Knowledge and Training for Financial Decision Making!

RESEARCH PAPERS | CORPORATE GOVERNANCE

Say on Pay

SHAREHOLDER GOVERNANCE AND CEO COMPENSATION: THE PEER EFFECTS OF SAY ON PAY

Diane K. Denis, Torsten Jochem, and Anjana Rajamani
2019
We document that firms whose compensation peers experience weak say on pay votes reduce CEO compensation following those votes. Reductions reflect proxy adviser concerns about peers' compensation contracts and are stronger when CEOs receive excess compensation, when they compete more closely with their weak-vote peers in the executive labor market, and when those peers perform well. Reductions occur following peers' disclosures of revised pay and are proportional to those needed to retain firms' relative positions in their peer groups. We conclude that the spillover effects of shareholder voting occur through both learning and compensation targeting channels. >more


Busy Directors

BUSY DIRECTORS AND SHAREHOLDER SATISFACTION

Kevin D. Chen, and Wayne R. Guay
2019
Prior research has examined the firm-level performance implications of “busy” boards. Firm-level analysis, however, masks important heterogeneity in the time constraints and expertise of individual busy directors. We develop and validate shareholder voting as a proxy for shareholders’ satisfaction. Our director-specific tests provide compelling evidence that the potential costs of busy directors outweigh their benefits. At the same time, we uncover new sources of heterogeneity among busy directors. For example, the downsides are more pronounced for directors who sit on boards where fiscal year-ends cluster in the same month. Our analysis highlights the role of shareholder voting in board composition research. >more


Director Influence

HOW MUCH DO DIRECTORS INFLUENCE FIRM VALUE?

Aaron Burt, Christopher M. Hrdlicka, and Jarrad Harford
2018
The value a director provides to a firm is empirically hard to establish. We estimate that value by exploiting the commonality in idiosyncratic returns of firms linked by a director and show that, on average, a single director's influence causes variation in firm value of almost 1% per year. The return commonality is not due to industry or other observable economic links. Variation in the availability of information on shared directors and a placebo test exploiting the timing of shared directors provide further identification. The results also imply that the directorial labor market does not fully assess directors in real time. >more


Top Management Teams

IS THE STOCK MARKET BIASED AGAINST DIVERSE TOP MANAGEMENT TEAMS?

Alberto Manconi, Antonino Emanuele Rizzo, and Oliver G. Spalt
2019
Using a novel text-based measure of top management team diversity, covering over 70,000 top executives in over 6,500 U.S. firms from 1999 to 2014, we show that analyst forecasts are systematically more pessimistic for firms with more diverse top management teams ("diverse firms"), especially for inexperienced analysts. Institutional investors, especially if located in conservative areas, are less likely to hold diverse firms, even though diverse firms do not exhibit inferior returns. Consistent with downward-biased expectations, abnormal returns on information-release days are systematically positive for diverse firms. Combined, our results suggest stock markets are biased against diversity in top management teams. >more


Director Selection

SELECTING DIRECTORS USING MACHINE LEARNING

Isil Erel, Lea Henny Stern, Chenhao Tan, and Michael S. Weisbach
2019
Can algorithms assist firms in their decisions on nominating corporate directors? We construct algorithms to make out-of-sample predictions of director performance. Tests of the quality of these predictions show that directors predicted to do poorly indeed do poorly compared to a realistic pool of candidates. Predictably poor performing directors are more likely to be male, have more past and current directorships, fewer qualifications, and larger networks than the directors the algorithm would recommend in their place. 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. >more


Director Influence

HOW MUCH DO DIRECTORS INFLUENCE FIRM VALUE?

