Residual claimants

Kevin Lewis

March 13, 2018

Do Tax Cuts Encourage Rent Seeking by Top Corporate Executives? Theory and Evidence
Dana Andersen & Ramón López
Contemporary Economic Policy, forthcoming


This paper explores the role of tax policy in shaping incentives for executive effort (labor supply) and rent seeking within the firm. We develop a theoretical model that distinguishes between effort and rent-seeking responses to income taxes, and provides a framework to estimate a lower bound for the rent-seeking response. Using executive compensation and governance data, we find that rent seeking represents an important component of the response to changes in tax rates, especially among executives in firms with the worst corporate governance.

CEO Attributes, Compensation, and Firm Value: Evidence from a Structural Estimation
Beau Page
Journal of Financial Economics, forthcoming


I present and estimate a dynamic model of chief executive officer (CEO) compensation and effort provision. I find that variation in CEO attributes explains the majority of variation in compensation (equity and total) but little of the variation in firm value. The primary drivers of cross-sectional compensation are risk aversion and influence on the board. Additionally, I estimate the magnitude of CEO agency issues. Removing CEO influence increases shareholder value in the typical firm by 1.74%, making CEOs risk neutral increases shareholder value by 16.12%, and removing all agency frictions increases shareholder value by 28.99%.

Busy directors and firm performance: Evidence from mergers
Roie Hauser
Journal of Financial Economics, forthcoming


This paper studies whether director appointments to multiple boards impact firm outcomes. To overcome endogeneity of board appointments, I exploit variation generated by mergers that terminate entire boards and thus shock the appointments of those terminated directors. Reductions of board appointments are associated with higher profitability, market-to-book, and likelihood of directors joining board committees. The performance gains are particularly stark when directors are geographically far from firm headquarters. I conclude that the effect of the shocks to board appointments is: (i) evidence that boards matter; and (ii) plausibly explained by a workload channel: when directors work less elsewhere, their companies benefit.

Busy Directors and Shareholder Satisfaction
Kevin Chen & Wayne Guay
University of Pennsylvania Working Paper, December 2017


Prior research has examined the firm-level performance implications of corporate boards that have a large proportion of “busy” directors, with mixed findings. Firm-level analysis, however, masks important heterogeneity in director time constraints. We develop and validate shareholder voting as a proxy for shareholders’ satisfaction with various types of busy directors. Our director-specific tests show that busy directors receive lower shareholder satisfaction than non-busy directors, but the effects vary substantially depending on the individual director’s other time constraints. Specifically, the negative relation between shareholder satisfaction and busyness is smaller for retired directors, and is larger for directors who are full-time executives and who sit on boards where fiscal-year-ends cluster in the same month. We also find that the potential expertise benefit of busy directors is more pronounced in early-stage firms, firms with higher CEO ownership, and firms with lower book-to-market ratios. Our analyses shed new light on the heterogeneity of busy directors and, more broadly, highlight the useful role of shareholder voting in board composition research.

Bid anticipation, information revelation, and merger gains
Wenyu Wang
Journal of Financial Economics, forthcoming


Because firms’ takeover motives are unobservable to investors, mergers are only partially anticipated and often appear as mixed blessings for acquirers. I construct and estimate a model to study the causes and consequences of bid anticipation and information revelation in mergers. Controlling for the market’s reassessment of the acquirer’s stand-alone value, I estimate that acquirers gain 4% from a typical merger. The total value of an active merger market averages 13% for acquirers, part of which is capitalized in their pre-merger market values. My model also explains the correlation between announcement returns and firm characteristics, as well as the low predictability of mergers.

The strategic choice of payment method in corporate acquisitions: The role of collective bargaining against unionized workers
I-Ju Chen, Yan-Shing Chen & Sheng-Syan Chen
Journal of Banking & Finance, March 2018, Pages 408–422


Acquirers facing strong union power tend to acquire target firms with cash rather than equity or a mix of cash and equity. A one standard deviation increase in the union power faced by the acquirer increases the odds of choosing cash payment by a factor ranging from 1.26 to 1.57. The effect is stronger when: the acquiring firm is located in states without the right-to-work laws; the interests of managers are more aligned with shareholders in acquiring firms; and acquiring firms’ asset specificity is high. When union power is strong, acquirers making cash payment are associated with a significantly positive announcement return. In addition, they are less likely to experience labor strikes or declines in operating performance, and more likely to obtain wage concessions in collective bargaining in the post-acquisition period than acquirers using other methods of payment. These findings suggest that cash payment allows acquirers to reduce excess liquidity and strengthen their bargaining power with unions.

