Corporate Results
Long-Term Pay for Performance: Cumulative Evidence over CEO Tenure
Kalash Jain et al.
Management Science, forthcoming
Abstract:
This study revisits the CEO pay-for-performance relation using two methodological innovations designed to address well-known measurement challenges. First, we aggregate pay and performance over the CEO's entire tenure, allowing us to account for ex post settling up in pay. Second, we use realized compensation rather than ex ante estimates to better capture the actual economic rewards that CEOs receive. We find strong evidence of pay for performance in the full sample with a magnitude 2-10 times greater than that reported in previous studies. However, the pay-for-performance relation is asymmetric. CEOs who outperform their peer firms exhibit strong pay-for-performance sensitivity; those who underperform do not. This asymmetry arises because boards offset weak performance with incremental equity grants, undoing the mechanical correlation that results from declining stock prices. Finally, we show that underperforming CEOs are significantly more likely to be dismissed, suggesting that turnover, rather than lower pay, could be a disciplinary mechanism used by boards. Collectively, our findings demonstrate that tenure-aggregated realized pay better reveals how boards structure incentives and accountability over the full horizon of a CEO's leadership.
Remotely Productive: The Efficacy of Remote Work for Executives
Ran Duchin & Denis Sosyura
Review of Financial Studies, forthcoming
Abstract:
We study the efficacy of remote arrangements between CEOs and firms. Such arrangements attract executive talent and overcome labor market segmentation but introduce frictions. Remote arrangements are associated with lower operating performance, firm valuation, and insider reviews. Using the private costs from uprooting the CEO's spouse as an instrument for the CEO's decision to seek remote work, we find similar negative effects. The performance decline increases for CEOs who live further away and who cross multiple time zones. The mechanisms include the CEO's loss of information, short-termism, and consumption of leisure, such as recreational boats and beach homes.
The Changing Nature of Firm Innovation: Short-Termism and Influential Innovation in U.S. Public Firms
Yuan Shi et al.
Management Science, forthcoming
Abstract:
We examine the link between short-term pressures and technologically significant innovation in U.S. public firms in 1997-2015. Using a market-based measure of short-term pressure, we estimate its relationship with influential and novel patents. We find that firms facing more intense short-term pressures are less likely to patent highly influential or novel innovations. To evaluate whether this relationship is causal, we use changes in ownership styles following financial institution mergers as instruments. Our analysis suggests that changing short-term pressures from investors had a causal impact on firm innovative outcomes; this finding is robust to a wide variety of empirical specifications. While public firms as a whole retained a constant share of highly influential patents, this activity has become more concentrated in fewer firms. This shift does not appear to be fully compensated by an increase in technologically significant patents by nonpublic firms such as venture-capital (VC)-backed start-ups. These findings raise questions about capital markets' impact on firm R&D strategy and the nature of innovative activities in public firms.
Challenging the short-termist thesis in financialization studies: Evidence from US non-financial corporations, 1998-2018
Niall Reddy & Joel Rabinovich
Cambridge Journal of Economics, forthcoming
Abstract:
It is widely argued that shareholder value orientation (SVO) causes firms to adopt a financialized business model, in which short-run share prices are prioritized over the firm's long-run growth. Financialized business models entail a 'downsizing and distributing' allocation regime — the channelling of resources to shareholder payouts over reinvestment — and other changes that undermine the firm's ability to innovate, reduce costs and retain market share, harming its competitiveness. We test this theory by examining how increased shareholder power and realigned managerial preferences — two underlying 'mechanisms' of SVO — affect two sets of outcomes: allocation regime (fixed investment, R&D expenditure and payouts) and real performance (productivity, market share and profitability). We allow for the fact that institutional shareholders likely vary in their preferences for governance, meaning that the broad objective of maximizing shareholder profit may conduce highly varying business strategies. Our findings suggest that short-termism is not an outcome common to shareholder primacy in general, but rather governance directed to certain kinds of shareholders — in particular low-turnover, non-passive institutional investors. Moreover, it is much more likely to occur when those investors are empowered within the firm rather than reliant solely on managerial re-incentivization. These findings suggest that short-termism is not a universal feature of non-financial corporation (NFC) financialization but arises under particular governance conditions.
