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RESEARCH PAPERS | CORPORATE GOVERNANCE

Management Incentives

COMMON OWNERSHIP, COMPETITION, AND TOP MANAGEMENT INCENTIVES

Miguel Anton, Florian Ederer, Mireia Gine, and Martin C. Schmalz
2016
We show theoretically and empirically that executives are paid less for their own firm's performance and more for their rivals' performance if an industry's firms are more commonly owned by the same set of investors. Higher common ownership also leads to higher unconditional total pay. We exploit quasi-exogenous variation in common ownership from a mutual fund trading scandal to support a causal interpretation. These findings challenge conventional assumptions in the corporate finance literature about the objective function of the firm. >more


Societas Europaea (SE)

THE ECONOMIC IMPACT OF FORMING A EUROPEAN COMPANY

Lars Hornuf, Abdul Mohamed, and Armin Schwienbacher
2016
Since 2004, companies located in member states of the European Economic Area (EEA) can opt to incorporate in a supranational legal form, the Societas Europaea (SE). Most importantly, the Societas Europaea offers the possibility to choose between the one-tier and two-tier board structure as well as to limit the extent of worker participation, two items that are not possible in some of the member states under national corporate law. In this paper, we investigate the reaction of investors to these changes in corporate governance structure. We find companies located in member states where the SE offers additional legal arbitrage opportunities benefit most. Moreover, our results show that stock price reaction is positive when the decision to incorporate as an SE involves moving the firm’s registered office and that firms are moving to jurisdictions with significantly lower corporate tax rates. Finally, we assess the importance of uncertainty surrounding managers’ decision to reincorporate as an SE and find evidence for corporate uncertainty at the registration date but not at the time of the shareholder meeting. >more


IPO Underpricing

PRE-MARKET TRADING AND IPO PRICING

Chun Chang, Yao-Min Chiang, Yiming Qian, and Jay R. Ritter
2016
By studying the only mandatory pre-IPO market in the world – Taiwan’s Emerging Stock Market (ESM), we document that pre-market prices are very informative about post-market prices and that the informativeness increases with a stock’s liquidity. The ESM price-earnings ratio shortly before the initial public offering explains about 90% of the variation in the offer price-earnings ratio. However, the average IPO underpricing level remains high, at 55%, suggesting that agency problems between underwriters and issuers can lead to excessive underpricing even when there is little valuation uncertainty. Also, regulations impact the relative bargaining power of players and therefore IPO pricing. >more


International Corporate Governance

LAW, FINANCE, AND THE INTERNATIONAL MOBILITY OF CORPORATE GOVERNANCE

Douglas J. Cumming, Igor Filatotchev, April M. Knill, David M. Reeb, and Lemma W. Senbet
2017
We introduce the topic of this special issue on the “Role of Financial and Legal Institutions in International Governance”, with a particular emphasis on a notion of “international mobility of corporate governance”. Our discussion places the special issue at the intersection of law, finance, and international business, with a focus on the contexts of foreign investors and directors. Country-level legal and regulatory institutions facilitate foreign ownership, foreign directors, raising external financial capital, and international M&A activity. The interplay between the impact of foreign ownership and foreign directors on firm governance and performance depends on international differences in formal/regulatory institutions. In addition to legal conditions, informal institutions such as political connections also shape the economic value of foreign ownership and foreign directors. We highlight key papers in the literature, provide an overview of the new papers in this special issue, and offer suggestions for future research. >more


Director Departures

DO INDEPENDENT DIRECTOR DEPARTURES PREDICT FUTURE BAD EVENTS?

Rüdiger Fahlenbrach, Angie Low, and René M. Stulz
2016
Following surprise independent director departures, affected firms have worse stock and operating performance, are more likely to restate earnings, face shareholder litigation, suffer from an extreme negative return event, and make worse mergers and acquisitions. The announcement returns to surprise director departures are negative, suggesting that the market infers bad news from surprise departures. We use exogenous variation in independent director departures triggered by director deaths to test whether surprise independent director departures cause these negative outcomes or whether an anticipation of negative outcomes is responsible for the surprise director departure. Our evidence is more consistent with the latter. >more


