Corporate Finance, Corporate Governance, Executive Compensation, Corporate Social Responsibility, Ownership Structure.
Ownership Concentration and Firm Risk: The Moderating Role of Mid-Sized Blockholders (with Silvia Rossetto and Raffaele Staglianò). Journal of Business Finance & Accounting, 2022, 1–34. DOI: 10.1111/jbfa.12634
This study analyzes the relationship between mid-sized blockholders and firm risk. We show that ownership structure matters for firm risk, beyond the first largest blockholder. Firms with multiple blockholders take more risk than firms with just one blockholder, even when controlling for the stake of the largest blockholder. Consistent with the diversification argument, we find that firm risk increases by 22% when the number of blockholders increases from one to two. Our results are robust to controlling for blockholder type and firm characteristics. We carry out various robustness checks to tackle endogeneity issues. More generally, we provide evidence that firms' decisions are affected by mid-sized blockholders, and not merely the largest blockholder. This is in line with theoretical predictions.
CEO Stock Option Exercises and Earnings Announcements (with Alexander Guembel).
Stock options are supposed to align CEO interests with those of shareholders. However, CEOs may behave opportunistically when their incentives become very sensitive i.e. when they have options that are about to expire. We investigate whether CEO exercise decisions affect the contents and timing of annual earnings announcements. We show that earnings are more likely to exceed analyst forecasts when CEOs exercise close-to-expiry stock options shortly after the announcements. The likelihood of positive earnings surprise is higher when option exercises are followed by stock sales. We then examine the timing of earnings announcements. The results show that companies accelerate earnings announcements when CEOs exercise stock options shortly after those announcements, especially when the obtained shares are sold. Finally, we investigate the relationship between the incentives given by stock option exercises made close to expiry and the level of accruals. We find a higher level of discretionary accruals when CEOs have to exercise options that are about to expire. The results of the paper are consistent with earnings manipulation when CEOs exercise close-to-expiry stock options shortly after earnings announcements.
Director Expertise and Compliance to Corporate Social Responsibility Regulations (with Wentao Li and Swarnodeep Homroy).
We study how corporate governance affects corporate social responsibility (CSR) using the 2013 CSR regulation in India that mandates qualifying companies to spend 2 percent of the profits on CSR. Controlling for the endogenous association of corporate governance and CSR choices, we demonstrate that the formation of CSR committees and appointment of directors with relevant experience (CSR-Directors) increases the compliance to the CSR law percent. Further, we show that CSR-Directors affect compliance by reducing the cost of compliance. This effect is larger for companies in more competitive industries, companies with higher debt, and companies with no previous history of CSR. Companies with higher CSR compliance gain in value and have increased creditworthiness. Our study contributes to the policy discussions on mandatory CSR regulations in various countries. It provides support to the 2020 EU recommendation of appointing sustainability experts on boards of listed companies. It demonstrates the benefits of such governance mechanisms.
National Directors’ Foreign Corporate Board Experience and Foreign Investments (with Shibashish Mukherjee and Niels Hermes).
Employing a sample of 4,053 US-headquartered listed firms, we show that firms with U.S. directors who have experience in code law countries reduce foreign investments. This negative association is particularly strong for non-executive US directors with past foreign board experience as opposed to executive directors, who are typically responsible for setting corporate policies. Additional analysis suggests that firms with such directors exhibit lower levels of operational risk-taking and adopt conservative corporate policies, such as increased payouts through stock repurchases. These results suggest that national directors with experience in foreign institutional environments—specifically, code law systems, negatively influence foreign investment at home.
CEO Stock Option Exercises and Private Information.
I study CEO stock option exercise behavior and use of private information. Using hand-collected data in French companies, I show that most CEOs exercise options during the last year since they stay longer in the company, on average, 6.8 years as CEOs and 18.3 years in the firm. This late exercise makes CEOs lose 55 % of the gain they could have obtained. The results suggest that CEOs with time flexibility use private information when exercising options and time exercises to occur on the most favorable day. The results show that close-to-expiry option exercises are not driven by private information.
Executive Compensation in the Netherlands (with Niels Hermes).