RESEARCH PAPERS | CORPORATE GOVERNANCE

HOW LARGE IS THE PAY PREMIUM FROM EXECUTIVE INCENTIVE COMPENSATION?
Ana M. Albuquerque, Rui A. Albuquerque, Mary Ellen Carter, and Qi (Flora) Dong
2024
We estimate the pay premium associated with CEO incentive compensation. Using explicit detailed U.S. CEO compensation contract data and simulation analysis, we find that CEOs with riskier pay packages receive a premium for pay at risk that represents 13.5 percent of total pay. The premium is positively correlated with proxies for CEO risk aversion, but implied risk aversion values suggest that the premium is economically smaller than suggested by prior studies. We perform our tests using a variety of proxies to measure the variance of pay and find consistent evidence of economically small pay risk premiums. These results are consistent with recent findings suggesting that risk may have a more limited influence over the level of pay than previously thought. >more

BEYOND ESG: EXECUTIVE PAY METRICS AND SHAREHOLDER SUPPORT
Nickolay Gantchev, Mariassunta Giannetti, and Marcus Hober
2024
We document that executive compensation contracts feature a multitude of market, earnings, operating, and ESG metrics and that the increase in ESG metrics has been accompanied by a higher propensity to use operating metrics. These developments are particularly pronounced in companies with volatile returns, recently appointed CEOs, and new active blockholders, such as activist hedge funds and private equity investors. Compensation metrics do not appear to have a large effect on actual payouts to executives and on the sensitivity of pay to market, earnings, and ESG performance, but rather aim to create consensus among shareholders on the proposed pay and the overall corporate strategy. >more

CORPORATE SUSTAINABILITY AND SCANDALS
Anna Vasileva, Jan Anton van Zanten, and Laurens Swinkels
2024
Corporate scandals can lead to loss of stakeholder confidence and trust and may have long-term reputational or financial consequences. Our study evaluates the link between corporate sustainability, measured by the extent to which a company contributes to the Sustainable Development Goals (SDGs), and scandals. We find that companies with higher alignment with the SDGs have a lower probability of being involved in scandals, and they are involved in fewer scandals that are less severe. If they are involved in scandals, they afflict fewer controversial topics or SDG themes. These findings are driven by companies active in highly scrutinized sectors, whereby SDGs related to climate change are particularly strongly related to scandal involvement. These results point to corporate sustainability being an indicator of corporate legitimacy and enabling investors to improve their sustainability and financial objectives. >more
 

CONTINUITY AND CHANGE ON CORPORATE BOARDS
Peter Cziraki, and Adriana Robertson
2024
The number of women on public company boards has increased dramatically in recent years. We study where these women directors came from and how they were absorbed. Since 2018, women with board experience obtain significantly more board seats than their male counterparts. Women directors are also more likely to have no previous board experience than men, indicating movement on both the intensive and extensive margin. Adding a woman director is associated with a transitory increase in board size roughly one third of the time. This increase is offset when an existing director rolls off. The bulk of this reversion happens within one year, and boards return to pre-addition size within three years. >more

VOTING RATIONALES
Roni Michaely, Silvina Rubio, and Irene Yi
2024
Why do institutional investors vote the way they vote? Using a novel dataset on the reasoning behind investors’ voting decisions, we provide direct evidence on the main reasons for institutions’ votes in director elections. The main reasons for opposition are independence and diversity. Concerns raised in rationales reflect firms’ governance weaknesses: companies with low board gender diversity receive more rationales on diversity, similar results for independence, tenure, busyness, and CEO duality. Companies listen and address frequently raised concerns. Results reveal institutions cast informed votes, their rationales are well grounded, and can be an effective low-cost strategy to communicate investors’ concerns. >more