Executive Compensation

GROWTH THROUGH RIGIDITY: AN EXPLANATION FOR THE RISE IN CEO PAY

Kelly Shue, and Richard R. Townsend
2016
The dramatic rise in CEO compensation during the 1990s and early 2000s is a long-standing puzzle. In this paper, we show that much of the rise can be explained by a tendency of firms to grant the same number of options each year. Number-rigidity implies that the grant-date value of option awards will grow with firm equity returns, which were very high on average during the tech boom. Further, other forms of CEO compensation did not adjust to offset the dramatic growth in the value of option pay. Number-rigidity in options can also explain the increased dispersion in pay, the difference in growth between the US and other countries, and the increased correlation between pay and firm-specific equity returns. We present evidence that number-rigidity arose from a lack of sophistication about option valuation that is akin to money illusion. We show that regulatory changes requiring transparent expensing of the grant-date value of options led to a decline in number-rigidity and helps explain why executive pay increased less with equity returns during the housing boom in the mid-2000s. >more


Director Turnover

IS THERE PERFORMANCE-BASED TURNOVER ON CORPORATE BOARDS?

Thomas W. Bates, David A. Becher, and Jared I. Wilson
2015
We examine the threat of turnover as an incentive to align the interests of corporate directors with shareholders. Our results suggest an economically significant relation between director turnover and past firm performance. This relation only manifests in idiosyncratic stock returns; consistent with the monitoring of actions attributable to corporate boards. The director turnover-performance sensitivity increases over time as well as post-SOX and contemporaneous listing standards. This sensitivity also varies with numerous governance characteristics, most notably with the presence of an active external blockholder. In sum, the threat of replacement in the context of poor firm performance represents an economically significant incentive for directors. >more


Blockholders

BLOCKHOLDERS: A SURVEY OF THEORY AND EVIDENCE

Alex Edmans, and Clifford G. Holderness
2016
This paper reviews the theoretical and empirical literature on the role of blockholders (large shareholders) in corporate governance. We start with the underlying property rights of public corporations; we discuss how blockholders are critical in addressing free-rider problems and why, like owners of private property in general, blockholders are likely to be active in firm governance. We then examine what distinguishes a blockholder from an ordinary shareholder and advocate additional definitions from the typical threshold of 5% ownership. We next present new evidence on the frequency and characteristics of blockholders in United States corporations. Then we develop a simple unifying model to present theories of blockholder governance through both voice (direct intervention) and exit (selling one's shares). We survey the empirical evidence on blockholder governance, emphasizing the empirical challenges in identifying causal effects involving blockholders. We highlight the lack of credible instruments for blockholders and argue that exogenous variation should not be a prerequisite for research --- a narrow focus on identification may lead to a focus on identifying narrow questions. We emphasize the value of descriptive research with blockholders and how endogeneity concerns can be addressed with economic logic and by directly testing alternative explanations. We close with suggestions for future research. >more


CEO Turnover

DOES THE MARKET VALUE CEO STYLES?

Antoinette Schoar, and Luo Zuo
2016
We study how investors perceive the skill set that different types of CEOs bring into their companies. We compare CEOs who started their careers during a recession with other CEOs. We show that the announcement return around the appointment of a recession CEO is very significant and positive, and this positive market reaction is driven by cases where a recession CEO replaces a non-recession CEO. Our results indicate that the market assigns a positive and economically meaningful value to a recession CEO, suggesting that there is a limited supply of these types of CEOs in the executive labor market. >more


CEO compensation

THE IMPACT OF FIRM PRESTIGE ON EXECUTIVE COMPENSATION

Florens Focke, Ernst G. Maug, and Alexandra Niessen-Ruenzi
2016
We show that CEOs of prestigious firms earn less. Total compensation is on average 8% lower for firms listed in Fortune's ranking of America's most admired companies. We suggest that CEOs are willing to trade off status and career benefits from working for a publicly admired company against additional monetary compensation. Our identification strategy is based on matched sample analyses, difference-in-differences regressions, and a regression discontinuity design. We perform several robustness checks and exclude many alternative explanations, including that firm prestige just proxies for better corporate governance, or for increased exposure of the pay-setting process to media attention. >more


Managerial Turnover

SEEKING ALPHA: EXCESS RISK TAKING AND COMPETITION FOR MANAGERIAL TALENT

Viral V. Acharya, Marco Pagano, and Paolo F. Volpin
2016
We present a model where firms compete for scarce managerial talent ("alpha") and managers are risk-averse. When managers cannot move across firms after being hired, employers learn about their talent, allocate them efficiently to projects and provide insurance to low-quality managers. When instead managers can move across firms, firm-level coinsurance is no longer feasible, but managers may self-insure by switching employer to delay the revelation of their true quality. However this results in inefficient project assignment, with low-quality managers handling projects that are too risky for them. >more


