Owning the Corporation
The Power of the People: Labor Unions and Corporate Social Responsibility
Amanda Heitz, Youan Wang & Zigan Wang
Review of Finance, forthcoming
Abstract:
Many policymakers and practitioners argue that corporations may become more stakeholder focused if employees are given more power. We study the causal impact of unionization on stakeholders by analyzing how close labor union elections affect environmental and social (E&S) scores. We find that unionization is associated with an increase in internal social scores that primarily benefit employees and a decrease in external E&S scores that primarily benefit non-employees. The negative effects on external E&S are amplified when firms have greater financial constraints. The effects on both internal and external E&S are magnified when labor unions have more bargaining power. Our results suggest that policymakers consider implications for all stakeholders before implementing policies that prioritize the corporate influence of one stakeholder group.
Do Proprietary Costs Deter Insider Trading?
Lyungmae Choi, Lucile Faurel & Stephen Hillegeist
Management Science, forthcoming
Abstract:
Insider trading conveys insiders' private information to outsiders. This private information potentially benefits rival firms, which may reduce the competitive advantage of the insiders' firms. Using a composite proprietary cost measure, we find proprietary costs are negatively associated with insiders' purchases, especially when their trades are more likely to be informative to rivals. Consistent with proprietary costs increasing the costs of insider purchases and, hence, the expected benefits required to trade, insiders earn significantly higher abnormal profits when proprietary costs are higher. Exploiting settings with exogenous and event-driven variation in proprietary costs, we find insiders significantly reduce their purchases when noncompete agreement enforceability is high and before new product launches. Moreover, firms with higher proprietary costs are more likely to impose window-based insider trading restrictions and insiders with greater equity holdings reduce their purchases more strongly in the presence of proprietary costs. Finally, we provide evidence of real effects of insider trading on rivals' investment decisions. We find that investments are associated with insiders' purchases at rival firms, and these associations are stronger when proprietary costs at rivals are higher. Our findings indicate insiders and firms are aware of potential proprietary costs when insiders trade on private information and respond accordingly.
A Model of CEO Succession Planning as a Risky Investment: Anticipated Costs, Uncertain Results, and Contingency Conditions
Donald Hambrick & Eric Lee
Organization Science, forthcoming
Abstract:
As a counterpoint to the prevailing normative view that CEO succession planning is universally wise, we develop a model of such endeavors as risky investments. Our model has three elements. First, we identify the potential costs of CEO succession planning, including opportunity costs associated with absorbing CEO and board attention, CEO-board conflict, and various forms of organizational disruption. Second, we identify and unpack the potential results of CEO succession planning, with explicit attention to the possibility that these results might be unfavorable. Specifically, expensively groomed executives may depart prior to succession; and groomed successors may perform no better, or even worse, than replacements obtained from the executive labor market, when needed. Third, we specify a slate of contingency conditions that substantially affect whether the various costs of CEO succession planning, and the likelihoods of unfavorable results, will be modest or considerable. We identify relevant contingencies at multiple levels: (a) incumbent CEO attributes, (b) firm attributes, (c) industry attributes, and (d) macro-environmental norms and institutions. No single contingency condition will necessarily make CEO succession planning an unpromising investment, but combinations might, prompting rational boards to balk at engaging in such endeavors. Our model has major implications for scholars, boards, governance watchdogs, and investors. Moreover, our analysis sheds indirect light on why many boards do not engage in CEO succession planning. It may not be due to their dereliction, as is typically asserted, but rather to their assessments that such initiatives do not make economic sense.
Algorithmic Trading and Forward-Looking MD&A Disclosures
Wayne Thomas, Yiding Wang & Ling Zhang
Journal of Accounting Research, September 2024, Pages 1533-1569
Abstract:
This study examines how algorithmic trading (AT) affects forward-looking disclosures in Management Discussion and Analysis (MD&A) of annual reports. We predict and find evidence that AT relates negatively to modifications in year-over-year forward-looking MD&A disclosures. This evidence is consistent with AT reducing investors' demand for fundamental information, which reduces managers' incentives to supply costly forward-looking disclosures. Cross-sectional tests provide additional evidence that this negative relation is more pronounced for firms with larger earnings surprises and those with losses. We further validate our conclusion by demonstrating that investors' fundamental information searches are a channel through which AT affects forward-looking disclosures. The conclusion is robust to using the SEC's Tick Size Pilot Program as an exogenous shock to AT and to using alternative disclosure measures (e.g., tone revisions and number of sentences in forward-looking MD&A disclosures). Overall, our study demonstrates that AT is a contributing factor to regulators' concerns over the diminishing usefulness of forward-looking information in MD&A disclosures.