Aaron Burt, Christopher M. Hrdlicka, and Jarrad Harford
2018
The value a director provides to a firm is empirically hard to establish. We estimate that value by exploiting the commonality in idiosyncratic returns of firms linked by a director and show that, on average, a single director's influence causes variation in firm value of almost 1% per year. The return commonality is not due to industry or other observable economic links. Variation in the availability of information on shared directors and a placebo test exploiting the timing of shared directors provide further identification. The results also imply that the directorial labor market does not fully assess directors in real time. >more


Independent Directors

INDEPENDENT EXECUTIVE DIRECTORS: HOW DISTRACTION AFFECTS THEIR ADVISORY AND MONITORING ROLES

Luke C.D. Stein, and Hong Zhao
2019
Active corporate executives are a popular source of independent directors. Although their knowledge, expertise, and network can bring value to firms on whose boards they sit, independent executive directors may be more likely to be distracted than other directors due to their outside executive roles. Using newly constructed data linking independent directors to their employers, we identify periods when employers’ poor performance may distract them from board service. We find that firms with distracted independent executive directors have lower performance and value, higher CEO compensation, reduced CEO turnover–performance sensitivity, lower earnings quality, and lower M&A performance. These adverse effects are mainly driven by distracted directors who sit on relevant committees, and are stronger for small boards. >more


Executive Compensation

THE ROLE OF EXECUTIVE CASH BONUSES IN PROVIDING INDIVIDUAL AND TEAM INCENTIVES

Wayne R. Guay, John Kepler, and David Tsui
2018
Given CEOs’ substantial equity portfolios, much recent literature on CEO incentives regards cash-based bonus plans as largely irrelevant, begging the question of why nearly all CEO compensation plans include such bonuses. We develop a new measure of bonus plan incentives, and document that performance sensitivities are much greater than prior estimates. We also test hypotheses regarding the role of bonuses in providing executives with individualized and team incentives. We find little evidence supporting the individualized incentives hypotheses, but consistent evidence that bonus plans appear to be used to encourage mutual monitoring and to facilitate coordination across the top management team as a whole. >more


Voting Rights

STICKING AROUND TOO LONG? DYNAMICS OF THE BENEFITS OF DUAL-CLASS VOTING

Hyunseob Kim, and Roni Michaely
2018
Using a new dataset of corporate voting-rights from 1971 to 2015, we find that young dual-class firms trade at a premium and operate at least as efficiently as young single-class firms. As dual-class firms mature, their valuation declines, and they become less efficient in their margins, innovation, and labor productivity compared to their single-class counterparts. Voting premiums increase with firm age, suggesting that private benefits increase over maturity. Most sunset provisions that dual-class firms adopt are ineffective. Our findings suggest that effective, time-consistent sunset provisions would be based on age or on inferior shareholders’ periodic right to eliminate dual-class voting. >more



Wage Distribution

RETURNS TO TALENT AND THE FINANCE WAGE PREMIUM

Claire Celerier, and Boris Vallee
2018
To study the role of talent in finance workers' pay, we exploit a special feature of the French higher education system. Wage returns to talent have been significantly higher and have risen faster since the 1980s in finance than in other sectors. Both wage returns to project size and the elasticity of project size to talent are also higher in this industry. Last, the share of performance-pay varies more with respect to talent in finance. These findings are supportive of finance wages reflecting the competitive assignment of talent in an industry that exhibits a high complementarity between talent and scale. >more


Gender Quotas

BOARD QUOTAS AND DIRECTOR-FIRM MATCHING

Daniel Ferreira, Edith Ginglinger, Marie-Aude Laguna, and Yasmine Skalli
2018
We study the impact of board gender quotas on the labor market for corporate directors. We find that the annual rate of turnover of female directors falls by about a third following the introduction of a quota in France in 2011. This decline in turnover is more pronounced for new appointments induced by the quota, and for appointments made by firms that regularly hire directors who are members of the French business elite. By contrast, the quota has no effect on male director turnover. The evidence suggests that, by changing the director search technology used by firms, the French quota has improved the stability of director-firm matches. >more


Institutional Investors

INSTITUTIONAL INVESTOR CLIQUES AND GOVERNANCE

Alan D. Crane, Andrew Koch, and Sebastien Michenaud
2017
We examine the impact of investor coordination on governance. We identify coordinating groups of investors ("cliques") as those connected through the network of institutional holdings. Clique members vote together on proxy items: a one-standard-deviation increase in clique ownership more than doubles votes against low quality management proposals. We use the 2003 mutual fund trading scandal to show that this effect is causal. These findings suggest coordination strengthens governance via voice. Coordination, however, also weakens governance via threat of exit. Clique owners exit positions more slowly and firm value responds negatively to liquidity shocks when clique ownership is high. >more