Managerial Characteristics

ARE CEOS DIFFERENT? CHARACTERISTICS OF TOP MANAGERS

Steven N. Kaplan, and  Morten Sorensen
2016
We use a data set of over 2,600 executive assessments to study thirty individual characteristics of candidates for top executive positions – CEO, CFO, COO and others. Candidate characteristics can be classified by four primary factors: general ability, execution skills, charisma and strategic skills. CEO candidates tend to score higher on all four of these factors; CFO candidates score lower. Hired candidates score higher than all assessed candidates on interpersonal skills (for each job category) suggesting that such skills are important in the selection process. Scores on the four factors also predict future career progression. Non-CEO candidates who score higher on the four factors are subsequently more likely to become CEOs. The patterns are qualitatively similar for public, private equity and venture capital owned companies. We do not find economically large differences in the four factors for men and women. Women, however, are ultimately less likely to become CEOs holding the four factors constant. >more


CEO Incentives

COMMON OWNERSHIP, COMPETITION, AND TOP MANAGEMENT INCENTIVES

Miguel Anton, Florian Ederer, Mireia Gine, and  Martin C. Schmalz
2016
Standard corporate finance theories assume the absence of strategic product market interactions or that shareholders don't diversify across industry rivals; the optimal incentive contract features pay-for-performance relative to industry peers. Empirical evidence, by contrast, indicates managers are rewarded for rivals' performance as well as for their own. We propose common ownership of natural competitors by the same investors as an explanation. We show theoretically and empirically that executives are paid less for own performance and more for rivals' performance when the industry is more commonly owned. The growth of common ownership also helps explain the increase in CEO pay over the past decades. >more


Panama Papers

THE VALUE OF OFFSHORE SECRETS – EVIDENCE FROM THE PANAMA PAPERS

James O'Donovan, Hannes F. Wagner, and  Stefan Zeume
2016
We use the data leak of the Panama Papers on April 3, 2016 to study whether and how the use of offshore vehicles affects valuation around the world. The data leak made transparent the operations of more than 214,000 shell companies incorporated in tax havens by Panama-based law firm Mossack Fonseca. The Panama Papers implicate a wide range of firms, politicians, and other individuals around the globe to have used secret offshore vehicles. Allegations include tax evasion, financing corruption, money laundering, violation of sanctions, and hiding other activities. We find that, around the world, the data leak erased an unprecedented risk-adjusted US$230 billion in market capitalization among 1,105 firms with exposure to the revelations of the Panama Papers. Firms with subsidiaries in Panama, the British Virgin Islands, the Bahamas, or the Seychelles – representing 90% of the tax havens used by Mossack Fonseca – experienced an average drop in firm value of 0.5%-0.6% around the data leak. We also find that firms operating in perceivably corrupt countries – particularly in those where high-ranked government officials were implicated by name in the leaked data – suffered a similar decline in firm value. Further, firms operating both in Mossack Fonseca’s primary tax havens and in countries with implicated politicians experienced the largest negative abnormal returns. For instance, firms linked to Mossack Fonseca’s tax havens and operating in Iceland experienced negative abnormal returns of -1.4%; the data leak revealed that Iceland’s Prime Minister failed to disclose beneficial interest in a British Virgin Islands incorporated shell company. Overall, our estimates suggest that investors perceive the leak to destroy some of the value generated from offshore activity. >more


Insider Trading

 

 

WHAT DO INSIDERS KNOW? EVIDENCE FROM INSIDER TRADING AROUND SHARE REPURCHASES AND SEOS

Peter Cziraki, Evgeny Lyandres, and  Roni Michaely
2016
We examine the information contained in insider trades prior to open market share repurchases and seasoned equity offerings using a comprehensive sample of over 4,300 repurchase and nearly 1,800 SEO announcements. We show that insiders tend to purchase stock prior to repurchase announcements and sell prior to SEO announcements. More purchasing before both types of events is associated with higher announcement returns. In addition, in the case of repurchases, information gets incorporated into stock prices slowly, leading to a positive relation between pre-event insider trading and post-event long-term returns. We also examine the nature of information contained in pre-event insider trading. We find that more insider purchasing before both types of events predicts better post-event operating performance. In addition, in the case of repurchases, more insider buying is associated with a larger reduction in post-event cost of capital. Taken together, our results suggest that insiders’ trades prior to repurchases and SEOs contain information regarding firms’ future fundamentals, and that such information is incorporated into prices over time. >more


