(January 3, 2022 Version)
Independent Director Reputation Incentives: CEO Compensation Contracts and Financial Reporting, January 2022, (Under Revision.) (with Shawn Mobbs)
Abstract: We document that independent director reputation incentives influence CEO compensation structure and accounting reporting decisions. As a larger fraction of independent directors consider the firm more (less) prestigious, CEO equity-based compensation rises (falls), raising (lowering) pay-performance sensitivity while accrual-based and real earnings management decline (rise). We also document stronger effects as compensation and audit committee members’ reputation incentives strengthen. These results are invariant to endogeneity adjustments under multiple approaches and two different proxies for director reputation incentives. We conclude that directors with stronger reputation incentives more closely monitor CEOs with high-powered compensation packages given their heightened incentives to inflate earnings.
Mitigating Effects of Gender Diverse Boards in Companies with Aggressive Management, January 2022, (Under Revision) (with Suman Banerjee and Arun Upadhyay)
Abstract: Little research exists on matching CEO types with board composition. Examining whether gender-diverse boards help mitigate the negative effects of overconfident CEOs, we find stronger performance when firms have a female independent director (female ID). Professional Female IDs with good board attendance drive this relationship. Exogenous departures of female IDs trigger significant declines in firm performance. Female ID appointment announcements at firms with overconfident CEOs generate positive CARs. We document that female IDs impose greater accountability on overconfident CEOs. Our results suggest that simple board restructuring can be as effective in improving CEO behavior as more intrusive regulations.
Does Changing Liability Protection Affect Corporate Director Quality?, December 2021. (Under Revision.) (with Sichen Shen and Zhao Hong)
Abstract: We investigate how state Universal Demand statutes (UD) that lower the risk of shareholder derivative lawsuits affect recruiting and retention of outside directors. Using a difference-in-differences analysis, we document improvements in outside director experience following UD adoptions, especially for firms facing greater litigation risk or smaller local supplies of director candidates. UD adoptions also make high-quality director candidates from non-UD states firms more willing to join boards at firms incorporated in UD states. We find some limited evidence that UD adoptions help attract outside director candidates with better educational and certain professional backgrounds and reduce voluntary departures of high-quality directors.
Older and Wiser or Too Old to Govern? October 2021 (Under Revision.) (Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation and ECGI working paper and the ECGI Preamble.) (with Cong Wang, Fei Xie and Shuran Zhang)
Abstract: An unintended consequence of recent governance reforms in the U.S. is greater reliance on older director candidates, causing noticeable board aging. We investigate this phenomenon and its implications for corporate governance. We document that older directors exhibit poor board meeting attendance, serve less frequently as committee chairs or on key board committees, and experience less shareholder support in annual elections. We find that their presence is associated with weaker board oversight in acquisition decisions, CEO turnover, executive compensation, and financial reporting. However, they provide valuable advisory services when they have specialized experience and when managers have a greater need for board advice.
Target Employee-Shareholder Conflicts of Interest, Unemployment Insurance and Takeover Outcomes, January 2022. (Under Revision.) (with Lixiong Guo and Jing Kong)
Abstract: We examine the extent that unemployment insurance (UI) reduces employee-shareholder conflicts of interest in target firms and affects takeover outcomes. A 10% increase in UI level raises takeover likelihoods by 15-26% over the unconditional mean. This rise is only partially explained by unionized employees. Board stakeholder orientation is another important channel. Adoption of directors’ duties laws raises a board’s stakeholder orientation and UI’s influence on takeover likelihoods. Higher target state UI benefits also raise deal synergies and gains to acquirer and target shareholders. Our evidence suggests that UI improves takeover market efficiency and UI policy should recognize this benefit.
