Management Material
A face only an investor could love: CEO facial structure predicts firm financial performance
Elaine Wong, Margaret Ormiston & Michael Haselhuhn
Psychological Science, forthcoming
Abstract:
Leadership researchers have theorized that innate personal traits relate to leadership success. While links between psychological characteristics and leadership success have been well established, research has yet to identify any objective physical traits that predict actual organizational performance. In the present paper we identify a specific physical trait, facial structure, of leaders that correlates with organizational performance. Specifically, chief executive officers (CEOs) with wider faces (relative to facial height) achieve superior firm financial performance. Decision making dynamics within the leadership team moderate this effect, such that the relationship between facial measurements and financial performance is stronger in firms with cognitively-simple leadership teams.
----------------------
Behavioral consistency in corporate finance: CEO personal and corporate leverage
Henrik Cronqvist, Anil Makhija & Scott Yonker
Journal of Financial Economics, forthcoming
Abstract:
We find that firms behave consistently with how their CEOs behave personally in the context of leverage choices. Analyzing data on CEOs' leverage in their most recent primary home purchases, we find a positive, economically relevant, robust relation between corporate and personal leverage in the cross-section and when examining CEO turnovers. The results are consistent with an endogenous matching of CEOs to firms based on preferences, as well as with CEOs imprinting their personal preferences on the firms they manage, particularly when governance is weaker. Besides enhancing our understanding of the determinants of corporate capital structures, the broader contribution of the paper is to show that CEOs' personal behavior can, in part, explain corporate financial behavior of the firms they manage.
----------------------
Power Increases Social Distance
Joris Lammers et al.
Social Psychological and Personality Science, forthcoming
Abstract:
Five experiments investigated the effect of power on social distance. Although increased social distance has been suggested to be an underlying mechanism for a number of the effects of power, there is little empirical evidence directly supporting this claim. Our first three experiments found that power increases social distance toward others. In addition, these studies demonstrated that this effect is (a) mediated by self-sufficiency and (b) moderated by the perceived legitimacy of power-only when power is seen as legitimate, does it increase social distance. The final two studies build off research showing that social distance is linked to decreased altruism and find an interaction between power and legitimacy on willingness to help others. The authors propose that the concept of social distance offers a synthesizing lens that integrates seemingly disparate findings in the power literature and explains how power can both corrupt and elevate.
----------------------
Pay Cuts for the Boss: Executive Compensation in the 1940s
Carola Frydman & Raven Molloy
NBER Working Paper, August 2011
Abstract:
Executive pay fell during the 1940s, marking the last notable decrease in the past 70 years. We study this decline using a new panel dataset on the remuneration of top executives in 246 firms. We find that government regulation-including explicit salary restrictions and taxation-had, at best, a modest effect on executive pay. By contrast, a decline in the returns to firm size and an increase in the power of labor unions contributed greatly to the reduction in executive compensation relative to other workers' earnings from 1940 to 1946. The continued decrease in relative executive pay remains largely unexplained.
----------------------
Directors' and officers' liability insurance and acquisition outcomes
Chen Lin, Micah Officer & Hong Zou
Journal of Financial Economics, forthcoming
Abstract:
We examine the effect of directors' and officers' liability insurance (D&O insurance) on the outcomes of merger and acquisition (M&A) decisions. We find that acquirers whose executives have a higher level of D&O insurance coverage experience significantly lower announcement-period abnormal stock returns. Further analyses suggest that acquirers with a higher level of D&O insurance protection tend to pay higher acquisition premiums and their acquisitions appear to exhibit lower synergies. The evidence provides support for the notion that the provision of D&O insurance can induce unintended moral hazard by shielding directors and officers from the discipline of shareholder litigation.
----------------------
Did Board Configuration Matter? The Case of US Subprime Lenders
Maureen Muller-Kahle & Krista Lewellyn
Corporate Governance, forthcoming
Research Question/Issue: The origins of the global financial crisis have been attributed to the combination of a housing price bubble and innovative financial instruments, as well as the lack of restraint by corporate executives and boards to engage in excessive risk-taking. The rise in subprime lending between 1997 and 2005 played a crucial role in inflating the housing price bubble. We take a unique dataset of US financial institutions heavily engaged in subprime lending and ask the following research question: Did board configuration play a role in determining whether a financial institution specialized in subprime lending?
Research Findings/Insights: We use a matched-pair sample of firms in the financial industry from 1997-2005 with half of the sample specializing in subprime lending and conduct panel data logistic regression analysis. We find that the board configurations of those financial institutions that engaged in subprime lending were significantly different from those that did not. Specifically, subprime lenders had boards that were busier, had less tenure, and were less diverse with respect to gender.