Agency Costs of Debt

INSTITUTIONAL DEBT HOLDINGS AND GOVERNANCE

Aneel Keswani, Anh L. Tran, and Paolo F. Volpin
2018
Using data on the universe of US-based mutual funds, we find that two out of five fund families hold corporate bonds of firms in which they also own an equity stake. We show that the greater the fraction of debt a fund family holds in a given firm, the greater its propensity to vote in the interests of firm debt holders at shareholder meetings. In addition, portfolio firms tend to make corporate decisions that appear more in the interests of debt holders than shareholders when mutual fund companies also hold their debt as opposed to holding only their equity. >more


CEO Power

POWERFUL CEOS AND CORPORATE GOVERNANCE

Mark Humphery-Jenner, Emdad Islam, Lubna Rahman, and Jo-Ann Suchard
2018
Excessive CEO power is often regarded as value-destroying. We use a quasi-exogenous regulatory shock to analyze whether forced changes in board composition help to reign in powerful CEOs. We find that post-regulation, firms led by powerful CEOs, on average, initiate a strategic shift in resource allocation. Firms managed by powerful CEOs increase innovation inputs (R&D expenditures) and produce more innovation outputs (patents) that are scientifically more important and economically more valuable. We also find that powerful CEO managed firms are more likely to pay dividends and reduce investments in capital expenditures. Investment quality also improves, manifesting in better takeover performance. Our results suggest that firms with an independent board can balance executive power, force powerful CEOs to consider other opinions, and reign in value destruction. >more


Director Incentives

HOW VALUABLE ARE INDEPENDENT DIRECTORS? EVIDENCE FROM EXTERNAL DISTRACTIONS

Ronald W. Masulis, and Emma Jincheng Zhang
2018
We provide new evidence on the value of independent directors by exploiting exogenous events that seriously distract independent directors. Approximately 20% of independent directors are significantly distracted in a typical year. They attend fewer meetings, trade less frequently in the firm’s stock and resign from the board more frequently, indicating declining firm-specific knowledge and a reduced board commitment. Firms with more preoccupied independent directors have declining firm valuation and operating performance and exhibit weaker M&A profitability and accounting quality. These effects are stronger when distracted independent directors play key board monitoring roles and when firms require greater director attention. >more


Director Selection

THE SELECTION OF DIRECTORS TO CORPORATE BOARDS

David J. Denis, Diane K. Denis, and Mark D. Walker
2018
Corporate spinoffs present a unique opportunity to analyze the choice of directors from a pool of potential candidates. We find that post-spinoff unit and remaining parent firms are more likely to select pre-spinoff parent directors who have: i) relevant industry expertise; and ii) pre-spinoff parent board ties to the post-spinoff CEO. Using pre-spinoff firm performance as a proxy for director quality, the evidence also suggests that firms are more likely to retain high-quality directors. We conclude that firms select individual directors based on both their expertise relevant to firm assets and their ties to CEOs who possess specific information about their ability. >more


Impact of Institutional Investors

DO INSTITUTIONAL INVESTORS DRIVE CORPORATE SOCIAL RESPONSIBILITY? INTERNATIONAL EVIDENCE

I.J. Alexander Dyck, Karl V. Lins, Lukas Roth, and Hannes F. Wagner
2018
This paper assesses whether shareholders drive the environmental and social (E&S) performance of firms worldwide. Across 41 countries, institutional ownership is positively associated with E&S performance with additional tests suggests this relation is causal. Institutions are motivated by both financial and social returns. Investors increase firms’ E&S performance following shocks that reveal financial benefits to E&S improvements. In cross-section, investors increase firms’ E&S performance when they come from countries where there is a strong community belief in the importance of E&S issues, but not otherwise. As such, these institutional investors transplant their social norms regarding E&S issues around the world. >more


