Owning the Executives
Selecting Directors Using Machine Learning
Isil Erel et al.
Review of Financial Studies, forthcoming
Abstract:
Can algorithms assist firms in their decisions on nominating corporate directors? Directors predicted by algorithms to perform poorly indeed do perform poorly compared to a realistic pool of candidates in out-of-sample tests. Predictably bad directors are more likely to be male, accumulate more directorships, and have larger networks than the directors the algorithm would recommend in their place. Companies with weaker governance structures are more likely to nominate them. Our results suggest that machine learning holds promise for understanding the process by which governance structures are chosen and has potential to help real-world firms improve their governance.
Corporate Purpose and Acquisitions
Claudine Gartenberg & Shun Yiu
University of Pennsylvania Working Paper, March 2021
Abstract:
This study analyzes the relationship between acquisitions -- a centerpiece of corporate strategy -- and employees’ sense of purpose. Using data from more than 1.5 million employees, we find that purpose is substantially weaker in companies following recent acquisitions. This association is driven by unique acquisitions and those with opaque disclosed rationales. We explore the performance implications of this relationship. We first isolate the component of purpose directly attributable to the deal, and then relate this component to subsequent performance. We find that deals associated with stronger purpose outperform, and those with weaker purpose do not. Together, our evidence suggests a possible tension between strategic and motivational determinants of acquisition success: while firms benefit strategically from uniqueness, it may also erode the sense of purpose within firms.
Does firm‐level political risk influence corporate social responsibility (CSR)? Evidence from earnings conference calls
Pattanaporn Chatjuthamard et al.
Financial Review, forthcoming
Abstract:
Exploiting a novel measure of firm‐level political risk based on earnings conference calls, we explore the effect of political exposure on corporate social responsibility (CSR). We show that firms more exposed to political risk invest significantly more in CSR activities. This finding is consistent with the risk‐mitigation hypothesis, which posits that CSR produces moral capital that safeguards the firm in case of a negative event. Hence, firms exposed to more political risk engage in more CSR activities to take advantage of its insurance‐like effect. An increase in political exposure by one standard deviation raises CSR engagement by 27.95%.
Is Public Equity Deadly? Evidence from Workplace Safety and Productivity Tradeoffs in the Coal Industry
Erik Gilje & Michael Wittry
NBER Working Paper, May 2021
Abstract:
We study how ownership structure, in particular public listing status, affects workplace safety and productivity tradeoffs. Theory offers competing hypotheses on how listing related frictions affect these tradeoffs. We exploit detailed asset-level data in the U.S. coal industry and find that workplace safety deteriorates dramatically under public firm ownership, primarily in mines that experience the largest productivity increases. We find evidence consistent with information asymmetry between managers and shareholders of public firms, and ties of private firm ownership with local communities being first-order drivers of workplace safety and productivity tradeoffs.
The Dollar Profits to Insider Trading
Peter Cziraki & Jasmin Gider
Review of Finance, forthcoming
Abstract:
This paper studies insider trading quantities and dollar profits to measure the benefits insiders extract from their superior information. Dollar profits are economically small for a typical insider, the median insider earning $464 per year. The correlation between dollar profits and percentage returns is moderate, because returns are negatively correlated with trade size and frequency. We show that these correlations vary with proxies for insider preferences, firm-level monitoring, and regulatory scrutiny. As a consequence, variables that predict percentage returns fail to predict dollar profits, and past dollar profits are negatively related to future returns. Our work suggests that dollar profits are a better measure for corporate governance applications of insider trading.
Access to public capital markets and employment growth
Alexander Borisov, Andrew Ellul & Merih Sevilir
Journal of Financial Economics, forthcoming
Abstract:
This paper examines the effect of going public on firm-level employment. To establish a causal effect, we employ a novel data set of private firms to investigate employment growth in IPO firms relative to a group of firms that file for an IPO but subsequently withdraw their offering. We find that employment increases significantly after going public, and the increase is more pronounced in industries with requirements for highly skilled labor and greater dependence on external finance. Improved ability to undertake acquisitions and a strategic shift toward commercialization, rather than agency problems, explain employment growth. Overall, these results highlight the importance of going public for firms’ employment policies.
Are US founding families expropriators or stewards? Evidence from quasi-natural experiment
Edward Lawrence, Dung Nguyen & Arun Upadhyay
Journal of Corporate Finance, forthcoming
Abstract:
We use board structure changes brought by the Sarbanes-Oxley Act (SOX; 2002) and subsequent listing standards as a natural experiment to investigate if founding families are expropriators or stewards of shareholder value. We hypothesize gain in a firm's value post-SOX if founding families are expropriators and a value loss if they are stewards. Using a difference-in-difference approach, we find that family firms that did not meet the requirements of SOX-related, board independence provisions before 2002, suffered significant value loss post-SOX. Our results favor the steward role for founding families.
