Money Leader

Kevin Lewis

December 26, 2009

Blockholder Trading, Market Efficiency, and Managerial Myopia

Alex Edmans
Journal of Finance, December 2009, Pages 2481-2513

This paper analyzes how blockholders can exert governance even if they cannot intervene in a firm's operations. Blockholders have strong incentives to monitor the firm's fundamental value because they can sell their stakes upon negative information. By trading on private information (following the "Wall Street Rule"), they cause prices to reflect fundamental value rather than current earnings. This in turn encourages managers to invest for long-run growth rather than short-term profits. Contrary to the view that the U.S.'s liquid markets and transient shareholders exacerbate myopia, I show that they can encourage investment by impounding its effects into prices.


Executive pay and "independent" compensation consultants

Kevin Murphy & Tatiana Sandino
Journal of Accounting and Economics, forthcoming

Executive compensation consultants face potential conflicts of interest that can lead to higher recommended levels of CEO pay, including the desires to "cross-sell" services and to secure "repeat business." We find evidence in both the US and Canada that CEO pay is higher in companies where the consultant provides other services, and that pay is higher in Canadian firms when the fees paid to consultants for other services are large relative to the fees for executive-compensation services. Contrary to expectations, we find that pay is higher in US firms where the consultant works for the board rather than for management.


The desire to win: The effects of competitive arousal on motivation and behavior

Deepak Malhotra
Organizational Behavior and Human Decision Processes, forthcoming

The paper theoretically elaborates and empirically investigates the "competitive arousal" model of decision making, which argues that elements of the strategic environment (e.g., head-to-head rivalry and time pressure) can fuel competitive motivations and behavior. Study 1 measures real-time motivations of online auction bidders and finds that the "desire to win" (even when winning is costly and will provide no strategic upside) is heightened when rivalry and time pressure coincide. Study 2 is a field experiment which alters the text of email alerts sent to bidders who have been outbid; the text makes competitive (vs. non-competitive) motivations salient. Making the desire to win salient triggers additional bidding, but only when rivalry and time pressure coincide. Study 3, a laboratory study, demonstrates that the desire to win mediates the effect of rivalry and time pressure on over-bidding.


Escape from New York: The market impact of loosening disclosure requirements

Nuno Fernandes, Ugur Lel & Darius Miller
Journal of Financial Economics, February 2010, Pages 129-147

We examine the first significant deregulation of U.S. disclosure requirements since the passage of the 1933/1934 Exchange and Securities Acts: the 2007 Securities and Exchange Commission (SEC) Rule 12h-6. Rule 12h-6 has made it easier for foreign firms to deregister with the SEC and thereby terminate their U.S. disclosure obligations. We show that the market reacted negatively to the announcement by the SEC that firms from countries with weak disclosure and governance regimes could more easily opt out of the stringent U.S. reporting and legal environment. We also find that since the rule's passage, an unprecedented number of firms have deregistered, and these firms often had been previous targets of U.S. class action securities lawsuits or SEC enforcement actions. Our findings suggest that shareholders of non-U.S firms place significant value on U.S. securities regulations, especially when the home country investor protections are weak.


Preference reversals in evaluations of cash versus non-cash incentives

Victoria Shaffer & Hal Arkes
Journal of Economic Psychology, December 2009, Pages 859-872

Data are presented from six experiments that demonstrate preference reversals for cash versus non-cash incentives. When given a hypothetical choice between cash and non-cash incentives, participants chose the cash incentive (joint evaluation, JE). However when asked to evaluate them separately (separate evaluation, SE), participants gave higher ratings to the non-cash incentive; these findings were replicated with "real" monetary incentives. Preference reversals were partially dictated by the type of non-cash incentive offered: they were observed for hedonic non-cash incentives but not for utilitarian non-cash incentives. Preference reversals were caused by two factors: a shift in the dominant attribute under consideration and the presence of a value-seeking attribute that provides information about the rational choice. Specifically, participants consider the affective characteristics of the incentives during SE and the fungibility of the incentives during JE. Additionally, employees receiving rewards from an incentive program reported that recipients of non-cash awards would enjoy their reward more and would be more likely to tell their friends about it.


Is doing good good for you? How corporate charitable contributions enhance revenue growth

Baruch Lev, Christine Petrovits & Suresh Radhakrishnan
Strategic Management Journal, February 2010, Pages 182-200

This study examines the impact of corporate philanthropy growth on sales growth using a large sample of charitable contributions made by U.S. public companies from 1989 through 2000. Applying Granger causality tests, we find that charitable contributions are significantly associated with future revenue, whereas the association between revenue and future contributions is marginally significant at best. We then identify the mechanism underlying our findings. Our results are particularly pronounced for firms that are highly sensitive to consumer perception, where individual consumers are the predominant customers. In addition, we document a positive relationship between contributions and customer satisfaction. Overall, our evidence suggests that corporate philanthropy, under certain circumstances, furthers firms' economic objectives.


Procedural Fairness and Endorsement of Prototypical Leaders: Leader Benevolence or Follower Control?

Marius van Dijke & David De Cremer
Journal of Experimental Social Psychology, January 2010, Pages 85-96

This research explored why strongly identifying followers endorse prototypical leaders by addressing the role of procedural fairness in this process. We introduced the distinction between procedural fairness rules relating to leader benevolence (i.e. whether the leader supports the group's interests) and follower control (i.e., whether followers can influence the leader's decisions). We predicted that strongly identifying group members endorse prototypical leaders because they perceive such leaders as acting in line with benevolence related fairness rules rather than because such leaders are perceived as giving followers control. An organizational field study and a laboratory experiment revealed support for these ideas. Our results thus provide insights into why prototypical leaders are endorsed among strongly identifying followers. They also have implications for the procedural fairness literature in showing that frequently studied procedural fairness rules (e.g. voice) do not explain endorsement of leaders believed to support the group's interests.


Does Raiding Explain the Negative Returns to Faculty Seniority?

Bernt Bratsberg, James Ragan & John Warren
Economic Inquiry, forthcoming

We track faculty for 30 yr at five PhD-granting departments of economics. Two-thirds of faculty who take alternative employment move downward; less than one-quarter moves upward. We find a substantial penalty for seniority, even after richly controlling for faculty productivity, and the penalty is little changed when we allow wages and returns to seniority to differ by mobility status. Faculty who end up moving to better or comparable positions were penalized as severely for seniority while they were in our sample as faculty who stay. These results are incompatible with the raiding hypothesis. Faculty from top 10 programs are also punished for seniority but to a lesser degree than other faculty, which could reflect reduced monopsony power against such faculty if they are more marketable. All results persist when we control for prospective publications and allow lower returns for older publications. Match-quality bias has dissipated in the post-internet period, which may be the consequence of greater availability of information.


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