Firm performance, reporting goals, and language choices in narrative disclosures
Scott Asay, Robert Libby & Kristina Rennekamp
Journal of Accounting and Economics, forthcoming


We use an experiment with experienced managers to provide more-direct evidence on how reporting goals and firm performance influence language choices. We find that bad news disclosures are less readable than good news, but only when managers have a stronger self-enhancement motive. Our results suggest that this difference is driven mainly by attempts to write more readable good news reports as opposed to intentional obfuscation of poor performance. In order to frame poor performance in a positive light, managers also focus more on the future, provide causal explanations for poor performance, and use more passive voice and fewer personal pronouns.

Protection of trade secrets and capital structure decisions
Sandy Klasa et al.
Journal of Financial Economics, forthcoming


Firms strategically choose more conservative capital structures when they face greater competitive threats stemming from the potential loss of their trade secrets to rivals. Following the recognition of the Inevitable Disclosure Doctrine by US state courts, which exogenously increases the protection of a firm's trade secrets by reducing the mobility of its workers who know its secrets to rivals, the firm increases its leverage relative to unaffected rivals. The effect is stronger for firms with a greater risk of losing key employees to rivals, for those facing financially stronger rivals, and for those in industries where competition is more intense.

How has takeover competition changed over time?
Tingting Liu & Harold Mulherin
Journal of Corporate Finance, April 2018, Pages 104-119


We study a random sample of completed and withdrawn takeovers during the 1981 to 2014 time period to provide new evidence on the role of takeover impediments such as poison pills, staggered boards and state antitakeover devices. Do such impediments act in the interest of management by promoting entrenchment or do they act in shareholder interest by improving bargaining power during the takeover auction process? We first confirm the growing trend of takeover impediments over time in our sample. We then relate these trends to changes in the takeover auction process over time. Although we corroborate prior findings of a decline in hostile takeovers and publicly reported takeover auctions between the 1980s and later time periods, we find that takeover competition across the entire auction process between deal initiation and completion has not declined. In effect, takeover competition via auctions has gone underground. Moreover, takeover premiums have not declined over time. We interpret the results to be consistent with the shareholder interest/bargaining power hypothesis and inconsistent with the management interest/entrenchment hypothesis. Our analysis highlights the usefulness of research sources for SEC merger documents including microfiche, Lexis Nexis and Thomson One Financial that provide historical information on the takeover auction process prior to the EDGAR filings that started in the mid-1990s.

Does CEO Bias Escalate Repurchase Activity?
Suman Banerjee, Mark Humphery-Jenner & Vikram Nanda
Journal of Banking & Finance, forthcoming


We propose and test the hypothesis that overconfident-CEOs, with upwardly-biased estimates of own firm-value, are more predisposed to repurchasing stock. An implication is that the stock-market, recognizing overconfident-CEO behavior, will react less positively to repurchase announcements. The hypothesis is strongly supported: Overconfident managers repurchase stock at lower levels of cash holdings, and respond more to stock-price declines. Entrenchment exacerbates this behavior. Interestingly, institutional investors appear to encourage repurchases, perhaps to curb excessive investment. Overconfident-CEOs are also more likely to substitute repurchases for dividends or capital expenditure. Consistent with our hypothesis, the stock-market reaction to these share repurchase announcements is less positive.

