Inside jobs
Dispositional Sources of Managerial Discretion: CEO Ideology, CEO Personality, and Firm Strategies
Abhinav Gupta, Sucheta Nadkarni & Misha Mariam
Administrative Science Quarterly, forthcoming
Abstract:
We investigate the dispositional sources of managerial discretion by theorizing that CEOs’ personality traits affect the extent to which their firms’ strategies reflect their preferences. In a longitudinal study of Fortune 500 firms, we examine the moderating influence of two personality traits — narcissism and extraversion — on the relationship between CEOs’ liberal- or conservative-leaning political ideologies and two firm strategies: corporate social responsibility (CSR) and workforce downsizing. We anticipate and confirm that liberal-leaning CEOs are more likely than others to enact CSR practices, and conservative-leaning CEOs are more likely than others to engage in downsizing. We find that extraversion strengthens these effects: it increases liberal CEOs’ use of CSR and conservative CEOs’ use of downsizing. Narcissism likewise strengthens the effect of CEO liberalism on CSR, but it does not significantly moderate the effect of CEO conservatism on downsizing. In a supplementary study using primary data from working professionals, we further explore the distinct mechanisms associated with these two personality traits. We find that narcissism relates strongly to individuals’ inflated perception of their discretion, whereas extraversion relates to their ability to sell an issue to others. Our study furthers research on managerial discretion by providing nuanced theory and evidence on innate sources of CEOs’ influence, and it enhances research on CEOs’ political ideology by spotlighting the dispositional boundary conditions of its effects on firms’ strategies.
Female board representation, corporate innovation and firm performance
Jie Chen, Woon Sau Leung & Kevin Evans
Journal of Empirical Finance, September 2018, Pages 236-254
Abstract:
We show evidence that female board representation is associated with greater innovative success, and thus enhances firm performance in innovation-intensive industries. Firms with female directors tend to invest more in innovation and obtain more patents and citations for given R&D expenditures. An increase of 10 percentage points in the tenure-weighted fraction of female directors is associated with approximately 6% more patents and 7% more citations. Investigating the underlying mechanisms, the positive association between female board representation and corporate innovation is stronger when product market competition is lower and when managers are more entrenched, consistent with increased monitoring by female directors improving managers’ incentives to innovate. Furthermore, we find that female board representation is positively associated with performance only for firms for which innovation and creativity play a particularly important role.
Pay Inequality and Corporate Divestitures
Emilie Feldman, Claudine Gartenberg & Julie Wulf
Strategic Management Journal, forthcoming
Abstract:
This paper analyzes how pay inequality influences divestiture decisions. Using detailed data on division manager compensation and divestiture activity, this study documents that firms are more likely to divest divisions when pay inequality among division managers is higher. To address potential bias in the measurement of pay inequality, we construct a “synthetic” measure that varies with regional and industry pay shocks that differentially affect division managers within firms. Post hoc analyses reveal that social comparison appears to explain, at least partially, the relationship between unequal pay and divestiture. These findings support the notion that pay inequality can be an important predictor of firm boundaries. More generally, they suggest that unequal pay may have significant strategic consequences as firms increasingly adopt performance‐based compensation to motivate employees.
How does competition affect real earnings management to meet or beat targets? Evidence from import tariff reductions
Alex Young
Annals of Finance, August 2018, Pages 331–342
Abstract:
Targets provide incentives for earnings management, and a longstanding question is whether earnings management is undertaken opportunistically or to communicate private information about future firm value. To discriminate between these motivations, I follow analytical research showing that an increase in competition through a large decrease in tariffs disciplines managers and better aligns their interests with those of shareholders. Thus, if earnings management reflects managerial opportunism, then an increase in competition will decrease earnings management; and if it signals future performance expectations, then an increase in competition will increase earnings management. Consistent with earnings management indicating managerial opportunism, I show that an increase in competition decreases real earnings management to avoid reporting negative earnings or a negative change in earnings. In addition, by showing that the lessening of trade barriers through import tariff reductions reduces the use of real earnings management to meet or beat earnings targets, I provide evidence on the role of macroeconomic conditions as a determinant of earnings quality.