Governance in the Banking Sector

CORPORATE GOVERNANCE OF BANKS AND FINANCIAL STABILITY

Deniz Anginer, Asli Demirgüç-Kunt, Harry Huizinga, and Kebin Ma
2017
We find that shareholder-friendly corporate governance is associated with higher stand-alone and systemic risk in the banking sector. Specifically, shareholderfriendly corporate governance results in higher risk for larger banks and for banks that are located in countries with generous financial safety nets as banks try to shift risk towards taxpayers. We confirm our findings by comparing banks to non-financial firms and examining changes in bank risk around an exogenous regulatory change in governance. Our results underline the importance of the financial safety net and too-big-to-fail guarantees in thinking about corporate governance reforms at banks. >more


Director Tenure

ON LONG-TENURED INDEPENDENT DIRECTORS

Stefano Bonini, Justin Deng, Mascia Ferrari, and Kose John
2017
Recent surveys show that 24% of independent directors in Russel 3,000 firms have continuously served on their boards for fifteen years or more. Based on a sample of S&P 1500 firms over the period 1998-2012, we document strong positive effects on financial performance for firms with one, very long-tenured independent director. We show that long-tenured independent directors are highly skilled individuals, and over time they accumulate information and knowledge valuable to the companies they serve in, even when the cost of acquiring information is high. Long-tenured directors also decrease the likelihood of (1) corporate scandals, and (2) motions by hedge funds requiring changes in board composition. Our results are robust to several endogeneity tests including instrumental variable and dynamic regressions. >more


Board Composition

MITIGATING EFFECTS OF GENDER DIVERSE BOARD IN COMPANIES MANAGED BY OVERCONFIDENT CEOS

Suman Banerjee, Ronald W. Masulis, and Arun Upadhyay
2018
Prior literature examines the matching of firm-types with board composition, but very little research focuses on the matching of CEO types with directors' skill sets. We examine whether a gender-diverse board helps to mitigate the negative impacts of overconfident managers, thus improving firm performance. Specifically, we argue that female directors have different viewpoints, approach, and skills vis-`a-vis their male counterparts, which helps to provide a more nuanced atmosphere inside the boardroom and consequently, improves board effectiveness. We find support for our hypothesis when CEOs are overconfident and the female directors are independent, i.e. not gray or executive directors. Our results imply that simpler governance-improving mechanisms may be in many cases equally effective in achieving desirable changes in CEO behavior. >more


CSR

CORPORATE SOCIAL RESPONSIBILITY VERSUS CORPORATE SHAREHOLDER RESPONSIBILITY: A FAMILY FIRM PERSPECTIVE

Amal Abeysekera, and Chitru S. Fernando
2018
Recent literature suggests that some socially responsible corporate actions benefit shareholders while others do not. We study differences in policy toward corporate social responsibility (CSR) between family and non-family firms, using environmental performance as the proxy for CSR. We show that family firms are more responsible to shareholders than non-family firms in making environmental investments. When shareholder interests and societal interests coincide, i.e., when it comes to alleviating environmental concerns that have potential to harm society and elevate the firm’s risk exposure, family firms do at least as well as non-family firms in protecting shareholder interests. However, when shareholder and societal interests diverge, i.e., when it comes to making environmental investments that might benefit society but do not benefit shareholders, family firms protect shareholder interests by undertaking a significantly lower level of such investments than non-family firms. Our findings suggest that lack of diversification by controlling families creates strong incentives for them to act in the financial interest of all shareholders, which more than overcomes any noneconomic benefits families may derive from engaging in social causes that do not benefit non-controlling shareholders. >more


Executive Compensation

EXECUTIVE COMPENSATION: A SURVEY OF THEORY AND EVIDENCE

Alex Edmans, Xavier Gabaix, and Dirk Jenter
2017
This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -- shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research. >more