Do Wealth Creating Mergers Really Hurt Acquirer Shareholders? February 2017. (Under Revision.) (with Peter Swan and Mark Humphrey-Jenner)
Abstract: We examine the economic benefits of acquisitions of U.S. public firms. Estimating revelation biases concerning internal investment opportunities, we find that it produces a significant negative bidder announcement effect, often interpreted as shareholder wealth destruction. Examining exogenously failed bids, which lack revelation bias, we estimate that bidders capture roughly 77% of economic gains. The combined firm’s economic gains represent 15.4% of total assets. Adjusting for revelation bias over the acquisition bid cycle, we find that conventional methodologies understate bidder returns. We confirm the neoclassical view that takeovers are highly profitable for typical bidders, consistent with acquisitions generally being profitable investments.
Career Concerns, Risk-related Agency Conflicts, and Corporate Policies, January 2022. (Under Review and Featured in the ECGI Preamble and Working Paper Series) (with M. Emdad Islam and Lubna Rahman)
Abstract: Stricter enforcement of post-employment restrictions that strengthens trade secrets protection also limits CEOs’ alternative employment opportunities. We find that such mobility restrictions, which heightened CEO career concerns can dampen their risk-taking incentives and distort corporate financing decisions, particularly in firms whose CEOs value outside employment opportunities relatively highly. Stock market reactions to acquisition announcements suggest that intensified CEO career concerns from mobility restrictions compromise the quality of investment decisions. More generally, managerial career concerns adversely affect shareholder value by exacerbating risk-related agency conflicts. Thus, our evidence suggests that shareholders can benefit from more unconstrained labor markets that promote managerial risk-taking.
Private Benefits of Corporate Philanthropy and Distortions to Corporate Financing and Investment Decisions, August 2021. (Revision Requested and Featured in the Columbia Law School Blue Sky Blog on Corporations and the Capital Market, the ECGI preamble and the Oxford Business Law Blog.) (with Walid Syed Reza)
Abstract: We find that corporate giving represents a private benefit of control that reduces corporate investment and financing activity, consistent with free cash flow theory. Corporate giving discourages managers from pursuing external financing, especially debt issuance, to minimize outside monitoring. It creates preferences for internally-financed cash acquisitions, for the same reason. These distortions reduce shareholder wealth. After the 2003 dividend tax cut and hedge fund activism, charitable contributions fall, while corporate investment rises, suggesting suboptimal investment caused by managerial private benefit consumption. Negative effects of corporate giving are pronounced at firms with poor corporate governance that can avoid external capital raising.
Ownership, Investment and Governance: The Costs and Benefits of Dual Class Shares, April 2020 (Under Revision and Featured in The Harvard Law School Forum on Corporate Governance and Financial Regulation and ECGI working paper.) (with Suman Banerjee and Arun Upadhyay)
Abstract: We show that dual-class shares can be a solution to agency conflicts, rather than a result of agency conflicts. When firms with a controlling shareholder issue voting shares to fund projects, the risk of losing control rises, which can threaten the controller's private benefits. Thus, incumbents may forgo positive NPV investments to maintain control. Non-voting shares allow firms to fund projects without diluting an incumbent's voting rights; which alleviates the underinvestment problem. But, issuing non-voting shares dilutes dividends per share and facilitates entrenchment, reducing value-enhancing takeover bids. We develop prediction when the benefits from using non-voting shares outweigh its costs.
Equity Ownership in IPO Issuers by Brokerage Firms and Analyst Research Coverage, January 2022. (Under Revision.) (with Qiang Kang and Xi Li)
Abstract: Extensive research shows that analysts have strong conflicts of interest when their brokerage firms are IPO lead underwriters. Our study is the first to examine whether brokerage firms’ venture capital ownership in IPOs affects their research coverage, which raises similar conflicts of interest concerns. Alternatively, brokerage shareholdings can enhance analysts’ credibility with investors and reduce overly optimistic recommendations. We find affiliated analyst recommendations are less optimistic and produce larger abnormal announcement returns than those of unaffiliated analysts, especially for stocks with greater information asymmetry. Thus, having venture capital investment and analyst coverage under one umbrella appears to benefit IPO investors.