Controlling Shareholders
Shareholder Activism and the Deterrence Effect of Democratic Politician Shareholders
Mark DesJardine, Wei Shi & Timothy Werner
Organization Science, forthcoming
Abstract:
Firms strategically establish political connections in the hopes of obtaining access to resources and opportunities controlled by the state. However, little is known about benefits that may accrue to firms from ties with politician shareholders. We explore potential spillover benefits of such ties in the context of financially motivated shareholder activism (“financial activism”). Specifically, we examine whether financial activists are deterred from targeting firms owned by Democratic politicians, who tend to adopt a more interventionist and stakeholder-oriented stance toward economic regulation than Republicans. Based upon an analysis of S&P 1500 firms over a 15-year period, we find that the number of Democratic politician shareholders is negatively associated with a firm’s likelihood of being targeted by a financial activist. This relationship is stronger when Democratic politician shareholders are more publicly prominent and when firms have more Democratic-leaning boards. Our study shows that the benefits firms derive from politician shareholders spill over beyond the business-government interface into the domain of corporate governance.
CEO Political Partisanship and Corporate Misconduct
Thomas Fewer & Murat Tarakci
Academy of Management Journal, forthcoming
Abstract:
Are firms led by liberal versus conservative CEOs more likely to engage in corporate misconduct? This study unearths the ideological bases of misconduct by distinguishing the values and identity perspectives of political ideology. Rather than attributing misconduct to liberal or conservative values, we introduce and examine CEO political partisanship -- that is, the strength of a CEO’s identification with political and ideological groups. We hypothesize and find robust evidence for a positive relationship between CEO political partisanship and corporate misconduct in a sample of Fortune 500 CEOs from 2010 to 2018. Our findings thus contribute to the conversation on the role of political ideology in organizations by unearthing the organizational implications of political identities. As CEOs increasingly engage in political discussions and political divisions grow stronger, our study offers a timely warning about the harmful link between CEO political partisanship and corporate misconduct.
An Anatomy of Firms’ Political Speech
Pablo Ottonello, Wenting Song & Sebastian Sotelo
NBER Working Paper, September 2024
Abstract:
We study the distribution of political speech across U.S. firms. We develop a measure of political engagement based on firms’ communications (earnings calls, regulatory filings, and social media), by training a large language model to identify statements that contain political opinions. Using these data, we document five facts about firms’ political engagement. (1) Political engagement is rare among firms. (2) Political engagement is concentrated among large firms. (3) Firms tend to specialize in specific topics and outlets. (4) Large firms tend to engage in a wider set of topics and outlets. (5) The 2020 surge in firms’ political engagement was associated with an increase in the engagement of medium-sized firms and a change in the mix of political topics.
Manager political preferences and company investor bases
Hongrui Feng et al.
Financial Review, forthcoming
Abstract:
We investigate how the personal political preferences of top managers shape the investor base of firms. Based on the risk-aversion attitude of firm decisions that rely on conservative political ideologies, we find that Republican managers tend to maintain a lower leverage level; invest less in tangible assets and R&D to pursue near-term profitability; and maintain a high quality of information disclosure to increase stock liquidity. We demonstrate that firms led by Republican managers can attract more transient institutions. This relationship becomes stronger during financially stressful periods and is robust after considering the moderating role of managerial discretion and potential endogeneity.
What Are the Firm Value Implications of SEC-Challenged Shareholder Proposals?
Maxime Couvert
Management Science, forthcoming
Abstract:
The Securities and Exchange Commission (SEC) permits managers to request the exclusion of shareholder-initiated proposals. I construct a novel data set of excluded and withdrawn proposals from the SEC’s responses to managers’ requests. An examination of announcement returns to withdrawal and exclusion decisions demonstrates that SEC-challenged proposals are value destroying. I find that special interest investors pursuing self-serving agendas and retail investors advocating for one-size-fits-all reforms explain the value-destroying nature of SEC-challenged proposals. On average, the SEC challenge benefits firm value by filtering out these harmful proposals. However, a regression discontinuity design reveals that proposals the SEC refuses to exclude may receive majority shareholder support and destroy firm value.
