Corporate Management and Performance
Modern Management: Good for the Environment or Just Hot Air?
Nicholas Bloom, Christos Genakos, Ralf Martin & Raffaella Sadun
Economic Journal, May 2010, Pages 551-572
Abstract:
We use an innovative methodology to measure management practices in over 300 manufacturing firms in the UK. We then match this management data to production and energy usage information for establishments owned by these firms. We find that establishments in better managed firms are significantly less energy intensive. This effect is quantitatively substantial: going from the 25th to the 75th percentile of management practices is associated with a 17.4% reduction in energy intensity. Better managed firms are also significantly more productive. These results suggest that management practices that are associated with improved productivity are also linked to lower greenhouse gas emissions.
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Are Overconfident CEOs Better Innovators?
David Hirshleifer, Siew Hong Teoh & Angie Low
University of California Working Paper, April 2010
Abstract:
Using options- and press-based proxies for CEO overconfidence (Malmendier and Tate 2005a, 2005b, 2008), we find that over the 1993-2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development (R&D) expenditure. Overconfident managers only achieve greater innovation than non-overconfident managers in innovative industries. Overconfidence is not associated with lower sales, ROA, or Q.
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Promotion Incentives and Corporate Performance: Is There a Bright Side to "Overpaying" the CEO?
Jayant Kale, Ebru Reis & Anand Venkateswaran
Journal of Applied Corporate Finance, Winter 2010, Pages 119-128
Abstract:
Earlier studies have shown that stronger equity-based incentives for CEOs are generally associated with better corporate performance and higher values. In this article, the authors report the findings of their recent study of the effects of promotion-based "tournament" incentives for non-CEO executives (or "VPs") on corporate performance for a large sample of companies during the 12-year period from 1993-2004. The study's main finding is that such tournament incentives, as measured by the pay differential between the CEO and VPs, were associated with better corporate operating performance and higher corporate stock returns. Moreover, tournament incentives, as one would expect, appeared to be more effective when CEOs were nearing retirement - but less effective when the firm had a new CEO (and even weaker when the new CEO was an outsider).
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The dark side of outside directors: Do they quit when they are most needed?
Rüdiger Fahlenbrach, Angie Low & René Stulz
NBER Working Paper, April 2010
Abstract:
Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.
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Agency Theory Revisited: CEO Returns and Shareholder Interest Alignment
Anthony Nyberg, Ingrid Fulmer, Barry Gerhart & Mason Carpenter
Academy of Management Journal, forthcoming
Abstract:
Agency theory suggests that there may be managerial mischief when the interests of owners and managers (agents) diverge; one possible solution to this agency problem is the alignment of owner and agent interests through agent compensation and equity ownership. We develop the theoretical concept of CEO returns, and empirically estimate the magnitude of financial alignment, as measured by the relationship between CEO returns and shareholder returns. Our results, based on this new conceptualization and corresponding measurement, suggest stronger alignment than reported in previous work. We find that the magnitude of this alignment relationship plays a positive role in predicting subsequent firm performance; however, it does so in ways not clearly articulated or tested in prior CEO compensation research.
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When are outside directors effective?
Ran Duchin, John Matsusaka & Oguzhan Ozbas
Journal of Financial Economics, May 2010, Pages 195-214
Abstract:
This paper uses recent regulations that have required some companies to increase the number of outside directors on their boards to generate estimates of the effect of board independence on performance that are largely free from endogeneity problems. Our main finding is that the effectiveness of outside directors depends on the cost of acquiring information about the firm: when the cost of acquiring information is low, performance increases when outsiders are added to the board, and when the cost of information is high, performance worsens when outsiders are added to the board. The estimates provide some of the cleanest estimates to date that board independence matters, and the finding that board effectiveness depends on information cost supports a nascent theoretical literature emphasizing information asymmetry. We also find that firms compose their boards as if they understand that outsider effectiveness varies with information costs.
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Corporate Cash Holdings and Political Connections
Matthew Hill, Kathleen Fuller, G.W. Kelly & Jim Washam
University of Mississippi Working Paper, May 2010
Abstract:
We examine the relation between corporate liquidity and political connections measured via lobbying expenditures. This is an interesting question as many of the motives for holding cash should be diminished by political connections. Results suggest a significant and inverse relation between cash levels and lobby expenses and that the marginal value of cash decreases with lobbying. Taken together, these results suggest firms react optimally to the reduced benefits of cash linked to political connections and that the market appears to recognize the weakened benefits of cash. Overall, our research shows another way political connections can shape corporate policy.
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Have the tax benefits of debt been overestimated?