----------------------
Corporate Social Responsibility for Irresponsibility
Matthew Kotchen & Jon Jungbien Moon
NBER Working Paper, July 2011
Abstract:
This paper provides an empirical investigation of the hypothesis that companies engage in corporate social responsibility (CSR) in order to offset corporate social irresponsibility (CSI). We find general support for the causal relationship: when companies do more "harm," they also do more "good." The empirical analysis is based on an extensive 15-year panel dataset that covers nearly 3,000 publicly traded companies. In addition to the overall finding that more CSI results in more CSR, we find evidence of heterogeneity among industries, where the effect is stronger in industries where CSI tends to be the subject of greater public scrutiny. We also investigate the degree of substitutability between different categories of CSR and CSI. Within the categories of community relations, environment, and human rights-arguably among those dimensions of social responsibility that are most salient-there is a strong within-category relationship. In contrast, the within-category relationship for corporate governance is weak, but CSI related to corporate governance appears to increase CSR in most other categories. Thus, when CSI concerns arise about corporate governance, companies seemingly choose to offset with CSR in other dimensions, rather than reform governance itself.
----------------------
Do Shareholders Benefit from Corporate Misconduct? A Long-Run Analysis
Samuel Tibbs, Deborah Harrell & Ronald Shrieves
Journal of Empirical Legal Studies, September 2011, Pages 449-476
Abstract:
To test if shareholders benefit from corporate misconduct, we analyze long-run operating and stock performance before and after allegations are publicly disclosed. We provide the first empirical evidence that shareholders benefit from corporate misconduct. We find positive abnormal stock returns during the prediscovery period, which are only partially reversed during the postdiscovery period. Partitioning the results based on the relation between the alleged offending firm and damaged party, we find prediscovery outperformance is driven by third-party misconduct, and postdiscovery underperformance is driven by related-party misconduct. Although operating performance results are somewhat sensitive to the metric analyzed, overall they are consistent with the stock performance results. Taken as a whole, our findings provide evidence of a net benefit to shareholders from corporate misconduct when the damaged party is unrelated to the offending firm. Additionally, the disparity between postdiscovery operating performance based on the offending firm's relation with the offended party highlights the importance of reputational penalties.
----------------------
The Perils of Altering Incentive Plans: A Case Study
Antti Kauhanen
Managerial and Decision Economics, September 2011, Pages 371-384
Abstract:
This paper studies a retail chain that introduced a sales incentive plan that rewarded for exceeding a sales target and subsequently cut the incentive intensity in addition to increasing the target. Utilizing monthly panel data for 54 months for all 53 units of the chain the paper shows that the introduction of the sales incentive plan increased sales and profitability, whereas the changes in the plan lead to a marked drop in sales and profitability. Thus, modifying the incentive plan proved costly for the firm. The results are consistent with the gift-exchange model of labor contracts.
----------------------
Roy Chua & Sheena Iyengar
Leadership Quarterly, forthcoming
Abstract:
A perennial question facing managers is how much decision latitude to give their employees at work. The current research investigates how decision latitude affects employees' perceptions of managers' personalities and, in turn, their leadership effectiveness. Results from three studies using different methods (two experiments and a survey) indicate an inverted-U shaped relationship between degree of decision latitude and leadership effectiveness perceptions. The increase in leadership effectiveness perception between low and moderate decision latitude was explained by an increase in perceived agreeableness; the decrease in leadership effectiveness perception between moderate and high decision latitude was explained by a decrease in perceived conscientiousness. Theoretical and practical implications of these findings are discussed.
----------------------
Feedback, Self-Esteem, and Performance in Organizations
Camelia Kuhnen & Agnieszka Tymula
Management Science, forthcoming
Abstract:
We examine whether private feedback about relative performance can mitigate moral hazard in competitive environments by modifying the agents' self-esteem. In our experimental setting, people work harder and expect to rank better when told that they may learn their ranking, relative to cases when feedback will not be provided. Individuals who ranked better than expected decrease output but expect a better rank in the future, whereas those who ranked worse than expected increase output but lower their future rank expectations. Feedback helps create a ratcheting effect in productivity, mainly because of the fight for dominance at the top of the rank hierarchy. Our findings suggest that organizations can improve employee productivity by changing the likelihood of feedback, the reference group used to calculate relative performance, and the informativeness of the feedback message.
----------------------
Martina Musteen, Xin Liang & Vincent Barker
Leadership Quarterly, forthcoming
Abstract:
Drawing on the strategic leadership and leadership cognition literature, we develop a theoretical framework linking personal characteristics of strategic leaders with their perceptions of organizational decline and retrenchment activities. Our hypotheses are tested using a sample of 110 experienced MBA students in a scenario-based study. The findings of this exploratory study suggest that strategic leaders' perceptions of the severity of a firm's decline play an important role in the recommendation of extensive retrenchment activities in response to decline. However, perceptions of the severity of decline vary substantially across decision makers and are influenced by an individual's locus of strategic control, functional background and maturity. The study's findings that perceptions of decline and planned responses to decline vary substantially and predictably across individuals are discussed in light of existing theory and practice.