Earnings Conference Calls and the SEC Comment Letter Process
Alina Lerman, Thomas Steffen & Kangkang Zhang
Management Science, forthcoming
Abstract:
The Securities and Exchange Commission (SEC) reviews firms' financial reports and issues comment letters to ensure compliance with applicable disclosure and accounting requirements. We explore the nature, determinants, and consequences of SEC comment letters that refer to information disclosed in voluntary earnings conference calls. Using hand-collected data, we document that the SEC primarily references these voluntary disclosures to illustrate insufficiencies and, less commonly, inconsistencies in mandatory filings across a wide range of topics. These letters are more likely to be issued when filing reviews are more complex, SEC staff are less resource constrained, and for firms with more institutional investors and analysts. Conference call-related comments tend to occur during higher-quality review processes and require greater remediation costs than other comments. The SEC's use of call disclosures also leads to more pronounced changes in firms' subsequent mandatory filings, particularly when the firm indicates agreement with SEC comments. However, we observe a mixed effect on the overall information environment, consistent with possible unintended consequences for the quality of firms' voluntary disclosures.
A Shared Interest: Do Bonds Strengthen Equity Monitoring?
Todd Gormley & Manish Jha
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
Institutional investors conduct more governance research and are less likely to follow proxy advisor vote recommendations when a company's bonds comprise a larger share of their assets. These findings are driven by bond holdings, shareholder proposals, and companies where fixed-income managers are more likely to be attentive and share an interest with equity investors in improving governance. The findings do not concentrate on companies or shareholder proposals where creditor-shareholder conflicts are likely. Overall, the findings suggest that corporate bond holdings influence how actively institutions monitor their equity positions and contribute to institutions' overall incentive to be engaged stewards.
Female Equity Analysts and Corporate Environmental and Social Performance
Kai Li et al.
Management Science, forthcoming
Abstract:
This paper examines the impact of female analyst coverage on firms' environmental and social (E&S) performance. Exploiting broker closures as a quasi-exogenous shock to analyst coverage, we find that firms experiencing an exogenous decline in female analyst coverage subsequently show a significantly larger drop in E&S scores than those experiencing an equivalent decline in male analyst coverage. To explore the underlying mechanisms, we develop novel machine-learning models to analyze more than 2.4 million analyst reports and 120,000 earnings call transcripts. Our analysis shows that, compared with their male counterparts, female analysts are more likely to address E&S issues, particularly those involving regulatory compliance, stakeholders, and the environment, in both research reports and earnings conference calls. They also display distinct cognitive and linguistic patterns when discussing E&S issues. Furthermore, female analysts are more likely to issue lower stock recommendations and target prices (lower stock recommendations) following negative E&S discussions in their reports (E&S incidents) than male analysts. Finally, investors respond more strongly to female analysts' negative tones when discussing E&S issues. Overall, our findings suggest that gender diversity among analysts plays a significant role in shaping corporate E&S practices and provide new insights into the origins of gender differences in skills within the equity analyst profession.
Delegation and Chief Financial Officer Retention: Evidence from Chief Accounting Officers on the Executive Team
Leah Muriel, Adrienne Rhodes & Dan Russomanno
Management Science, forthcoming
Abstract:
In recent years, chief financial officer (CFO) responsibilities and resignations have increased. Given these trends, we examine whether delegating accounting is associated with CFO retention. We develop a methodology to identify voluntary CFO departures using the firm's public messaging around the CFO's exit. Our results suggest that CFOs are less likely to voluntarily depart when accounting is delegated. Further, we find evidence that the negative association between delegating accounting and voluntary CFO departures is stronger when accounting demands are higher. Moreover, we find evidence that delegating accounting increases the CFO's human capital. When CFOs do leave, they are more likely to become a chief executive officer and less likely to make a lateral move to another CFO position. Taken together, this study finds evidence consistent with the delegation of accounting increasing CFO retention and human capital.