Using scaled wealth-performance sensitivity as our measure of CEO incentives, and utilizing cross-sectional variations in industry innovativeness, product market competition and firms’ degree of exposure to the market for corporate control for identification purposes, we find that higher long-term incentives that stem from CEO holdings of unvested options are associated with greater subsequent corporate innovation, exactly where incentivizing innovation is a matter of necessity. We address the endogeneity concern with systems of simultaneous equations estimated using 3SLS. A possible channel for the observed relation is that unvested-options-based incentives encourage managers to undertake riskier projects to achieve long-term economic benefits.
This study examines the role of board composition in the determination of pension policies. The results suggest that the proportion of outside directors serving on the board is positively related with pension plan funding levels. In addition, the proportion of outside directors mitigates the relation between financial distress risk and plan underfunding. Last, as firms approach distress, boards with a greater proportion of outside directors tend to allocate a lower fraction of plan assets to riskier securities. Together, our findings suggest that outside directors are mindful of their obligations towards pension plan beneficiaries.
This essay is based on my keynote address at the 2016 annual meeting of the Eastern Finance Association. I propose that misunderstandings about the traditional model of corporate governance, with its emphasis on shareholder wealth maximization, contribute to negative societal attitudes about corporations. I discuss the implications of shareholder wealth maximization for other corporate stakeholders, the dangers of deviating from shareholder wealth maximization, and the roles that the media and the government play in the governance of corporations.
Politics can interfere with capital markets. We show that political interference is a necessary condition for local bias in the stock market. We extend the framework of Hong, Kubik and Stein (2008) and find that the inverse relation between market‐to‐book ratios and the ratio of the aggregate book value of firms to the aggregate risk tolerance of investors in a state (RATIO) is only prevalent among firms located in areas where politics has substantial influence on local markets. Our results indicate that the impact of politically induced local bias is primarily demand driven and stronger among firms that are less visible.
We investigate how firm-specific certification practices through corporate governance can reduce perceived ambiguity and thus enhance liquidity of a firm in the stock market. We show that better corporate governance helps reduce ambiguity. In addition, a reduction in ambiguity is significantly related to higher liquidity of firms. Our results are robust to alternative model specifications and measures of ambiguity, and remain statistically significant after controlling for other known determinants of ambiguity and liquidity. Our results shed light on how ambiguity can be moderated through firm-level certification practices and on the channel through which a moderation of ambiguity affects shareholder wealth.
This paper explores whether a CEO’s marital status reveals unobservable risk preferences which influence their firm’s investment and compensation policies. Using biographical data for CEOs of large domestic companies, we find that corporate deal-making activity (e.g., mergers, joint ventures, major capital expenditures, etc.) and overall firm riskiness both increase significantly with personal life restructuring (e.g., marriages and divorces). This relation is supported by an instrumental variables analysis and also an investigation surrounding CEO turnover. Finally, the link between a CEO’s marital status and preference for option-based compensation further suggests that personal restructuring may be an indicator of executive risk appetites.
Proponents of separating the CEO and Chairman positions advocate having an outside chairperson, although having an inside chairperson can be valuable for some firms. I find inside chairs are more likely where firm-specific human capital is more important and, in these firms, inside chairs are associated with higher firm valuation and better operating performance. Furthermore, skilled inside chairs increase forced CEO turnover sensitivity to performance. The evidence suggests that certain inside chairs can be valuable when firm-specific information is important for monitoring and an outside chair may be costly.
We ask if companies can attract foreign equity capital by improving the transparency of their financial statements. Using a large panel of firms across fifty-one countries outside the U.S., we show that the answer is yes, but only in countries with relatively high levels of investor protection. In countries with poor investor protection, unilaterally increasing firm-level transparency has no effect on foreign ownership. Furthermore, our results indicate that in countries with higher levels of investor protection the positive association between transparency and foreign ownership is stronger following a country’s adoption of the International Financial Reporting Standards.