CEO Contracts

CEO CAREER CONCERNS AND RISK TAKING

Peter Cziraki, and  Moqi Groen-Xu
2016
We introduce a novel measure of CEO career concerns: the distance to contract expiration. Using a sample of 3,954 CEO employment contracts, we show that the distance to contract expiration predicts CEO turnover and that CEO turnover is sensitive to performance only when contracts are close to expiration. We use within-CEO variation in contract-related turnover probability to isolate the effect of career concerns on risk taking. Protection against dismissal should encourage CEOs to engage in projects with less certain outcomes. We find that firms exhibit higher return volatility, higher idiosyncratic risk, and invest more when CEO turnover probability is low. >more


Gender Quota

DOES GENDER-BALANCING THE BOARD REDUCE FIRM VALUE?

B. Espen Eckbo, Knut Nygaard, and Karin S. Thorburn
2016
A board gender quota reduces firm value if it forces the appointment of under-qualified female directors. We test this hypothesis using Norway's 2005 board gender-quota law, which increased the average fraction of female directors from 5% in 2001 to 40% by 2008. Statistically robust analyses of quota-induced shareholder announcement returns, and of long-run stock and accounting performance, fail to reject the hypothesis of a zero valuation effect of this economy-wide shock to board composition and director independence. Evidence on female director turnover and changes in director networks also fails to suggest that qualified female directors were in short supply. >more


CEO Selection

A CORPORATE BEAUTY CONTEST

John R. Graham, Campbell R. Harvey, and Manju Puri
2015
We provide new evidence that the subjective “look of competence” rather than beauty is important for CEO selection and compensation. Our experiments, studying the facial traits of CEOs using nearly 2,000 subjects, link facial characteristics to both CEO compensation and performance. In one experiment, we use pairs of photographs and find that subjects rate CEO faces as appearing more “competent” than non-CEO faces. Another experiment matches CEOs from large firms against CEOs from smaller firms and finds large-firm CEOs look more competent. In a third experiment, subjects numerically score the facial traits of CEOs. We find competent looks are priced into CEO compensation, more so than attractiveness. Our evidence suggests this premium has a behavioral origin. First, we find no evidence that the premium is associated with superior performance. Second, we separately analyze inside and outside CEO hires and find that the competence compensation premium is driven by outside hires – the situation where first impressions are likely to be more important. >more


Managerial Style

THE WOLVES OF WALL STREET: MANAGERIAL ATTRIBUTES AND BANK BUSINESS MODELS

Jens Hagendorff,  Anthony Saunders, Sascha Steffen, and  Francesco Vallascas
2016
We investigate the role of executive-specific attributes (or ‘styles’) in affecting bank business models beyond pay-per-performance incentives. We decompose the variation in business models and document that members of a bank’s top management exert significant influence over key bank policy choices. Observable manager characteristics such as education or experience can only explain a small degree of bank manager style. Bank manager styles are important in understanding bank risk and performance during the 2007-2009 financial crisis. Finally, we derive manager specific profiles that combine various bank policies. >more


Institutional Investors

DO INSTITUTIONAL INVESTORS DRIVE CORPORATE SOCIAL RESPONSIBILITY? INTERNATIONAL EVIDENCE

I.J. Alexander Dyck, Karl V. Lins, Lukas Roth, and  Hannes F. Wagner
2015
We examine whether institutional investors affect a firm’s commitment to corporate social responsibility (CSR) for a large sample of firms from 41 countries over the period 2004 through 2013. We focus on environmental and social aspects of CSR, while controlling for firms’ governance levels. We find that institutional ownership is positively associated with firm-level environmental and social commitments. Further, the “color of money” matters. Domestic institutional investors and non-U.S. foreign investors account for these positive associations, while U.S. institutional investors’ holdings are not related to environmental and social scores. Similarly, higher scores are associated with long-term investors such as pension funds but not with hedge funds. Evidence from a quasi-natural experiment shows that institutional ownership causes improvements in environmental scores. Overall, our results suggest that institutional investors, in aggregate, use their ownership stakes to promote good CSR practices around the world. >more


Board Composition

WOMEN ON CORPORATE BOARDS: GOOD OR BAD?