COMPENSATION CONSULTANTS AND CEO PAY PEER GROUPS
Iftekhar Hasan, Woon Sau Leung, and Stefano Manfredonia
2024
We explore the impact of consultants on firms' selection of compensation peers and the resulting consequences on CEOs' pay packages. Our analysis of peer choice models reveals that, in addition to the commonly observed "peer pay effect" of favoring peers with higher-paid CEOs, firms also exhibit a preference for peers that employ the same consultant. This preference is found to reinforce the peer pay effect. We also observe that firms with a greater number of peers sharing a consultant tend to have higher median peer pay and CEO pay, less pay-performance sensitivity, and lower consultant turnover. Further results suggest that consultants may influence firms to select higher-paid CEO clients as peers due to a familiarity bias and a desire to attract new/repeated businesses. >more

LEARNING FROM THEIR DAUGHTERS: FAMILY EXPOSURE TO GENDER DISPARITY AND FEMALE REPRESENTATION IN MALE-LED VENTURES
Zhiyan Wu, Lucia Naldi, Karl Wennberg, and Timur Uman
2023
We build on recent studies on daughter-to-father influence to explore how male founders’ fatherhood of daughters impacts female representation in their ventures. We find that, conditional on the total number of children, fathering an additional daughter vs. a son is associated with a 4% (11%) increase in female director (employee) representation. This daughter-to-father effect gradually matures as daughters grow up and socialize in schools and workplaces, and increases as daughters age, suggesting that male founders vicariously learn from their daughters about the constraints women face throughout the daughters’ lifecycles. Heterogeneity analyses (regarding founder cohort, divorce status, and social class), combined with qualitative evidence, further substantiate the plausibility of vicarious learning as a potential yet understudied mechanism underlying daughter effects. In addition, daughter effects on employee recruitment are concentrated in microbusinesses (number of employees ≤ 10) where the founder is close in decision authority to all employees. These findings add important nuances to our understanding of daughter effects in organizational contexts, and extend theory of gender homophily in organizations. >more

DIRECTORS: OLDER AND WISER, OR TOO OLD TO GOVERN?
Ronald W. Masulis, Cong Wang, Fei Xie, and Shuran Zhang
2023
An unintended consequence of recent governance reforms in the U.S. is firms’ greater reliance on older director candidates, resulting in noticeable board aging. We investigate this phenomenon’s implications for corporate governance. We document that older independent directors exhibit poorer board meeting attendance, are less likely to serve on or chair key board committees and receive less shareholder support in annual elections. These directors are associated with weaker board oversight in acquisitions, CEO turnovers, executive compensation, and financial reporting. However, they can also provide particularly valuable advice when they have specialized experience or when firms have greater advisory needs. >more

ESG-LINKED PAY AROUND THE WORLD -TRENDS, DETERMINANTS, AND OUTCOMES
Sonali Hazarika, Aditya Kashikar, Lin Peng, Ailsa Röell, and Yao Shen
2023
We conduct a large-scale global study of ESG-linked pay for major firms that make up 85% of the market capitalization across 59 countries. We find that the pay adoption is higher for firms in extractive and utility industries, in countries that value individualism and femininity, have stronger shareholder protections, and are of civil legal origin, and for large firms or firms with high return to assets. The adopters experience better future social and financial performances. Exploiting a regulatory shock that mandates corporate ESG disclosure, we show that the effect of ESG-linked pay on performances is likely causal and suggest employee satisfaction as a channel. >more

FAILING JUST FINE: ASSESSING CAREERS OF VENTURE CAPITAL-BACKED ENTREPRENEURS VIA A NON-WAGE MEASURE
Natee Amornsiripanitch, Paul A. Gompers, George Hu, William Levinson, and Vladimir Mukharlyamov
2023
This paper proposes a non-pecuniary measure of career achievement, seniority. Based on a database of over 130 million resumes, this metric exploits the variation in how long it takes to attain job titles. When non-monetary factors influence career choice, assessing career attainment via non-wage measures, such as seniority, has significant advantages. Accordingly, we use our seniority measure to study labor market outcomes of VC-backed entrepreneurs. Would-be founders experience accelerated career trajectories prior to founding, significantly outperforming graduates from same-tier colleges with similar first jobs. After exiting their start-ups, they obtain jobs about three years more senior than their peers who hold (i) same-tier college degrees, (ii) similar first jobs, and (iii) similar jobs immediately prior to founding their company. Even failed founders find jobs with higher seniority than those attained by their non-founder peers. >more

