Incorporating Wisdom
SEC Scrutiny and Corporate Risk-Taking
David Weber, Nina Xu & Kangkang Zhang
Journal of Accounting and Economics, forthcoming
Abstract:
We examine whether heightened SEC scrutiny of financial reporting affects corporate risk-taking. Because managers are risk-averse, tightened regulatory oversight could increase risk-taking by strengthening accounting’s governance role, or reduce it by constraining managers’ ability to shield themselves from risky outcomes through earnings management. In 2007, the SEC elevated six district offices to the regional level, expanding their authority and enforcement resources. Using this reorganization in a difference-in-differences design, we find that treatment firms in the jurisdictions of the newly elevated offices experience declines in idiosyncratic stock return volatility, R&D expenditures, and innovation relative to control firms, consistent with reduced risk-taking. Treatment firms also exhibit lower earnings management. The effects of heightened scrutiny are concentrated among firms where managers face greater career concerns and where earnings management declines most. Overall, our results suggest that increased regulatory scrutiny can dampen corporate risk-taking by constraining managerial reporting discretion and intensifying risk-related agency frictions.
Board Fiduciary Duty, Communication, and Compensation
Lin Qiu
Management Science, forthcoming
Abstract:
This paper examines the consequences of tightening board fiduciary duty rules in a setting that combines agency frictions and strategic communication. A firm needs to tailor an investment decision (e.g., mergers and acquisitions) to the state of the world. The CEO is privately informed about the state but is an empire builder. The board can learn about the firm’s state through exerting a costly information gathering effort or through communication. In equilibrium, the board values communication more than the shareholders do. By granting the CEO a larger equity stake, the board fosters communication, and this reduces its need for costly information acquisition. Anticipating this, rational shareholders can adjust the board’s equity stake to boost its effort incentive. Surprisingly, the benefit to shareholders from stricter fiduciary duty rules is nonmonotonic in CEO agency conflicts and can diminish as the severity of agency conflict increases. Moreover, welfare analysis shows that strengthening fiduciary duty rules can weaken board effort incentives and reduce total equity value and overall welfare. Paradoxically, these efficiency losses occur when CEO agency conflicts are severe -- the very situations in which stringent fiduciary duty rules are typically introduced to address such concerns. These findings suggest unintended consequences of strengthening board fiduciary duty rules and highlight the importance of taking boards as strategic, self-interested entities.
The Intangibles Song in Takeover Announcements: Good Tempo, Hollow Tune
Zoran Filipović & Alexander Wagner
Review of Financial Studies, forthcoming
Abstract:
Mergers and acquisitions are often motivated by an intention to create value from intangible assets. We develop a word list of intangibles and apply it to takeover announcements. One standard deviation more in intangible-related language (“intangibles talk”) lowers announcement returns for the acquirer by 0.53 percentage points and predicts worse operating performance. Bidder managers appear to believe in the deals nonetheless, as evidenced by insider trades, payment choices, and completion probabilities and speed. Overall, takeover announcement texts reveal important information about hard-to-measure aspects of deal quality.
Does Corporate Tax Planning Affect Firm Productivity?
Spyridon Gkikopoulos, Edward Lee & Konstantinos Stathopoulos
Management Science, forthcoming
Abstract:
We examine the relation between corporate tax planning and firm-level productivity. Using a sample of U.S. public firms from 1993 to 2017, we find that tax planning is positively associated with productivity. Our findings further indicate that tax planning contributes to growth in production input factors: capital and labor. We also test the underlying mechanisms, documenting that the observed association between productivity and tax planning is more pronounced in financially constrained and knowledge capital–intensive firms. We exploit the initiation of new banking relationships and the introduction of Check-the-Box regulations as sources of tax planning variation to facilitate difference-in-differences analyses. The empirical evidence holds consistently across a wide array of robustness tests. Taken together, the results enhance the understanding on the economic implications of tax planning and provide insights for informed tax policy debates.
Venture Capital and Private M&A Contracting
Lauren Vollon
Management Science, forthcoming
Abstract:
This study investigates the role of venture capital (VC) firms in private mergers and acquisitions (M&A) contracting, particularly in reducing information asymmetry. Analyzing a proprietary data set of 851 startup acquisitions from 2015 to 2020, I find that M&A contracts are significantly less likely to include earnouts, mechanisms designed to mitigate information asymmetry, when a VC is involved in the transaction. Further analysis reveals that earnouts are more likely in transactions with high information asymmetry between the VC and the buyer. The study also examines the effect of prior relationships between VCs and buyers, showing that these connections not only increase the chances of repeat transactions but also further reduce the reliance on earnouts. These findings suggest that VCs play a crucial role in mitigating information asymmetry, reducing the need for earnouts, and ultimately improving M&A outcomes.
When do nice guys finish last? Prosociality and the psychological model of CEO-firm matching
Daniel Keum & Nandil Bhatia
Strategic Management Journal, forthcoming
Abstract:
Prosocial CEOs, characterized by greater concern for their employees, enhance employee motivation but incur higher costs when implementing layoffs. We develop a psychological model of CEO-firm matching wherein negative industry shocks requiring downsizing asymmetrically erode the match quality for prosocial CEOs. Leveraging increases in Chinese import competition, we show that layoff pressures lead to higher rates of both forced and voluntary turnover among prosocial CEOs. They are succeeded by less prosocial CEOs who are externally recruited, use less employee-friendly language, lean Republican in political orientation, or are less likely to volunteer at charities. Our study highlights psychological characteristics as a key consideration in the executive labor market and draws attention to the “first-stage” selection dynamics that shape the types of CEOs who lead firms.
Managerial Prosocial Preferences and Guilt as an Emotional Barrier to Exit Decisions
Daniel Keum & Xin Lucy Liu
Management Science, forthcoming
Abstract:
Despite economic setbacks, managers may resist exiting to avoid harming employees who will lose their jobs. We propose that managers with higher prosocial preferences set lower exit thresholds and select conservative investments that reduce the risk of having to exit because they experience stronger feelings of anticipatory guilt. Our field study shows that, in responding to intensifying Chinese import competition, prosocial managers are less likely to exit or divest. Our experiments (N = 1,411), including a sample of senior executives, show that anticipatory guilt mediates the negative effect of prosocial preferences on exit thresholds and risky investments. Anticipatory guilt and its effect are stronger when employees suffer greater harm from the firm’s exit due to the absence of social insurance programs, such as public health insurance or unemployment insurance. Our study presents an emotion-processual account of firm exit decisions and highlights anticipatory guilt as an emotional barrier to efficient decision-making.
Are boards reluctant to remove poorly performing successors to interim CEOs?
Robert Langan
Strategic Management Journal, forthcoming
Abstract:
Interim CEO appointments are disruptive and costly to firms. Boards justify them as necessary to find the right permanent successor. But what happens if that successor performs poorly? This paper argues that directors may be reluctant to remove a poorly performing successor to an interim CEO early in their tenure. It posits that this may be owing to directors' concerns for their own reputations or for the firm. Results demonstrate that successors to interim CEOs are considerably less likely than successors to permanent CEOs to experience performance-related early departures. This appears to be owing to directors' efforts to avoid further harming the firm. Additional analyses suggest these concerns may be justified, as early exits by successors to interim CEOs are associated with post-succession market declines.