Thomas Schmid, and Daniel Urban
2015
Prior literature shows that mandatory gender quotas are detrimental to firm value. However, little is known about causal effects of voluntarily appointed women. A large board dataset covering 53 countries and about 500,000 people enables us to identify exogenous retirements of board members due to death or illness. Long and short-run event studies yield evidence for a positive valuation effect of women. This is confirmed in panel regressions for the entire dataset. This positive impact is not driven by women per se, but a glass ceiling effect due to more rigorous selection. Thus, firms can benefit from a corporate culture that fosters the promotion of women. >more


Family Firms

HOW DO CEOS SEE THEIR ROLES? MANAGEMENT PHILOSOPHIES AND STYLES IN FAMILY AND NON-FAMILY FIRMS

William Mullins, and  Antoinette Schoar
2015
Using a survey of 800 Chief Executive Officers (CEOs) in 22 emerging economies, we show that CEOs' management styles and philosophies vary with the ownership and governance structure of their firms. Founders and CEOs of firms with greater family involvement display a greater stakeholder focus and feel more accountable to employees and banks than to shareholders. They also have a more hierarchical management approach, and see their role as maintaining the status quo rather than bringing about change. In contrast, CEOs of non-family firms emphasize shareholder-value-maximization. Finally, firm-level variation in ownership is as important in explaining management philosophies as cross-country or industry-level differences. >more


CEO Incentives

EQUITY VESTING AND MANAGERIAL MYOPIA

Alex Edmans, Vivian W. Fang, and Katharina Lewellen
2015
This paper links the CEO’s concerns for the current stock price to reductions in real investment. These concerns depend on the amount of equity he intends to sell in the short-term, but actual equity sales are an endogenous decision. We use the amount of stock and options scheduled to vest in a given year as an instrument for equity sales. Such vesting is determined by equity grants made several years prior, and thus is unlikely to be driven by current investment opportunities; it also significantly predicts actual sales. An interquartile increase in instrumented equity sales is associated with a 0.14% decline in the growth of R&D/assets, 2.6% of the average R&D/assets ratio. Vesting-induced equity sales are also associated with a higher likelihood of meeting or marginally beating analyst earnings forecasts and higher earnings announcement returns. More broadly, by introducing a measure of incentives that is not driven by the current contracting environment – vesting-induced equity sales – our paper suggests that CEO contracts affect real outcomes. >more


Agency Conflicts

PLAYING IT SAFE? MANAGERIAL PREFERENCES, RISK, AND AGENCY CONFLICTS

Todd A. Gormley, and David A. Matsa
2015
This paper examines managers’ incentive to “play it safe” by taking value-destroying actions that reduce their firms’ risk of distress. We find that, after managers are insulated by the adoption of an antitakeover law, firms take on less risk. Stock volatility decreases, cash holdings increase, and diversifying acquisitions increase by more than a quarter relative to unaffected firms that operate in the same state and industry. The acquisitions target “cash cows,” have negative announcement returns, and are concentrated among firms with greater risk of distress, higher inside ownership, and younger CEOs. Our findings suggest that shareholders face governance challenges beyond motivating managerial effort, and that instruments typically used to motivate managers, like greater financial leverage and larger ownership stakes, exacerbate these challenges. >more


Investor Horizon

DO LONG-TERM INVESTORS IMPROVE CORPORATE DECISION MAKING?

Jarrad Harford, Ambrus Kecskes, and Sattar Mansi
2015
We study the effect of investor horizons on a comprehensive set of corporate decisions. Long-term investors have the means and motive to monitor corporate managers, which generates corporate decisions that are consistent with shareholder value maximization. We find that long-term investors strengthen corporate governance and restrain managerial misbehaviors such as earnings management and financial fraud. They discourage a range of investment and financing activities but encourage payouts. Shareholders benefit through higher stock returns, higher profitability that is not fully anticipated by the market, and lower risk. Firms diversify their operations. We use a popular identification strategy to establish causality of our results. >more