CEO COMPENSATION: EVIDENCE FROM THE FIELD
Alex Edmans, Tom Gosling, and Dirk Jenter
2023
We survey directors and investors on the objectives, constraints, and determinants of CEO pay. We find that directors face constraints beyond participation and incentives, and that pay matters not to finance consumption but to address CEOs’ fairness concerns. 67% of directors would sacrifice shareholder value to avoid controversy, leading to lower levels and one-size-fits-all structures. Shareholders are the main source of constraints, suggesting directors and investors disagree on how to maximize value. Intrinsic motivation and reputation are seen as stronger motivators than incentive pay. Even with strong portfolio incentives, flow pay responds to performance to fairly recognize the CEO’s contribution. >more
 

IN THE CEO WE TRUST: NEGATIVE EFFECTS OF TRUST BETWEEN THE BOARD AND THE CEO
Kee-Hong Bae, Sadok El Ghoul, Zhaoran Gong, and Omrane Guedhami
2023
In this study, we investigate whether and how trust between board members and the CEO (board–CEO trust) affects the performance of mergers and acquisitions. Contrary to conventional wisdom, we find that firms with higher levels of board–CEO trust exhibit poor M&A performance. High trust is associated with low acquisition announcement returns, long-term stock return performance, and post-deal operating performance. This negative effect of board–CEO trust is more pronounced among acquiring companies prone to agency problems. Our results suggest that, in the institutional setting of corporate boards, high trust can be too much of a good thing. >more

GENDER AND EXECUTIVE JOB MOBILITY: EVIDENCE FROM MERGERS AND ACQUISITIONS
Xiaohu Guo, Vishal K. Gupta, Sandra Mortal, and Vikram K. Nanda
2023
The increasing presence of women in executive positions has fostered interest in understanding how men and women fare in the managerial labor market. We examine gender differences in managerial job mobility by focusing on managers displaced (almost 90%) when their firms are acquired. Comparing labor market outcomes for similarly-ranked managers from the same target firm and within the same functional area, we find that career disruption results in a larger drop in rank for female managers, despite similar job search efforts. Gender differences are moderated for managers hired by firms with more women in upper echelon positions. Women with rich prior managerial experience and service on external boards also fare well. Our results point to a significant (implicit) ‘gender penalty’ for women in terms of managerial job mobility, but also indicate contexts in which the penalty may be alleviated, and even reversed. >more

DO INSIDERS HIRE CEOS WITH HIGH MANAGERIAL TALENT?
Jason D. Kotter, and Yelena Larkin
2023
We examine the effect of the composition of the board of directors on the firm’s CEO hiring decision. Using a novel measure of managerial talent, characterized by an individual’s ascent in the corporate hierarchy, we show that firms with non-CEO inside directors tend to hire CEOs with greater managerial skills. This effect obtains for both internal and external CEO hires; moreover, the effect is pronounced when inside directors have stronger reputational incentives and limited access to soft information about the candidate. Our findings demonstrate that boards with inside directors more effectively screen for managerial talent, thereby improving the CEO hiring process. >more