Mutual Funds' Strategic Voting on Environmental and Social Issues
Roni Michaely, Guillem Ordonez-Calafi & Silvina Rubio
Review of Finance, forthcoming
Abstract:
Environmental and social (ES) funds in non-ES families must balance incorporating the stakeholders' interests they advertise and maximizing shareholder value favored by their families. We find that these funds support ES proposals that are far from the majority threshold, while opposing them when their vote is more likely to be pivotal. This strategy results in a high average support for ES proposals, seemingly consistent with their fiduciary responsibilities, while opposing contested ES proposals. This greenwashing strategy is driven by ES funds in non-ES families who cater to institutional investors. Indeed, these funds experience lower inflows when providing low average support for ES proposals. This strategic voting is not exhibited in governance proposals, nor by ES funds in ES families or by non-ES funds in non-ES families, reinforcing the notion of strategic voting to accommodate family preferences while appearing to meet the fiduciaries responsibilities of the funds.
Disclosing and cooling-off: An analysis of insider trading rules
Jun Deng et al.
Journal of Financial Economics, October 2024
Abstract:
We analyze two insider-trading regulations recently introduced by the Securities and Exchange Commission: mandatory disclosure and "cooling-off period". The former requires insiders disclose trading plans at adoption, while the latter mandates a delay period before trading. These policies affect investors' trading profits, risk sharing, and hence their welfare. If the insider has sufficiently large hedging needs, in contrast to the conventional wisdom from "sunshine trading", disclosure reduces the welfare of all investors. In our calibration, a longer cooling-off period benefits speculators, and its implications for the insider and hedgers depend on whether the disclosure policy is already in place.
Strategic Silence: The Impact of the CEO Pay Ratio Disclosure on Conference Call Content
Mary Ellen Carter et al.
Boston College Working Paper, May 2024
Abstract:
Critics claimed that the CEO pay ratio disclosure unfairly shamed CEOs for their level of pay and treatment of employees. We investigate whether CEOs responded to this disclosure by avoiding topics related to their firms' human capital management practices when interacting with stakeholders. Analyzing the information content of conference calls, we find robust evidence that managers decreased their discussions about human capital management after the disclosures. Our results show that intentional topic avoidance by CEOs is the most likely mechanism, as analysts' discussions about these topics are unchanged after the pay ratio disclosures. Further, we find that reducing the amount of discussion given to human capital topics during conference calls is negatively related to stock returns. Overall, our study reveals a consequence of mandatory human capital disclosures and highlights CEOs' incentives to disengage with outsiders.
Taking a Sick Day: The Effect of Paid Sick Leave Mandates on Financial Reporting Outcomes
Adam Koch & Yi Liang
University of Virginia Working Paper, November 2023
Abstract:
Mandating paid sick leave in the U.S. is controversial because it benefits employees while imposing extra costs on businesses. At the same time, the benefits that can accrue to employers are not well documented. We examine U.S. regions' staggered adoptions of paid sick leave mandates and predict that mandates will enhance financial reporting by boosting employee morale, reducing presenteeism, and hence improving the quality of rank-and-file employees' inputs to the accounting system. We find that internal control material weaknesses and financial statement misstatements decrease after adopting paid sick leave mandates. Financial reporting improves more for firms that are less likely to offer voluntary paid sick leave policies, experience more employee injuries and illnesses, and have weaker audit committees. Paid sick leave mandates also increase the horizon and accuracy of managerial guidance, and decrease audit fees and audit lags.
Signaling Innovation: The Nontax Benefits of Claiming R&D Tax Credits
Bradford Hepfer, Hannah Judd & Sarah Rice
Journal of Accounting and Economics, forthcoming
Abstract:
Using the IPO setting, we test whether firms signal the quality of their investments in innovation activities by claiming R&D tax credits. We find the presence and amount of the R&D credit are each associated with lower information asymmetry and with higher investor demand at IPO. Conservatively, we estimate that sample firms realize additional IPO proceeds of 32 to 45 percent of their creditable R&D expenditures, indicating economically significant non-tax benefits associated with the R&D credit. We verify the R&D credit signal by showing its positive association with firms' future patenting activity, patent citations, and post-IPO stock returns. Results from these tests are concentrated among firms limited in their ability to obtain tax benefits from R&D credits, consistent with the R&D credit providing nontax benefits as a signal of innovation investment quality.