Insider Trading

INSIDE THE DIRECTOR NETWORK: WHEN INSIDERS TRADE OUTSIDE STOCKS

Henk Berkman, Paul D. Koch, and P. Joakim Westerholm
2014
Members of corporate boards earn significant abnormal returns, both when they buy their company’s own stock as an insider, and when they buy stocks for which they are not classified as an insider. As outsiders, corporate directors earn larger abnormal returns when they buy stocks for which they have an interlocking board connection, and when they have higher status within the network of corporate boards. We also find similar trading inclinations and even greater performance for the family members of directors, indicating that the benefits of access to the corporate network spill over to the family networks of insiders. >more


Securities Regulation

SAME RULES, DIFFERENT ENFORCEMENT: MARKET ABUSE IN EUROPE

Douglas J. Cumming, Alexander Peter Groh, and Sofia Johan
2014
We present and analyze enforcement data from the European Securities Market Authority over the period following European Union harmonized rule setting on securities market abuse. The data show significant differences in the intensity of enforcement across Europe. The empirical tests are highly consistent with the view that the intensity of enforcement is the most statistically robust and economically significant predictor of market abuse detections. In particular, the data identify three important arms of enforcement: the number of supervisors which enhances detection, formalized cooperation which facilitates surveillance, and imprisonment which facilitates deterrence. We discuss research, practitioner and policy implications for securities regulation across countries. >more


CEO Overconfidence

RESTRAINING OVERCONFIDENT CEOS THROUGH IMPROVED GOVERNANCE: EVIDENCE FROM THE SARBANES-OXLEY ACT

Suman Banerjee, Mark Humphery-Jenner, and Vikram K. Nanda
2014
The literature posits that some CEO overconfidence benefits shareholders, though high levels may not. We argue adequate controls and independent viewpoints provided by an independent board mitigates the costs of CEO overconfidence. We use the concurrent passage of the Sarbanes-Oxley Act and changes to the NYSE/NASDAQ listing rules (collectively, SOX) as natural experiments to examine whether board independence improves decision-making by overconfident-CEOs. The results are strongly supportive: Post-SOX, overconfident CEOs reduce investment and risk exposure, increase dividends, improve post-acquisition performance, and have better operating performance and market value. Importantly, these changes are absent for overconfident-CEO firms that were compliant prior to passage. >more


Director Incentives

INDEPENDENT DIRECTOR INCENTIVES: WHERE DO TALENTED DIRECTORS SPEND THEIR LIMITED TIME AND ENERGY?

Ronald W. Masulis, and Shawn Mobbs
2013
We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally based on the directorship’s relative prestige. When directors experience an exogenous increase in a directorship’s relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced CEO departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors. >more


Institutional Investors

CAN INSTITUTIONAL INVESTORS IMPROVE CORPORATE GOVERNANCE THROUGH COLLECTIVE ACTION?

Craig Doidge, I.J. Alexander Dyck, Hamed Mahmudi, and Aazam Virani
2015
Can institutional investors generate sufficient power through collective action to drive improvements in governance? We use proprietary data on the private communications of a coalition of Canadian institutional investors and find that its private engagements influenced firms’ adoption of majority voting and say-on-pay advisory votes, improved compensation structure and disclosure, and influenced CEO incentive intensity. Spillovers from engaged firms to non-engaged firms through board interlocks and informal regulation through definition and dissemination of performance relative to best practices, suggest a broader impact. This form of activism is both a substitute and complement to other interventions to address governance concerns. >more


Management Turnover

DIFFERENCES IN CORPORATE GOVERNANCE BETWEEN PUBLIC AND PRIVATE FIRMS: EVIDENCE FROM TOP MANAGEMENT TURNOVER

Ugur Lel, Darius P. Miller, and Natalia Reisel 
2015
We compare a primary outcome of corporate governance, the propensity to replace poorly performing managers, between public and private firms in a large cross-country sample. We show that public firms are more likely to replace poorly performing managers than private firms. To identify the mechanisms driving this finding, we exploit cross-country variation in the development of legal and financial institutions. We find that the difference in governance outcomes stems from the governance mechanisms inherent in public equity markets, including the market for corporate control and information production and monitoring functions of stock markets. Our results suggest that financial markets play an important role in limiting managerial entrenchment and mitigating governance problems in public corporations. >more


Board Structure

LEAD INDEPENDENT DIRECTORS: GOOD GOVERNANCE OR WINDOW DRESSING?

