We explore the effect of director social capital, directors with large and influential networks, on credit ratings. Using a sample 11,172 firm-year observations from 1999 to 2011, we find that larger board networks are associated with higher credit ratings than both firm financial data and probabilities of default predict. Near-investment grade firms improve their forward-looking ratings when their board is more connected. Lastly, we find that larger director networks are more beneficial during recessions, times of increased financial uncertainty. Our results are robust to controls for endogeneity and tests confirm that causality runs from connected boards to credit ratings.
We study whether corporate governance and social responsibility are related to data breaches. We find that socially responsible companies with smaller boards and greater financial expertise are less likely to be breached. The financial impact of a breach is visible in the long-term. Specifically, data breach firms have -3.5% one year buy-and-hold abnormal returns. Additionally, banks with breaches have significant declines in deposits and nonbanks have significant declines in sales in the long run. Finally, we find that following a data breach, companies are more likely to replace their chief executive officer and chief technology officer as well as improve their governance and social responsibility.
We explore how various aspects of corporate governance influence the likelihood of a public corporation surviving as a separate public entity, after addressing potential endogeneity that arises from the competing corporate exit outcomes: acquisitions, going private transactions, and bankruptcies. We find that some corporate governance features are more important determinants of the form of a firm’s exit than many economic factors that have figured prominently in prior research. We also find evidence that outsider-dominated boards and lower restrictions on internal governance play major roles in the way firms exit public markets, particularly when a firm’s industry suffers a negative shock.
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.