Shareholder Voting on Golden Parachutes: Determinants and Consequences
Albert Choi, Andrew Lund & Robert Schonlau
University of Virginia Working Paper, August 2018
Abstract:
With the passage of the Dodd-Frank Act in 2010, Congress attempted to constrain executive compensation by giving shareholders a pair of advisory votes: Say on Pay and Say on Golden Parachute. Researchers have studied Say on Pay and its effect on compensation patterns, creating a burgeoning literature around this important new governance tool. This Article is the first to empirically examine the experience with Say-on-Golden-Parachute votes, which gives shareholders the right to approve or disapprove executive pay triggered by their firm being acquired. It sheds light on both the controversial practice of awarding golden parachutes as well as the conditions under which shareholder voting can be effectively utilized as a governance tool. We find that the Say-on-Golden-Parachute (“SOGP”) voting regime is significantly less promising than Say on Pay in controlling compensation. First, proxy advisors appear more likely to adopt a one-size-fits-all approach to recommendations on SOGP votes, focusing mainly on the presence of an excise tax gross-up provision and secondarily on aggregate payouts if extreme. Second, shareholders appear more likely to adhere to advisor recommendations, with standard variables explaining far less of the voting results once controls for proxy advisor recommendations are removed. Finally, golden parachutes appear to be increasing in recent years and we find that golden parachutes that are amended immediately prior to an SOGP vote tend to grow rather than shrink. These findings contrast with those of researchers who have studied Say on Pay. We suggest that the differences lie in the absence of second-stage discipline for SOGP votes. Directors at target firms who fail to respond to proxy advisor or shareholder complaints do not have to risk being voted out in subsequent elections since their directorships usually cease with the acquisition. For corporate governance more broadly, our findings suggest that advisory votes are only effective in certain situations where immediate or subsequent discipline is at least plausible. We conclude by offering potential avenues for improving SOGP’s ability to shape compensation practices. They include making SOGP votes more binding and making the GP payment and SOGP voting information more readily available to shareholders of corporations where the target directors also serve as directors and also of acquiring corporations.
Empirical Evidence of Overbidding in M&A Contests
Eric de Bodt, Jean-Gabriel Cousin & Richard Roll
Journal of Financial and Quantitative Analysis, August 2018, Pages 1547-1579
Abstract:
Surprisingly few papers have attempted to develop a direct empirical test for overbidding in merger and acquisition contests. We develop such a test grounded on a necessary condition for profit-maximizing bidding behavior. The test is not subject to endogeneity concerns. Our results strongly support the existence of overbidding. We provide evidence that overbidding is related to conflicts of interest, but also some indirect evidence that it arises from failing to fully account for the winner’s curse.
Activist‐Impelled Divestitures and Shareholder Value
Siwen Chen & Emilie Feldman
Strategic Management Journal, forthcoming
Abstract:
This study analyzes how the divestitures that are impelled by activist investors in their campaigns against public corporations affect shareholder value. Using hand‐collected data on the activist campaigns that were launched against and the divestitures that were undertaken by Fortune 500 companies between 2007 and 2015, we find that activist‐impelled divestitures are more positively associated with immediate and longer‐term measures of shareholder value than comparable manager‐led divestitures. These performance differences persist for nearly two years after the completion of these deals. Our results empirically test the idea that firms with agency problems unlock shareholder value when they divest, and support the notion that activist investors fulfill an important external governance function. Our work also opens new research opportunities and offers practical implications as well.
Is Silence Golden? Real Effects of Mandatory Disclosure
Sudarshan Jayaraman & Joanna Shuang Wu
Review of Financial Studies, forthcoming
Abstract:
Mandatory disclosure provides benefits, but it also entails costs. One cost concerns managerial learning: by discouraging informed trading, disclosure could reduce managers’ ability to glean decision-relevant information from prices. Using mandatory segment reporting in the United States, we uncover a reduction in investment-q sensitivity, indicating lower investment efficiency after regulation. Consistent with learning, lower sensitivity is concentrated in firms with more informed trading and lower financing constraints. Constrained firms exhibit no change in investment-q sensitivity, suggesting that they enjoy countervailing benefits via greater financing and stronger governance. Overall, we document a novel link between mandatory disclosure and real effects.