Phillip T. Lamoreaux, Lubomir P. Litov, and Landon M. Mauler
2014
We document the emergence of the lead independent director (LID) role in a sample of U.S. firms in 1999-2009. Firms with an LID are valued higher, provide stronger risk taking incentives for CEOs and are more likely to terminate poorly performing CEOs. These results are more pronounced in firms with busy or large boards and in firms with CEOs who are board chairmen. The results hold after applying various econometric techniques such as instrumental variables analysis, firm fixed effects and first differences regressions. Our findings suggest a rationale for the LID board position. >more


Director Rules

CORPORATE GOVERNANCE RESPONSES TO DIRECTOR RULE CHANGES

Benjamin S. Kay, and Cindy M. Vojtech
2015
In 2002, U.S. stock exchanges and the Sarbanes-Oxley Act established minimum standards for director independence. An unintended consequence of these director rules was to alter firm choice of other tools for mitigating agency problems. This unintended consequence is studied on a new dataset with a much larger range of firm size. Firms most treated by the director rules decrease CEO stock ownership (6 percent) and decrease the share of compensation in the form of stock (30-60 percent). This is consistent with CEO stock ownership as a substitute for outside director supervision. The average treated firm also increased interlocking directorships, the number of other boards its directors serve, by two interlocking directorships. Additionally, the rules failed to reduce CEO misbehavior like excess compensation, heavy use of incentive-compensation, or low turnover. Because treated firms do not outperform the market, these results are more consistent with governance reoptimization than either managerial entrenchment or governance improvement explanations. >more


Poison Pills

POISON PILL ADOPTION IN RESPONSE TO EXTERNAL THREATS

Nicole M. Boyson, and Pegaret Pichler 
2014
The likelihood that a firm will adopt a poison pill in response to hedge fund activism increases in the target firm's pre-adoption takeover probability and in the CEO's board influence, implying that some pills are intended to protect shareholders and others to protect management. Pills adopted in response to hedge funds appear to protect management, since the stock market reacts negatively, the probability of acquisition decreases, firms have worse long-term performance, and hedge funds are less likely to achieve their activism goals. We show that poison pills play both a direct and a signaling role in impeding hedge fund activists. >more


Financial Regulation

CORPORATE GOVERNANCE AND THE CREATION OF THE SEC

Arevik Avedian, Henrik Cronqvist, and Marc Weidenmier 
2014
We study the effects of the creation of the SEC on corporate governance. Established in 1934, the SEC effectively applied the listing standards of the NYSE to all regional stock exchanges in the U.S. We therefore examine the impact of the SEC by comparing non-NYSE listing firms before and after the landmark legislation was adopted, using the NYSE as a control group. Our estimates reveal that there was a 30 percent reduction in board independence, i.e., the creation of the SEC caused boards to become significantly less independent. We find no corresponding effects on firm valuations. Our evidence is consistent with a "substitution of governance mechanisms" hypothesis, i.e., firms endogenously trade off market-based (board) governance and government-sponsored (SEC) governance. The evidence has implications for changes to corporate governance regulations around the world. >more


Signing Bonuses

GOLDEN HELLOS: SIGNING BONUSES FOR NEW TOP EXECUTIVES

Jin Xu, and Jun Yang 
2014
A one-time, upfront award to a new executive, the signing bonus is labeled by the media as a “golden hello.” Some view the signing bonus as pay decoupled from performance and thus another form of excessive pay; others consider it an incentive device that attracts, motivates, and retains an executive whose superior skills are critical for a firm’s success. To shed light on this debate, we examine the signing bonus contract awarded when an executive was hired for or promoted to a Named Executive Officer (NEO) position at an S&P 1500 company during 1992–2011. We find an increasing use of the signing bonus, especially among outside hires. In addition to compensating for an executive’s wealth loss due to a job change, the signing bonus is often used by firms with higher innate risks and greater information asymmetry to mitigate the executive’s concern about termination risk. When such concerns are severe, the signing bonus award is positively associated with subsequent firm performance and executive tenure. >more


Unobserved Heterogeneity

GOOD MATCHES LAST LONGER - UNOBSERVED HETEROGENEITY ACROSS FIRM-OWNER MATCHES

Markus Brendel
2014
The majority of studies on the value impact of ownership concentration consider firm heterogeneity as a potential source of endogeneity. This paper suggests control concentration to be additionally correlated with unobserved firm-owner match characteristics that affect firm valuation. Using a sample of CDAX firms from 2000-2009, we find favorable – value enhancing – firm-owner matches to be more likely to emerge at high ownership concentration and with long tenure of the controlling owner. This finding supports the hypothesis of patient and committed large blockholders. We conclude that neglecting match heterogeneity masks the positive average effect of ownership concentration in Germany. >more


Bank Governance

RISKY LENDING: DOES BANK CORPORATE GOVERNANCE MATTER?