Bankrupt Innovative Firms
Song Ma, Joy Tianjiao Tong & Wei Wang
NBER Working Paper, May 2021
Abstract:
This paper studies how innovative firms manage their innovation portfolios after filing for Chapter 11 reorganization using three decades of data. We find that they sell off core (i.e., technologically critical and valuable), rather than peripheral, patents in bankruptcy. The selling pattern is driven almost entirely by firms with greater use of secured debt, and the mechanism is secured creditors exercising their control rights on collateralized patents. Creditor-driven patent sales in bankruptcy have implications for technology diffusion — the sold patents diffuse more slowly under new ownership and are more likely to be purchased by patent trolls.
Be careful what you wish for: CEO and analyst firm performance attributions and CEO dismissal
Sun Hyun Park, Sung Hun (Brian) Chung & Nandini Rajagopalan
Strategic Management Journal, forthcoming
Abstract:
Chief executive officers (CEOs) often make internal attributions of positive firm performance outcomes by highlighting their strategic choices as the cause of favorable performance results. We investigate the dynamic consequences of CEO internal performance attributions along a CEO's tenure. CEO internal attributions create an expectation that favorable firm performance will continue under the CEO's leadership. When firm performance turns negative, however, financial analysts also make internal attributions, pointing to the strategies highlighted by the CEO as the cause of performance downfall. Analysts' internal attributions provide a board with a legitimate account casting doubt on the CEO's leadership efficacy, increasing the likelihood of dismissal. We find strong empirical support for our hypotheses in a panel dataset that tracks CEO and analyst interviews in news media around quarterly earnings announcements.
It’s not so bad: Director bankruptcy experience and corporate risk-taking
Radhakrishnan Gopalan, Todd Gormley & Ankit Kalda
Journal of Financial Economics, forthcoming
Abstract:
We show that firms take more (but not necessarily excessive) risks when one of their directors experiences a corporate bankruptcy at another firm where they concurrently serve as a director. This increase in risk-taking is concentrated among firms where the director experiences a shorter, less-costly bankruptcy and where the affected director likely exerts greater influence and serves in an advisory role. The findings show that individual directors, not just CEOs, can influence a wide range of corporate outcomes. The findings also suggest that individuals actively learn from their experiences and that directors tend to lower their estimate of distress costs after participating in a bankruptcy firsthand.
Do Firms with Specialized M&A Staff Make Better Acquisitions?
Sinan Gokkaya, Xi Liu & René Stulz
NBER Working Paper, May 2021
Abstract:
We open the black box of the M&A decision process by constructing a comprehensive sample of US firms with specialized M&A staff. We investigate whether specialized M&A staff improves acquisition performance or facilitates managerial empire building instead. We find that firms with specialized M&A staff make better acquisitions when acquisition performance is measured by stock price reactions to announcements, long-run stock returns, operating performance, divestitures, and analyst earnings forecasts. This effect does not hold when the CEO is powerful, overconfident, or entrenched. Acquisitions by firms without specialized staff do not create value, on average. We provide evidence on mechanisms through which specialized M&A staff improves acquisition performance. For identification, we use the staggered recognition of inevitable disclosure doctrine as a source of exogenous variation in the employment of specialized M&A staff.
Tax Planning Knowledge Diffusion via the Labor Market
John Barrios & John Gallemore
NBER Working Paper, May 2021
Abstract:
We examine the extent to which the labor market facilitates the diffusion of tax planning knowledge across firms. Using a novel dataset of tax department employee movements between S&P 1500 firms, we find that firms experience an increase in their tax planning after hiring a tax employee from a tax aggressive firm. This finding is robust to various research designs and specifications. Consistent with tax planning knowledge driving this result, we find that the tax planning benefit of hiring an employee from a tax aggressive firm is stronger when the employee has more tax experience and is hired into a senior tax department role, and when the hiring firm likely had less tax planning knowledge prior to the hire. Further tests suggest that tax planning knowledge is highly specific in nature: the increase in tax avoidance is larger when the hiring and former firms are similar (i.e., operating in the same sector or having similar foreign operations), and firms are more likely to hire tax department employees from firms with similar characteristics. Our study documents the first-order role of the labor market in the diffusion of tax planning knowledge across firms, and suggests that tax department human capital is a central determinant of tax planning outcomes.