Network Synergy
Exequiel Hernandez & Myles Shaver
Administrative Science Quarterly, forthcoming


Acquisitions can dramatically reshape interorganizational networks by combining previously separate nodes and allowing the acquirer to inherit the target’s ties, potentially creating network synergy. Network synergy is the extent to which combining an acquirer’s and a target’s networks through node collapse results in a more favorable structural position for the combined firm as the acquirer gains control of the target’s existing ties. We hypothesize that the likelihood of selecting a target increases when the expected network synergy is greater. Using data from the biotechnology industry (1995–2007), we find support for this hypothesis by showing that acquirers prefer targets that generate greater expected increases in network status and greater expected access to structural holes—even when we control for other known sources of synergies. We further show that these effects are driven by complementary combinations of the acquirer’s and target’s networks that go beyond the attractiveness of the target’s network per se. By integrating the networks and acquisitions literatures, we introduce a novel source of synergies, provide evidence of a previously unexplored mechanism of network change, and show how firms can exert agency in the process of network change.

Director Connectedness: Monitoring Efficacy and Career Prospects
Vincent Intintoli, Kathleen Kahle & Wanli Zhao
Journal of Financial and Quantitative Analysis, February 2018, Pages 65-108


We examine a specific channel through which director connectedness may improve monitoring: financial reporting quality. We find that the connectedness of independent, non-co-opted audit committee members has a positive effect on financial reporting quality and accounting conservatism. The effect is not significant for non-audit committee or co-opted audit committee members. Our results are robust to tests designed to mitigate self-selection. Consistent with connected directors being valuable, the market reacts more negatively to the deaths of highly connected directors than to the deaths of less connected directors. Better connected directors also have better career prospects, suggesting they have greater incentives to monitor.

Managerial Ability and the Shareholder Tax Sensitivity of Dividends
Jenny Xinjiao Guan, Oliver Zhen Li & Jiameng Ma
Journal of Financial and Quantitative Analysis, February 2018, Pages 335-364


We examine the impact of managerial ability on the shareholder tax sensitivity of dividends. We find that managerial ability increases the sensitivity of dividends to the dividend tax penalty. In addition, the positive association between managerial ability and the shareholder tax sensitivity of dividends decreases in institutional ownership. Further, managerial ability increases the shareholder tax sensitivity of the substitution of dividends with share repurchases. Finally, evidence from tax reforms reveals that high ability managers are more responsive to a reduction in dividend tax penalty than to an increase. We conclude that managerial ability influences the formation of tax-efficient dividend policies.

Bridging the Gap: Evidence from Externally Hired CEOs
Yonca Ertimur et al.
Journal of Accounting Research, forthcoming


We investigate executive employment gaps (hereafter, gaps) between the appointment of an external CEO at a public firm and the individual's prior executive position at a public company. These gaps cannot be reliably obtained from common databases. We hand collect data for externally hired CEOs at public companies from 1992–2014. These CEOs represent approximately 40% of the 5,095 CEO successions and have a mean gap of 1.9 years. The gap increases to 3.2 years for the subset of new hires with a gap. We hypothesize that labor market frictions and executive skillsets contribute to the existence and length of these gaps. Using theories from labor economics, we predict (equilibrium) associations between two measures of “fit” (executive compensation and long-term match quality) and gaps (both existence and length). Finally, we provide descriptive evidence on what executives do (e.g., sit on boards, work for private consulting companies, or consume leisure) during their gaps. This project was subject to and published through a registered report process. Any tests that were not included in the accepted proposal are marked as unplanned analyses.

The Impact of Consulting Services on Audit Quality: An Experimental Approach
Zach Kowaleski, Brian Mayhew & Amy Tegeler
Journal of Accounting Research, forthcoming


We use experimental markets to examine whether providing consulting services to a nonaudit client impacts audit quality. Our paper directly addresses concerns raised by the Public Company Accounting Oversight Board that the largest public accounting firms’ growth in their consulting practices threatens audit quality. We conduct an experiment proposed using a registration-based editorial process. We compare a baseline where the auditor does not provide consulting services to conditions where auditors provide consulting to audit clients or where auditors only provide consulting services to nonaudit clients. Our unique design provides evidence on whether providing consulting to nonaudit clients strengthens the salience of a client-cooperative social norm that reduces audit quality. We do not find differences in audit quality by condition in our planned analysis, however we find greater variation in audit quality in the conditions where auditors provide consulting services compared to the baseline. In unplanned analyses, our results suggest providing consulting services increases auditor cooperation with managers, increasing audit quality when managers prefer high audit quality and decreasing audit quality when managers prefer low audit quality.

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