On Behalf of Shareholders

Kevin Lewis

September 05, 2023

Corporate Tax Breaks and Executive Compensation
Eric Ohrn
American Economic Journal: Economic Policy, August 2023, Pages 215-255


I analyze the effect of two corporate tax breaks, bonus depreciation and the Domestic Production Activities Deduction (DPAD), on executive compensation in publicly traded US firms. I find both tax breaks significantly increase executive compensation. For every dollar a firm benefits from the tax breaks, compensation of the firm's top five highest-paid executives increases by $0.17 to $0.25. The tax breaks increase compensation primarily in firms with weaker governance structures, suggesting the compensation response is driven by executive rent extraction.

ChatGPT and Corporate Policies
Manish Jha et al.
University of Chicago Working Paper, July 2023 


This paper uses ChatGPT, a large language model, to extract managerial expectations of corporate policies from disclosures. We create a firm-level ChatGPT investment score, based on conference call texts, that measures managers' anticipated changes in capital expenditures. We validate the ChatGPT investment score with interpretable textual content and its strong correlation with CFO survey responses. The investment score predicts future capital expenditure for up to nine quarters, controlling for Tobin's q, other predictors, and fixed effects, implying the investment score provides incremental information about firms' future investment opportunities. The investment score also separately forecasts future total, intangible, and R&D investments. High-investment-score firms experience significant future abnormal returns adjusted for factors, including the investment factor. We demonstrate ChatGPT's applicability to measure other policies, such as dividends and employment. ChatGPT revolutionizes our comprehension of corporate policies, enabling the construction of managerial expectations cost-effectively for a large sample of firms over an extended period.

Directing the Labor Market: The Impact of Shared Board Members on Employee Flows
Taylor Begley, Peter Haslag & Daniel Weagley
Georgia Tech Working Paper, August 2023


Using resume data on over 45 million U.S. workers, we find that the flow of employees between a pair of firms sharply drops by about 20% when the firms start to share a director on their boards. We find no trend prior to initiation, and the reduced flows persist throughout the overlapping period. This relationship is stronger in settings where firms are more likely to benefit from lower competition for each other's employees: between firms with a similar workforce, located in the same geographical area, and of similar size, between firms in the same product market, and between firms with greater historical flows of employees between the two companies. The drop in flows is most pronounced for high-skilled employees, who are likely more costly to replace. The results suggest that shared directors facilitate cooperative behavior in the labor market.

What Private Equity Does Differently: Evidence from Life Insurance
Divya Kirti & Natasha Sarin
Review of Financial Studies, forthcoming 


This paper studies how private equity creates value and its consequences for consumer welfare in the insurance industry, where PE investments grew tenfold following the financial crisis. PE firms add value through regulatory and tax arbitrage that increases profits relative to their non-PE counterparts. Crucially, the impact on consumer welfare is nuanced: in the short run, consumers benefit from more favorably priced products. But the arbitrage strategy also exposes them to more risk, as annual expected losses scaled by capital buffers rise by 50 percentage points. This creates the possibility of consumer harm in the event of a downturn.

When the Presidential Candidate Comes to Town: The Impact of Donald J. Trump's Campaign Rallies on Local Firms' Environmental and Social Performance
Feng Guo et al.
Journal of Business Ethics, September 2023, Pages 531-552 


This study investigates how the explicitly anti-prosocial and anti-pro-environmental speech by political elites affects firms' environmental and social (E&S) performance. Using the case of the Donald J. Trump (DJT) campaign for president in the United States when he gave out controversial and inflammatory remarks, including those regarding E&S issues, we find that local firms' E&S performance decreased significantly in the year following DJT's presidential campaign rally compared with firms in other geographic areas where there was no DJT's presidential campaign event. A further test indicates that the change in firms' E&S performance can be driven by DJT remarks' influence on local social norms shift. Furthermore, we show that the post-rally decrease of local firms' E&S performance is more pronounced for local firms that operate primarily locally or local firms that are more sensitive to political uncertainty. Taken together, these findings indicate that political events such as political elites giving remarks can affect firms' E&S performance.

The angels' share hypothesis in new firms
Ikenna Uzuegbunam et al.
Small Business Economics, August 2023, Pages 843-865 


We investigate the impact of the angels' share -- the angel investors' proportion of ownership -- on entrepreneurial performance. We argue that below the blockholder level of ownership, the angels' share is associated with greater innovation but lower market performance. In contrast, we predict that above the blockholder level of ownership, the angels' share is associated with lower innovation but higher market performance. We test this proposition across two independent samples of US-based ventures. In study 1, we analyzed data from the Kauffman Firm Survey (KFS, 2004-2011) to substantiate the angels' share hypothesis. Moreover, we show how angels' share and family investors interact in new ventures. In study 2, we analyzed data from the Entrepreneurship Database Program (EDP, 2013-2018) to check the robustness of the angels' share hypothesis. Both studies point to the importance of ownership thresholds in predicting angel investor activism in the strategy of new ventures.

Corporate Ownership and Employee Compensation
Claudine Madras Gartenberg & Elaine Seoyoung Pak
University of Pennsylvania Working Paper, August 2023 


This study documents that firms with active corporate owners compensate their employees less than their peers. We analyze over 20 million employee records from 897 US firms and calculate pay differentials for employees in comparable positions across firms. The analysis yields three main insights. First, firms with external active owners (i.e., hedge funds and private equity firms) pay 3 to 5% less than other firms for comparable work. Second, these pay differentials correspond to differences in rent-sharing practices across these firms: firms with external active owners provide flatter incentives (i.e., lower bonus to base pay) and are less likely to grant equity to employees. Lastly, lower pay for comparable work does not correspond to higher profits for firms, even within industries that depend relatively more on cost management than on innovation. All together, these results are consistent with corporate owners having different orientations toward human capital, which in turn may reflect differing strategic approaches toward value creation and appropriation.

Shareholder Monitoring through Voting: New Evidence from Proxy Contests
Alon Brav et al.
Review of Financial Studies, forthcoming 


We present the first comprehensive study of mutual fund voting in proxy contests. Among contests where voting takes place, passive funds are 10 percentage points less likely than active funds to vote for dissidents. The gap shrinks significantly when accounting for votes withheld from management nominees, settled contests, and votes by non-"Big-Three" fund families. Passive and active funds are equally informed about firm fundamentals, although passive funds view contest-related SEC filings more often than active funds during contests, in absolute levels and incrementally relative to noncontest periods. We conclude that passive funds are engaged shareholders in high-stakes voting events.


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