Uncertainty about Managers’ Reporting Objectives and Investors’ Response to Earnings Reports: Evidence from the 2006 Executive Compensation Disclosures
Fabrizio Ferri, Ronghuo Zheng & Yuan Zou
Journal of Accounting and Economics, forthcoming
Abstract:
We examine whether the information content of the earnings report, as captured by the earnings response coefficient (ERC), increases when investors’ uncertainty about the manager's reporting objectives decreases, as predicted in Fischer and Verrecchia (2000). We use the 2006 mandatory compensation disclosures as an instrument to capture a decrease in investors’ uncertainty about managers’ incentives and reporting objectives. Employing a difference-in-differences design and exploiting the staggered adoption of the new rules, we find a statistically and economically significant increase in ERC for treated firms relative to control firms, largely driven by profit firms. Cross-sectional tests suggest that the effect is more pronounced in subsets of firms most affected by the new rules. Our findings represent the first empirical evidence of a role of compensation disclosures in enhancing the information content of financial reports.
Corporate Strategy, Conformism, and the Stock Market
Thierry Foucault & Laurent Frésard
Review of Financial Studies, forthcoming
Abstract:
We show that product differentiation reduces the informativeness of a firm’s stock price (or its peers’ stock prices) about the value of its growth opportunities. This results in less efficient exercise of a firm’s growth options when managers rely on information in stock prices for their decisions. This informational cost of differentiation induces conformity in product market strategies and is larger for private firms. Hence, a firm should differentiate more after going public. We confirm this prediction empirically and show that the post-IPO increase in differentiation is stronger for firms with better informed managers or less informative peers’ stock prices.
CFO social capital and private debt
Kathy Fogel, Tomas Jandik & William McCumber
Journal of Corporate Finance, October 2018, Pages 28-52
Abstract:
The cost and terms of private debt are affected by the social capital of the borrowing firm's chief financial officer (CFO), proxied by measures of social network centrality that identify the relative position of CFO in the hierarchy of executives. Firms with CFOs possessing higher social capital issue new loans with lower spreads and fewer covenant restrictions, controlling for all direct connections between borrowers and lenders. Spread reductions are stronger for opaque firms and when CFOs lack objective reputation verification. The results hold when controlling for CFO personal characteristics and firm attributes related to network centrality.
National Culture and Takeover Contest Outcomes
Magnus Blomkvist, Karl Felixson & Timo Korkeamäki
Financial Review, August 2018, Pages 605-625
Abstract:
We examine the effects of cultural differences on the outcome of takeover contests. Our main focus is on individuality, which we posit to have an effect on firm behavior in international takeover contests. In a sample of international acquisitions with bidders from multiple countries, we find that individuality positively relates to the probability of placing the winning bid. We further find that takeover contest winners with high individuality scores experience lower announcement returns. Our results are consistent with the literature that links individuality to overconfidence. Our evidence suggests that firms should control culture‐related behavioral biases in their mergers and acquisitions activity.
Do Insiders Time Management Buyouts and Freezeouts to Buy Undervalued Targets?
Jarrad Harford, Jared Stanfield & Feng Zhang
Journal of Financial Economics, forthcoming
Abstract:
We provide evidence that managers and controlling shareholders time management buyouts (MBOs) and freezeout transactions to take advantage of industry-wide undervaluation. Portfolios of industry peers of MBO and freezeout targets show significant alphas of around 1% per month over the 12-month period following the transaction. These returns are not explained by a battery of risk factors or empirical methodologies, but exhibit significant heterogeneity across deals. Additional tests show that, on average, abnormal returns to industry peers are a reliable proxy for those to the target firm. Further, MBOs and freezeouts are announced during troughs of industry profitability.
Payoffs for layoffs? An examination of CEO relative pay and firm performance surrounding layoff announcements
Scott Bentley, Ingrid Fulmer & Rebecca Kehoe
Personnel Psychology, forthcoming
Abstract:
In this study, we theorize that CEOs’ peer pay comparisons influence their decisions to engage in layoffs, and we consider the conditions under which layoffs deliver “payoffs” in the form of increases in subsequent CEO relative pay. Empirical results obtained using a unique dataset indicate that a CEO's relative pay in one year negatively relates to the likelihood of the CEO announcing layoffs in the subsequent year. Further, we find that the relationship between layoffs and subsequent changes in CEO relative pay depends on post‐layoff changes in firm performance, with CEOs in firms with the largest performance gains receiving the largest increases in relative pay. We also show that our results are robust to an alternative operationalization of CEO relative pay. We provide evidence that external social comparisons may have predictable consequences for both CEOs’ propensities to engage in particular strategic actions and future changes in CEOs’ relative pay.