Jennifer Blouin, John Core & Wayne Guay
Journal of Financial Economics, forthcoming
Abstract:
We re-examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields. We show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions. We develop improved estimates of marginal tax rates using a non-parametric procedure that produces more accurate estimates of the distribution of future taxable income. We show that additional debt would provide firms with much smaller tax benefits than previously thought, and when expected distress costs and difficult-to-measure non-debt tax shields are also considered, it appears plausible that most firms have tax-efficient capital structures.
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The effect of CEO power on bond ratings and yields
Yixin Liu & Pornsit Jiraporn
Journal of Empirical Finance, forthcoming
Abstract:
We argue that executives can affect firm outcomes only if they have influence over crucial decisions. This study explores the impact of CEO power or CEO dominance on bond ratings and yield spreads. We find that credit ratings are lower and yield spreads higher for firms whose CEOs have more decision-making power. To further investigate why bondholders are concerned about CEO power, we show that powerful CEOs tend to maintain an opaque information environment. Bondholders demand higher yields because it is difficult for them to monitor managers in firms with powerful CEOs. Taken together, the results suggest that bondholders perceive CEO power as a critical determinant of the cost of bond financing.
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The New Game in Town: Competitive Effects of IPOs
Hung-Chia Hsu, Adam Reed & Jorg Rocholl
Journal of Finance, April 2010, Pages 495-528
Abstract:
We analyze the effect of initial public offerings (IPOs) on industry competitors and provide evidence that companies experience negative stock price reactions to completed IPOs in their industry and positive stock price reactions to their withdrawal. Following a successful IPO in their industry, they show significant deterioration in their operating performance. These results are consistent with the existence of IPO-related competitive advantages through the loosening of financial constraints, financial intermediary certification, and the presence of knowledge capital. These aspects of competitiveness are significant in explaining the cross-section of underperformance as well as survival probabilities for competing firms.
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Board interlocks and the propensity to be targeted in private equity transactions
Toby Stuart & Soojin Yim
Journal of Financial Economics, July 2010, Pages 174-189
Abstract:
We examine how board networks affect change-of-control transactions by investigating whether directors' deal exposure acquired through board service at different companies affect their current firms' likelihood of being targeted in a private equity-backed, take-private transaction. In our sample of all US publicly traded firms in 2000-2007, we find that companies which have directors with private equity deal exposure gained from interlocking directorships are approximately 42% more likely to receive private equity offers. The magnitude of this effect varies with the influence of directors on their current boards and the quality of these directors' previous take-private experience, and it is robust to the most likely classes of alternative explanations-endogenous matching between directors and firms and proactive stacking of board composition by management. The analysis shows that board members and their social networks influence which companies become targets in change-of-control transactions.
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Competitive experimentation with private information: The survivor's curse
Giuseppe Moscarini & Francesco Squintani
Journal of Economic Theory, March 2010, Pages 639-660
Abstract:
We study a winner-take-all R&D race between two firms that are privately informed about the arrival rate of an invention. Over time, each firm only observes whether the opponent left the race or not. The equilibrium displays a strong herding effect, that we call a ‘survivor's curse.' Unlike in the case of symmetric information, the two firms may quit the race (nearly) simultaneously even when their costs and benefits for research differ significantly.
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Employee stock options and future firm performance: Evidence from option repricings
David Aboody, Nicole Bastian Johnson & Ron Kasznik
Journal of Accounting and Economics, May 2010, Pages 74-92
Abstract:
We investigate firms' operating performance subsequent to the repricing of executive and non-executive employee stock options. We find that, relative to non-repricers, repricing firms have a larger increase in operating income and cash flows in subsequent periods. This performance improvement is attributable to the underlying economic determinants of the decision to restore the options' incentive properties. However, only repricings of executive stock options are associated with improvement in performance; we find no such evidence for non-executive employees. Our findings suggest employee stock options provide sufficiently large incentive effects to favorably affect firms' performance, but primarily so at the executive level.
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Earnings Pressure and Competitive Behavior: Evidence from the U.S. Electricity Industry
Yu Zhang & Javier Gimeno
Academy of Management Journal, forthcoming
Abstract:
This study examines the effect of earnings pressure, the tension felt by management to meet or beat analysts' earnings forecasts, on firms' behavior in oligopolistic output competition. We argue that firms whose management experiences earnings pressure seek to increase current profits to meet analysts' forecasts by exploiting market power opportunities and tightening output, even though this could encourage rival output expansion. Using data from the US electricity generation industry, we found that firms facing earnings pressure tended to restrict output in markets where market structure and competitor characteristics were favorable for the exercise of market power, while their competitors tended to increase output in those markets.