Independent Directors
Partisan Corporate Speech
William Cassidy & Elisabeth Kempf
NBER Working Paper, May 2025
Abstract:
We construct a novel measure of partisan corporate speech using natural language processing techniques and use it to establish three stylized facts. First, the volume of partisan corporate speech has risen sharply between 2012 and 2022. Second, this increase has been disproportionately driven by companies adopting more Democratic-leaning language, a trend that is widespread across industries, geographies, and CEO political affiliations. Third, partisan corporate statements are followed by negative abnormal stock returns, with significant heterogeneity by shareholders’ degree of alignment with the statement. Finally, we propose a theoretical framework and provide suggestive empirical evidence that these trends are at least in part driven by a shift in investors’ nonpecuniary preferences with respect to partisan corporate speech.
Assessing the Objective Function of the SEC against Financial Misconduct: A Structural Approach
Chuan Chen et al.
Journal of Accounting and Economics, forthcoming
Abstract:
We examine the objective function of the SEC against financial misconduct by estimating a structural model of the interactions between the SEC and a regulated firm. The SEC considers social costs, enforcement costs, and firms’ compliance costs when making enforcement decisions. Identification exploits SOX as a shock to enforcement intensity. Four insights emerge from counterfactual analyses. First, marginal social costs have a greater impact on the SEC’s perceived welfare than marginal enforcement costs. Second, the SEC’s current enforcement mitigates earnings management to a level close to the first-best scenario. Third, a “hawkish” regulator, who perceives high social costs of financial misconduct, would impose excessive costs on society. Lastly, removing regulatory discretion would result in higher penalties and lower welfare, with little effect on earnings management.
Management and Firm Dynamism
Raffaella Sadun et al.
NBER Working Paper, May 2025
Abstract:
We show better-managed firms are more dynamic in plant acquisitions, disposals, openings and closings in U.S. Census and international data. Better-managed firms also birth better-managed plants and improve the performance of the plants they acquire. To explain these findings we build a model with two key elements. First, management is a combination of firm-level management ability (e.g. CEO quality), which can be transferred to all plants, and plant-level management practices, which can be changed through intangible investment (e.g. consulting or training). Second, management both raises productivity and also reduces the operational costs of dynamism: buying, selling, opening and closing plants. We structurally estimate the model on Census microdata, fitting our key dynamic moments, and then use it to establish three additional results. First, mergers and acquisitions raise economy-wide management and productivity by reallocating plants to firms with higher management ability. Banning M&A would depress GDP and management by about 15%. Second, greater product market competition improves both management and productivity by reallocating away from badly managed plants. Finally, management practices account for about 20% of the cross-country productivity differences with the US.
Is ESG a Sideshow? ESG Perceptions, Investment, and Firms' Financing Decisions
Roman Kräussl, Joshua Rauh & Denitsa Stefanova
NBER Working Paper, May 2025
Abstract:
We study the effects of market ESG perceptions, as proxied by ESG ratings, on public firms’ security issuance and asset accumulation decisions. Higher ESG scores are followed by capital structure adjustments, specifically increases in equity issuance and decreases in net debt issuance of similar magnitude. These are driven completely by the “E” component of ESG. There are no effects of ESG assessments on capital expenditures or non-cash asset accumulation, supporting the hypothesis that ESG perceptions are a sideshow for capital investment. To address the endogeneity of firms' decisions to raise equity, we consider industry-wide rating changes and decompose the ESG ratings into an industry- and a firm-specific component. The response to the industry component of equity and debt issuance is highly significant, indicating that our findings are not explained by firms' decisions. As many ratings products use restated or backfilled ratings, our results focus on a point-in-time (PIT) ratings panel that we develop. We document that if using a standard ratings product instead of PIT data, researchers might falsely infer that higher ESG ratings lead to asset accumulation, due in particular to the use of restated ESG scores in standard ratings data products.
Are Employees Safer When the CEO Looks Greedy?