THE CHANGING LANDSCAPE OF CORPORATE GOVERNANCE DISCLOSURE: IMPACT ON SHAREHOLDER VOTING
David Becher, Michelle Lowry, and Jared I. Wilson
2023
While mutual funds are required to vote on directors in every portfolio firm every year, many funds satisfy this requirement by following the recommendations of proxy advisory service companies such as ISS. However, companies complain that ISS employs one-size-fits-all policies, which do not consider firm-specific governance demands. A rational response to such frictions would be for firms to decrease investors’ costs of evaluating directors’ expertise. Consistent with this conjecture, we find that firms increasingly disclose directors’ expertise in image-based formats. Moreover, these disclosures lead to less reliance on ISS, and to higher voting support, particularly in cases where ISS tends to employ blanket recommendations and in firms with high information asymmetry. Finally, we find that this transparent disclosure of directors’ skills is informative regarding future firm outcomes. >more

PRIVATE SANCTIONS
Oliver Hart, David Thesmar, and Luigi Zingales
2022
We survey a representative sample of the U.S. population to understand stakeholders’ desire to see their firms exit Russia after the invasion of Ukraine. 61% of respondents think that firms should exit Russia, regardless of the consequences. Only 37% think that leaving Russia is a purely business decision. If a firm does not conform with these desires, 66% of the respondents are willing to boycott it. This desire diminishes with the costs they face in boycotting. At $500, 43% would want to boycott. This propensity to boycott is high, even for participants who are told they have no impact, suggesting strong deontological concerns. Nevertheless, it is difficult to separate deontological and consequentialist motives to boycott, because subjects’ beliefs about “impact” are highly correlated with their willingness to act “whatever the consequences”. When we randomize beliefs about impact, we find a clear effect for shareholders, but not for the other stakeholders. We discuss what are the geopolitical and economic implications of a world where private corporations may discontinue profitable business relationships for moral or political reasons. >more

WHAT DO FINANCIAL EXECUTIVES SAY ABOUT CORPORATE CULTURE AND STRATEGY?
John R. Graham, Jillian Grennan, Campbell R. Harvey, and Shivaram Rajgopal
2022
We present interview evidence from financial executives that highlights how thinking about culture in a quantitative way and making continuous investments in culture can amplify success, improve firm value, and help employees thrive in the new world of work. By reporting financial executives’ views of when, how, and why strategy and culture matter for performance, we provide novel insights for scholars looking to improve their theories of strategy and culture and for practitioners looking to build better businesses. Among the many insights, financial executives insist that culture can be quantified and even optimized, and that firm characteristics are of central importance to determining the interaction between culture and strategy. We conclude by sharing ideas for building an effective corporate culture. >more

ATTENTION INDUCED TRADING AND RETURNS: EVIDENCE FROM ROBINHOOD USERS
Brad M. Barber, Xing Huang, Terrance Odean, and Christopher Schwarz
2021
We study the influence of financial innovation by fintech brokerages on individual investors’ trading and stock prices. Using data from Robinhood, we find that Robinhood investors engage in more attention-induced trading than other retail investors. For example, Robinhood outages disproportionately reduce trading in high-attention stocks. While this evidence is consistent with Robinhood attracting relatively inexperienced investors, we show that it can also be partially driven by the app’s unique features. Consistent with models of attention-induced trading, intense buying by Robinhood users forecast negative returns. Average 20-day abnormal returns are -4.7% for the top stocks purchased each day. >more

CREDENTIALS MATTER, BUT ONLY FOR MEN: EVIDENCE FROM THE S&P 500
Peter Cziraki, and Adriana Robertson
2022
We study gender differences in the value of credentials in managerial labor markets. We use within-firm variation in S&P 500 status for marginal firms “just included” on the index and managers who joined a marginal firm before its addition to the index to obtain variation in S&P 500 experience. We then difference out any unobservables that affect both women and men within the same firm-year. Men with experience at an S&P 500 firm obtain more subsequent independent directorships and executive roles at other S&P 500 firms, but not at non-S&P 500 firms. The increase is 12-42% relative to the average. Strikingly, we observe no such relationship for women. Our results suggest that one obstacle women face in the managerial labor market is that they receive less credit than men for similar credentials. >more