Olubunmi Faleye, and Karthik Krishnan
2014
We study the effect of bank governance on risk-taking in commercial lending. We find that banks with more effective boards are less likely to lend to risky borrowers. However, the reduction in risk-taking is restricted to periods of distress in the banking industry and the relation is stronger at banks with board-level credit committees. The role of bank boards in risk-taking is complicated by the debate on whether bank boards should consider the interests of depositors and tax-payers in addition to those of shareholders. Our results suggest that bank boards respond to this dichotomy by actively regulating risk-taking, depending on conditions in the banking industry. >more



Golden Parachute Payments

DO CHANGE-IN-CONTROL PAYMENTS AFFECT FIRM VALUE?

David Offenberg, and Micah S. Officer
Extant studies show that golden parachutes hurt shareholder wealth. However, for the median CEO, golden parachute payments are only 43% of total change-in-control compensation. The authors measure the impact of total change-in-control payments on firm value using newly-available data for a sample of firms listed in the S&P SmallCap 600 index in 2009. While the results of this paper show that traditional golden parachutes hurt firm value, the authors find a positive association between total change-in-control payments and shareholder wealth. Their findings suggest that change-in-control payments do not impede takeovers but rather create incentives that align the goals of managers with those of shareholders. >more


Role of Media in Acquisitions

THE ROLE OF THE MEDIA IN CORPORATE GOVERNANCE: DO THE MEDIA INFLUENCE MANAGERS’ DECISIONS TO ABANDON ACQUISITION ATTEMPTS?

Baixiao Liu, and John J. McConnell
AFA 2013 San Diego Meetings Paper
Drawing upon 636 large acquisition attempts that are accompanied by a negative stock price reaction at their announcement from 1990-2010, the authors reveal that, in deciding whether to abandon such a value-reducing acquisition attempt, a managers’ sensitivity to the firm’s stock price reaction during the announcement period is affected by the level and the tone of media attention to the proposed transaction. The interpretation of these findings might imply that managers have reputational capital at risk in making corporate capital allocation decisions and that the level and tone of media attention increase the impact of a value-reducing acquisition on the manager’s reputational capital. >more


Threat of Blockholder Exit

THE WALL STREET WALK WHEN BLOCKHOLDERS COMPETE FOR FLOWS

Amil Dasgupta, and Giorgia Piacentino
AFA 2013 San Diego Meetings Paper
Theoretical literature suggests that the threat of exit can be an effective governance device when the blockholder acts as a principal. Yet, many blockholders are money managers. Different types of money managers care to different degrees about investor flows. The authors show that when blockholders are sufficiently flow-motivated, exit fails as a disciplining device, while if they are sufficiently profit-motivated, it is effective. This yields testable implications across different fund classes. The paper shows that the threat of exit complements shareholder voice thus providing an explanation for the observed variation in how different types of funds use voice. >more


Shareholder Empowerment

SHAREHOLDER EMPOWERMENT: THE RIGHT TO APPROVE AND THE RIGHT TO PROPOSE

John G. Matsusaka, and Oguzhan Ozbas
AFA 2013 San Diego Meetings Paper
This paper develops a theory to investigate the impact of shareholder empowerment on corporate decision making. The authors focus on the distinctions between the right to approve and the right to propose. The main implications, accordingly, concern the right to propose: in case shareholders can initiate their own proposals, managerial agency problems can be significantly controlled; however, the right to propose can also worsen corporate decisions by inducing managers to inefficiently accommodate extreme shareholder groups. The paper's analysis suggests that the right to approve managerial proposals (such as director nominations or new investment) constrains managers but not enough to cause efficient actions. Implications of this analysis are identified for a variety of current regulatory issues concerning director elections, proxy access, bylaw amendments, and shareholder voting. >more