Don O’Sullivan et al.
Journal of Business Ethics, May 2025, Pages 655-673
Abstract:
In this study, we explore the relationship between perceived CEO greed and workplace safety. Drawing on insights from the social psychology literature, we theorize that CEOs are cognizant that their perceived greed has implications for how observers respond to failures in workplace safety. Our theorizing points to a somewhat counterintuitive positive relationship between perceived CEO greed and workplace safety. Consistent with our theorizing, we find that the relationship is attenuated when the CEO is insulated from how observers respond to firm conduct and is amplified when the CEO’s characteristics have a larger impact on how observers respond to adverse firm-level events. We contribute to business ethics research on executive greed, on the relationship between CEO traits and (ir)responsible corporate conduct, and on the antecedents of workplace safety.
The Trust Dilemma: Does CEO Vulnerability Attract or Alarm Investors?
Farzaneh Mahmoudi & Nicholas Seybert
University of Maryland Working Paper, February 2025
Abstract:
Prior research in management and organizational behavior investigates how leaders’ disclosure of vulnerability influences subordinates and team members, revealing that vulnerability is powerful in fostering genuine connections within teams. Despite this body of research in employee-centric frameworks, no prior study examines the effects of leader vulnerability disclosure on external stakeholders, nor in financial contexts. We conduct three experiments to investigate the effect of CEO vulnerability on investor judgments. In our first experiment, we find that a CEO’s disclosure of personal vulnerability increases investor trust, leading to higher assessments of investment attractiveness when the CEO issues a more-optimistic (vs. less-optimistic) forecast. Because such optimistic guidance is likely to lead to future disappointment, we conduct a second experiment to examine the impact of expressed vulnerability on investor reactions to good and bad news realizations. Consistent with psychology theory, while bad news elicits a strong negative reaction from investors, CEO disclosure of vulnerability mitigates this response. Finally, in a third experiment, we find that the timing of vulnerability disclosure is important – investor reactions to bad news are mitigated only when the vulnerability disclosure occurs prior to news realization. Our studies collectively demonstrate that CEO disclosure of personal vulnerability fosters investor trust, which increases investment attractiveness in the face of optimistic forecasts and negative earnings news.
CEO Turnover at Dual-Class Firms
Yifat Aran, Brian Broughman & Elizabeth Pollman
University of Pennsylvania Working Paper, December 2024
Abstract:
In recent years, an increasing percentage of tech companies have gone public with a dual- class structure, where founders hold high-vote stock. Commentators argue that this entrenches founder-CEOs, allowing them to retain power long after the IPO. We examine a sample of U.S. VC-backed firms that went public from 2002 to 2020. Our time-to-event analysis finds that CEOs of dual-class firms have a median post-IPO tenure of 6.6 years, compared to 4.3 years for a matched sample of single-class firms. While this supports concerns of CEO entrenchment, the difference is largely due to a higher rate of M&A sales involving single-class firms. Excluding M&A-related turnover, there is no significant difference in CEO tenure, challenging the view that dual-class structures shield underperforming CEOs from internal pressure to step down. Furthermore, poor shareholder returns frequently precede turnover of dual-class CEOs, and news coverage often mentions poor firm performance as a reason for the change. Most dual-class turnovers occurred well before any sunset clauses were triggered, calling into question the focus on this governance mechanism.
Common Investor Relations Representation
David Volant
Journal of Accounting Research, June 2025, Pages 1237-1283
Abstract:
This study examines the capital market implications of common investor relations (IR) representation, a phenomenon in which multiple public firms share the same external IR representative. Using a difference-in-differences research design, I document that common IR representation is associated with greater overlap in institutional ownership and sell-side analyst coverage as well as similarities in disclosure practices among clients -- even those operating in different industries. These effects culminate in heightened return comovement among firms sharing IR representation. My findings provide insight into the role of IR companies as capital market gatekeepers and suggest that when a firm outsources its IR function, the IR company influences its capital market connectivity.