CEO Succession

RECRUITING THE CEO FROM THE BOARD: DETERMINANTS AND CONSEQUENCES

Udi Hoitash, and Anahit Mkrtchyan
2017
We investigate an increasingly prevalent CEO succession strategy: recruiting CEOs from the board of directors (director-CEOs). Director-CEOs might be hired in a planned succession because they combine outsiders’ new perspectives with insiders’ firm-specific knowledge. Alternatively, directors may be recruited when the board is unprepared for a leadership change. We find that unplanned successions, in which director-CEOs are appointed as a “quick-fix” solution, result in a negative market reaction, deterioration in performance, and ill-fitting candidates with shorter tenures. Conversely, firms recruiting director-CEOs in planned successions perform similarly to other firms. We find no evidence that poor firm quality drives these results. >more


Director Experience

LEARNING FROM DIRECTORS’ FOREIGN BOARD EXPERIENCES

Peter Iliev, and Lukas Roth
2017
We study the transfer of governance across countries through overlapping boards. Companies converge to the governance characteristics and board practices of foreign firms through their directors’ foreign board experiences. Learning from foreign firms’ governance practices is as important as learning from connected domestic firms, and increases with the number of directors with foreign board appointments. This learning is stronger in firms domiciled in less-developed governance markets, suggesting a potential channel through which better governance practices are propagated. Our results are also obtained when we use an exogenous shock to board practices, are present in the time series, and don’t exist in in placebo samples. >more


Busy Boards

BUSY DIRECTORS AND FIRM PERFORMANCE: EVIDENCE FROM MERGERS

Roie Hauser
2017
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. >more


CEO Investment Choices

CEO PERSONALITY AND FIRM POLICIES

Ian D. Gow, Steven N. Kaplan, David F. Larcker, and Anastasia A. Zakolyukina
2016
Based on two samples of high quality personality data for chief executive officers (CEOs), we use linguistic features extracted from conferences calls and statistical learning techniques to develop a measure of CEO personality in terms of the Big Five traits: agreeableness, conscientiousness, extraversion, neuroticism, and openness to experience. These personality measures have strong out-of-sample predictive performance and are stable over time. Our measures of the Big Five personality traits are associated with financing choices, investment choices and firm operating performance. >more


CEO Compensation

FOREIGN EXPERIENCE AND CEO COMPENSATION

Martin J.J. Conyon, Lars Helge Hass, Skrålan Vergauwe, and Zhifang Zhang
2016
This paper investigates the relation between foreign experience and CEO compensation. Using a sample of large UK firms from the FTSE 350 index from 2003 to 2011, we find that foreign-born CEOs and national CEOs with foreign working experience receive significantly higher levels of total compensation compared to those without these characteristics. We document that this foreign-CEO pay premium is stronger in firms that are more globalized. The results are robust to controlling for firm-specific economic and corporate governance characteristics as well as the endogenous CEO selection using propensity score matching. Our results show that the foreign-CEO pay premium is attributed to specialized foreign expertise rather than broader general managerial skills. >more


Board Diversity

BOARD DIVERSITY, FIRM RISK, AND CORPORATE POLICIES

Gennaro Bernile, Vineet Bhagwat, and Scott E. Yonker
2017
We examine the effects of diversity in the board of directors on corporate policies and risk. Using a multi-dimensional measure, we find that greater board diversity leads to lower volatility and better performance. The lower risk levels are largely due to diverse boards adopting more persistent and less risky financial policies. However, consistent with diversity fostering more efficient (real) risk-taking, firms with greater board diversity also invest persistently more in R&D and have more efficient innovation processes. Instrumental variable tests that exploit exogenous variation in firm access to the supply of diverse nonlocal directors indicate that these relations are causal. >more


Monitoring

BANK MONITORING AND CEO RISK-TAKING INCENTIVES

Anthony Saunders, and Keke Song
2017
This paper investigates whether monitoring by bank lenders affects CEO incentives of borrowing firms. We find that an increase in bank monitoring incentives significantly reduce the sensitivity of CEO wealth to stock return volatility (Vega). The results are more profound when bank lenders are more powerful and reputable and have a prior lending relationship with the borrowing firms. Additionally, Vega decreases after financial covenant violations and increases when bank lenders have offsetting equity stakes in borrowing firms. These results together suggest banks have a unique role in monitoring and shaping CEO incentives to mitigate the risk-shifting incentives of firm managers. >more


