Brian White
University of Texas Working Paper, September 2017


We conduct two experiments to examine investors’ reactions to starting and stopping CSR initiatives as well as to investigate how separate and integrated reporting of CSR initiatives affect these reactions. We find that investors react more negatively to stopping a CSR initiative than to stopping a general business initiative, even though reactions to starting the initiatives do not differ. Further, communicating CSR information in an integrated report that combines financial and CSR information partially mitigates this reaction and changes investors’ reasoning processes. Investors who learn about a firm’s decision to stop a CSR initiative in a standalone report react negatively because they are focused on the (un)ethical basis for the decision, whereas those who receive an integrated report react less negatively because they are focused on business reasons for the decision. Our findings have an important takeaway for practice, in that managers who consider undertaking CSR initiatives need to understand the consequences of starting, stopping and reporting on an initiative to make informed decisions.

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