Information-Based Competition: The Case of Rival Owners in Rating Agencies
Mark DesJardine, Boshuo Li & Wei Shi
Academy of Management Journal, forthcoming
Abstract:
This study extends competitive dynamics research by theorizing how and when information about a firm may be shaped by competitive forces operating through information intermediaries. Arguing that ownership bestows investors with influence over information intermediaries from which investors can profit, we suggest that firms receive less favorable ratings from rating agencies in which their rivals’ investors have greater ownership. Building on research in this vein, we develop a dynamic theory of information-based competition that suggests the rating discounts a firm receives from rating agencies owned by its rivals’ investors are shaped by the reputational threats and opportunities faced by the firm and its rivals, which motivate and enable investors to use information intermediaries to intervene in competitive dynamics. Analyses of environmental, social, and governance (ESG) ratings of 2,787 firms by a leading ESG rating agency support these ideas. Our study introduces the concept of information-based competition and illuminates the conditions under which investors engage in information-based competitive attacks.
Not In My Backyard: Personal Bias in Mutual Fund Voting on Environmental and Social Proposals
Ryan Flugum, Choonsik Lee & Matthew Southern
University of Rhode Island Working Paper, May 2024
Abstract:
Fund managers cast votes that are more critical of firm environmental and social (ES) practices when the firm has operations located close to fund headquarters. This elevated level of support for shareholder ES proposals is not mirrored in shareholder governance proposals, which likely have less impact on the local community. We find similar pro-ES fund voting practices at firms with operations near the fund manager’s college, and in utility companies that provide electric and gas service to the fund’s address. We conclude that fund managers exhibit a personal bias in voting on ES ballot items, being more likely to support shareholder proposals for ES issues that impact them personally.
Venture capitalist directors and managerial incentives
Lubomir Litov et al.
Journal of Corporate Finance, December 2024
Abstract:
We examine the effect of board members with venture capital experience (VC directors) on executive incentives at non-venture-backed public firms. VC directors serving on the compensation committee are associated with greater CEO risk-taking incentives (vega) and pay-for-performance sensitivity (delta). These effects are more substantial if VC directors are from highly reputable VC firms. Using the change of direct flight availability to VC hub cities caused by major airline mergers and annual estimates of VC dry powder per industry as instruments, we show that these results are causal. In addition, VC directors are more focused on growth performance goals in CEO compensation contracts. We also document that prior finding of greater research intensity and innovation when VC directors serve on boards of public firms is partly explained by stronger CEO incentives instilled by such directors. Lastly, we find that having VC directors on nominating and/or governance committees is associated with a higher likelihood of forced CEO turnover.
Credit Ratings: Strategic Issuer Disclosure and Optimal Screening
Jonathan Cohn, Uday Rajan & Günter Strobl
Review of Finance, forthcoming
Abstract:
We consider a model in which a security issuer can manipulate information observed by a credit rating agency (CRA). We show that stricter screening by the CRA can sometimes lead to increased manipulation by the issuer. Accounting for the issuer’s behavior pulls optimal CRA screening towards the extremes of laxness or stringency. Surprisingly, an improvement in prior asset quality can result in more rating errors. In a two-period version of the model, stricter screening can result in more short-run rating errors. Our results suggest complex interplay between issuer and CRA behavior, complicating the evaluation of CRA policy effectiveness.
Does tax reform affect labor investment efficiency?
Steven Kaplan & Eugie Lee
Journal of Corporate Finance, December 2024
Abstract:
We investigate whether the Tax Cuts and Jobs Act (TCJA) impacts labor investment efficiency. By lowering the top corporate tax rate from 35 % to 21 %, ceteris paribus, the TCJA provides firms with a cash windfall. Based on difference-in-differences analysis using non-US based firms as a control group, we find that in the post-TCJA years, labor investment inefficiency increased for US based, but not for non-US based, firms. Further, the increase in labor investment inefficiency is concentrated among US firms with high cash holdings, suggesting that these firms face higher agency costs in the post-TCJA period. Additional analysis suggests that in the post-TCJA period, managers of high cash holding firms were seeking a quiet life. We find weak evidence that strong corporate governance mitigated this negative behavior. Overall, our findings show that tax reform can impact labor investment efficiency and should be of interest to investors, boards of directors, tax authorities, and to researchers.