Family Firms

MANAGING THE FAMILY FIRM: EVIDENCE FROM CEOS AT WORK

Oriana Bandiera, Andrea Prat, Renata Lemos, and Raffaella Sadun
2017
We present evidence on the labor supply of CEOs, and on whether family and professional CEOs differ on this dimension. We do so through a new survey instrument that allows us to codify CEOs’ diaries in a detailed and comparable fashion, and to build a bottom-up measure of CEO labor supply. The comparison of 1,114 family and professional CEOs reveals that family CEOs work 9% fewer hours relative to professional CEOs. Hours worked are positively correlated with firm performance, and differences between family and non-family CEOs account for approximately 18% of the performance gap between family and non-family firms. We investigate the sources of the differences in CEO labor supply across governance types by exploiting firm and industry heterogeneity, and quasi-exogenous meteorological and sport events. The evidence suggests that family CEOs value–or can pursue–leisure activities relatively more than professional CEOs. >more


Management Quality

THE CONSEQUENCES OF MANAGERIAL INDISCRETIONS: SEX, LIES, AND FIRM VALUE

Brandon N. Cline, Ralph A. Walkling, and Adam S. Yore
2016
Personal managerial indiscretions are separate from a firm’s business activities but provide information about the manager’s integrity. Consequently, they could affect counterparties’ trust in the firm and the firm’s value and operations. We find that companies of accused executives experience significant wealth deterioration, reduced operating margins, and lost business partners. Indiscretions are also associated with an increased probability of unrelated shareholder-initiated lawsuits, DOJ/SEC investigations, and managed earnings. Further, CEOs and boards face labor market consequences, including forced turnover, pay cuts, and lower shareholder votes at re-election. Indiscretions occur more often at poorly governed firms where disciplinary turnover is less likely. >more


Worker Representation on Corporate Boards

LABOR REPRESENTATION IN GOVERNANCE AS AN INSURANCE MECHANISM

E. Han Kim, Ernst G. Maug, and Christoph Schneider
2017
We hypothesize that labor participation in governance helps improve risk sharing between employees and employers. It provides an ex-post mechanism to enforce implicit insurance contracts protecting employees against adverse shocks. Results based on German establishment-level data show that skilled employees of firms with 50% labor representation on boards are protected against layoffs during adverse industry shocks. They pay an insurance premium of 3.3% in the form of lower wages. Unskilled blue-collar workers are unprotected against shocks. Our evidence suggests that workers capture all the gains from improved risk sharing, whereas shareholders are no better or worse off than without codetermination. >more


CSR

DOES CORPORATE SOCIAL RESPONSIBILITY CREATE SHAREHOLDER VALUE? THE IMPORTANCE OF LONG-TERM INVESTORS

Phuong-Anh Nguyen, Ambrus Kecskes, and Sattar Mansi
2016
We study the effect of corporate social responsibility (CSR) on shareholder value. We argue that long-term investors can ensure that managers choose the amount of CSR that maximizes shareholder value. We find that long-term investors do increase the value to shareholders of CSR activities, not through higher cash flow but rather through lower cash flow risk. Following prior work, we use indexing by investors and state laws on stakeholder orientation for identification. Our findings suggest that CSR activities can create shareholder value as long as managers are properly monitored by long-term investors. >more


Shareholder Voting

ARE SHAREHOLDER VOTES RIGGED?

Laurent Bach, and Daniel Metzger
2017
We show that management holds extraordinary power over the voting process at U.S. corporations, allowing it to block improvements to corporate governance. Using a sample of shareholder proposals from 2003 to 2016, we uncover a large and discontinuous drop in the density of voting results at the 50% threshold. Counterfactual distributions reveal that 11% of closely-contested proposals that were eventually rejected by voters were defeated because management was able to alter the voting results very precisely. These findings imply that one cannot routinely use RDD to identify the causal effects of changes in corporate governance generated by shareholder votes. >more


