Owning Management

Kevin Lewis

October 07, 2021

When the local newspaper leaves town: The effects of local newspaper closures on corporate misconduct
Jonas Heese, Gerardo Pérez-Cavazos & Caspar David Peter
Journal of Financial Economics, forthcoming

We examine whether the local press is an effective monitor of corporate misconduct. Specifically, we study the effects of local newspaper closures on violations by local facilities of publicly listed firms. After a local newspaper closure, local facilities increase violations by 1.1% and penalties by 15.2%, indicating that the closures reduce firm monitoring by the press. This effect is not driven by the underlying economic conditions, the underlying local fraud environment, or the underlying firm conditions. Taken together, our findings indicate that local newspapers are an important monitor of firms’ misconduct. 

Ideological Homophily in Board Composition and Interlock Networks: Do Liberal Directors Inhibit Viewpoint Diversity?
Kerry Hudson & Robert Morgan
Corporate Governance, forthcoming

A consistent feature of social networks is homophily: the tendency for people to interact with similar others. Psychological and sociological research suggests that homophily is most pronounced along ideological lines, with conflicting evidence as to whether this tendency is higher among individuals who hold liberal or conservative beliefs. Based on this literature, we conduct the first study of ideological homophily in two key organizational networks: the intra-firm connections among directors on the board, and the inter-firm connections created by board interlocks. In a panel of 408 U.S. firms between 2000 and 2020, we find that liberalism increases homophily both within and between boards. Furthermore, we find that homophily has decreased over time, but that this has been driven by conservative boards while the effect of liberalism has strengthened in recent years. These findings provide the first evidence for an ideological component in the composition of intra- and inter-organizational networks. 

Does Analyst Coverage Affect Workplace Safety?
Daniel Bradley, Connie Mao & Chi Zhang
Management Science, forthcoming

We find firms’ work-related injury rates are negatively associated with the level of analyst coverage. This result is also robust at the establishment level at which we find local analysts have a more profound impact than distant analysts. Cross-sectionally, our results are exacerbated in firms with weak internal governance mechanisms and in industries with low union representation. Finally, management is more likely to discuss safety issues during earnings conference calls in the presence of more analysts. Overall, our results suggest analysts play an effective external monitoring role and have a subtle yet important impact on employee welfare. 

Value creation in shareholder activism
Rui Albuquerque, Vyacheslav Fos & Enrique Schroth
Journal of Financial Economics, forthcoming

We measure value creation by activist investors via structural estimation of a model of the choice between passive investment and activism. Our estimates imply that average returns following activist intent announcements consist of 74.8% expected value creation, or treatment, 13.4% stock picking, and 11.8% sample selection effects. Higher treatment values predict improvements in firm performance and lower proxy contest probabilities, whereas abnormal announcements returns do not, suggesting that our estimate identifies more effective activism campaigns. The evidence demonstrates the importance of using the joint distribution of investment strategies and announcement returns to recover the expected returns and costs of activism. 

Does Modern Information Technology Attenuate Managerial Information Hoarding? Evidence from the EDGAR Implementation
Xiaoran Ni, Ye Wang & David Yin
Journal of Corporate Finance, forthcoming

Exploiting the staggered implementation of the EDGAR system from 1993 to 1996 as exogenous shocks to information dissemination technologies, we document that faster dissemination of corporate disclosures through the internet increases firms' future stock price crash risk. These results are robust to alternative sample constructions, measures of crash risk, and fixed effects. Supplemental evidence suggests two channels: an increase in stock liquidity and an increase in investors' reliance on public disclosure, both of which exacerbate managers' incentives to withhold bad news. Overall, our findings suggest that modern information technology may have an unintended effect on managers' bad news hoarding behavior. 

Management team cultural alignment and mergers and acquisitions
Hong Zhao
Finance Research Letters, forthcoming

We examine the way cultural alignment between acquirer and target management teams affects the success of M&As. By tracing managers’ cultural origins based on their family names, we obtain two measures of cultural alignment: cultural distance and origin similarity between the management teams. The regression results show that firms with culturally aligned management teams are more likely to form merger-pairs. Regarding merger-performance, cultural alignment increases acquirer-target-combined announcement returns, acquirers’ post-merger operating and market performance, and the integration of targets’ top executives. Taken together, our results suggest that managers’ cultural alignment is an important determinant of merger success.

The Distress Anomaly Is Deeper Than You Think: Evidence from Stocks and Bonds
Doron Avramov et al.
Review of Finance, forthcoming

The distress anomaly reflects the abnormally low returns of high credit risk stocks during financial distress. Evidence from stocks and corporate bonds reinforces the anomaly and challenges rationales based on shareholders’ ability to extract value from bondholders, time-varying betas, lottery-type preferences, biased earnings expectations, and limits-to-arbitrage. Moreover, mispricing of distressed stocks and bonds is associated with excess investment and excess external financing. Potential real distortions are materially understated when assessed based only on equity mispricing. We emphasize the important role of corporate bonds in dissecting the distress anomaly, and show that the anomaly is an unresolved puzzle. 

Ambiguity and the Tradeoff Theory of Capital Structure
Yehuda Izhakian, David Yermack & Jaime Zender
Management Science, forthcoming

We examine the impact of ambiguity, or Knightian uncertainty, on the capital structure decision, using a static tradeoff theory model in which agents are both ambiguity and risk averse. The model confirms the well-known result that greater risk — the uncertainty over outcomes — leads firms to decrease leverage. Conversely, the model indicates that greater ambiguity — the uncertainty over the probabilities associated with the outcomes — leads firms to increase leverage. Using a theoretically based measure of ambiguity, our empirical analysis presents evidence consistent with these notions, showing that ambiguity has an important and distinct impact on capital structure. 

Repeated engagement in misconduct by executives involved with financial restatements
Poonam Khanna et al.
Organizational Behavior and Human Decision Processes, September 2021, Pages 194-203

Recidivism, or repeated engagement in misconduct despite being sanctioned, among top executives has received limited attention in the literature on organizational misconduct. Based on insights from fairness theory, supplemented by insights from attribution theory, we argue that the likelihood of an executive recidivating is associated with the perceived fairness of the sanctions he/she faces following the initial misconduct. We examine one consequence of a common managerial labor market sanction – lower compensation – on the likelihood of recidivism. Using a sample of Chief Financial Officers (CFOs) who left their positions following financial misconduct at their firms and subsequently migrated to another public firm in the same capacity, we test and find support for our prediction. A number of robustness and endogeneity tests add support to our recidivism model. 

Does Media Coverage Cause Meritorious Shareholder Litigation? Evidence from the Stock Option Backdating Scandal
Dain Donelson, Antonis Kartapanis & Christopher Yust
Journal of Law & Economics, forthcoming

This study examines the role of media coverage on meritorious shareholder litigation. Asserting a causal effect of the media on litigation is normally difficult due to the endogenous nature of media coverage. However, we use the Wall Street Journal’s backdating coverage to overcome these issues. Using a matched sample of firms with similar probabilities of backdating and related government investigations, we find consistent evidence of a causal relation between media coverage and meritorious litigation. We also find a negative abnormal market reaction to the articles and conduct a variety of analyses to show that it was the content of the articles, rather than the coverage itself, that resulted in litigation. Our results demonstrate that the media serves an important role in corporate accountability that both disincentivizes misconduct and holds firms accountable.


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