Corporate Social Responsibility

SOCIAL CAPITAL, TRUST, AND FIRM PERFORMANCE: THE VALUE OF CORPORATE SOCIAL RESPONSIBILITY DURING THE FINANCIAL CRISIS

Karl V. Lins, Henri Servaes, and Ane Tamayo
2016
During the 2008-2009 financial crisis, firms with high social capital, measured as corporate social responsibility (CSR) intensity, had stock returns that were four to seven percentage points higher than firms with low social capital. High-CSR firms also experienced higher profitability, growth, and sales per employee relative to low-CSR firms, and they raised more debt. This evidence suggests that the trust between the firm and both its stakeholders and investors, built through investments in social capital, pays off when the overall level of trust in corporations and markets suffers a negative shock. >more


Financial Regulation

WAGES AND HUMAN CAPITAL IN FINANCE: INTERNATIONAL EVIDENCE, 1970-2011

Hamid Boustanifar, Everett Grant, and Ariell Reshef
2016
We study the allocation and compensation of human capital in the finance industry in a set of developed economies in 1970-2011. Finance relative wages generally increase but not in all countries, and to varying degrees. Trading-related activities account for 50% of the increases, despite accounting for only 13% of employment, on average. Financial deregulation is the most important factor driving up wages in finance; it has a larger effect in environments where informational rents and socially inefficient risk taking are likely to be prevalent. Differential investment in information and communication technology does not have causal explanatory power. High finance wages attract skilled international immigration to finance, raising concerns for "brain drain." >more


Staggered Boards

STAGGERED BOARDS AND LONG-TERM FIRM VALUE, REVISITED

Martijn Cremers, Lubomir P. Litov, and Simone M. Sepe
2017
This paper revisits the staggered board debate focusing on the long-term association of firm value with changes in board structure. We find no evidence that staggered board changes are negatively related to firm value. However, we find a positive relation for firms engaged in innovation and where stakeholder relationships matter more. This suggests that staggered boards promote value creation for some firms by committing the firm to undertaking long-term projects and bonding it to the relationship-specific investments of its stakeholders. Our results are robust to matching procedures and an exogenous change in Massachusetts corporate law that mandated staggered boards. >more


Board Reforms

BOARD REFORMS AND FIRM VALUE: WORLDWIDE EVIDENCE 

Larry Fauver, Mingyi Hung, Xi Li, and Alvaro G. Taboada
2017
We examine the impact of corporate board reforms on firm value in 41 countries. Using a difference-in-differences design, we find that board reforms increase firm value. Reforms involving board and audit committee independence, but not reforms involving separation of chairman and CEO positions, drive the valuation increases. In addition, while comply-or-explain reforms result in a greater increase in firm value than rule-based reforms, the effects of reforms are similar across Civil-law and Common-law countries. Further investigation suggests that the subsequent change in board independence plays an important role in explaining the effectiveness of the reforms. >more


Insider Trading

GENDER DIFFERENCES IN EXECUTIVES’ ACCESS TO INFORMATION

A. Can Inci, M.P. Narayanan, and H. Nejat Seyhun
2016
We provide novel evidence on gender differences in insider trading behavior and profitability of senior corporate executives. On average, both female and male executives make positive profits from insider trading. Males, however, earn significantly more than females in equivalent positions and also trade more than females. These gender differences disappear when we limit the sample to firms in which female trading is relatively high. Collectively these results suggest that female executives have a disadvantage relative to males in access to inside information even if they have equal formal status and informal networks may play an important role attenuating this disadvantage. >more


Executive Compensation

OPTION REPRICING, CORPORATE GOVERNANCE, AND THE EFFECT OF SHAREHOLDER EMPOWERMENT

Huseyin Gulen, and William O'Brien
2016
We use the practice of employee option repricing to investigate how shareholder involvement in firm compensation policies affects the quality of firm governance. We find that a 2003 reform that empowered shareholders to approve or reject repricing proposals led to value increases in previous repricers. The likelihood of repricing becomes less sensitive to poor manager performance, but remains similarly sensitive to bad luck, after the reform. Average post-repricing changes in firm performance are positive only after the reform. Overall, our results suggest that shareholder empowerment improves the governance of repricing and can transform repricing into a value-creating tool. >more


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