Journal Articles:
Board Structure and Monitoring: New Evidence from CEO Turnovers, with Ronald Masulis, 2015, Review of Finance Studies.
We use the 2003 NYSE and NASDAQ listing rules concerning board and committee independence as a quasi-natural experiment to examine the causal relations between board structure and CEO monitoring. Noncompliant firms forced to raise board independence or adopt a fully independent nominating committee significantly increase their forced CEO turnover sensitivity to performance relative to compliant firms. Nominating committee independence is important even when firms have an independent board, and the effect is stronger when the CEO was on the committee. We conclude that more independent boards and fully independent nominating committees lead to more rigorous CEO monitoring and discipline.
Tradeoffs between Internal and External Governance: Evidence from Exogenous Regulatory Shocks, with Patrick A. Lach and Shawn Mobbs, 2015, Financial Management.
We use the 2002 NYSE and NASDAQ listing requirements mandating firms to have a majority of independent directors on the board as an exogenous shock to examine the interaction between internal and external governance. Relative to compliant firms, non-compliant firms significantly reduced exposure to three external governance mechanisms: the market for corporate control, shareholder activism, and credit markets, by adding antitakeover provisions, adopting officer and director protection provisions, and reducing debt levels, respectively. The results are stronger in firms with greater exposure to the relevant external governance mechanism. The evidence suggests that firms treat internal and external governance as substitutes.
How Does Forced CEO Turnover Affect Directors?, with Jesse Ellis and Shawn Mobbs, 2021, Journal of Financial and Quantitative Analysis.
We study changes in independent director behavior and labor market outcomes after experiencing a forced CEO turnover. We find they are more willing to fire CEOs of underperforming firms, hire outside CEOs after a firing and encourage better board meeting attendance by fellow directors. We also find that shareholders of poorly performing firms react positively when experienced directors join the board. It does come with a small cost for directors, in terms of additional directorships, though the cost is not as great as that for directors who do not fire the CEO of a poorly performing firm.
Shareholder Litigation and Workplace Safety, with Ning Gong and Zhiyan Wang, 2023, Journal of Corporate Finance.
Using the staggered adoption of Universal Demand (UD) laws at the state level that increased the hurdle of shareholder derivative suits as a shock, we find that reduced litigation threat increases workplace injury rates. The effect is more pronounced for treated firms facing higher litigation risk, less product market competition, in low union coverage industries, and with Employee Stock Ownership Plans (ESOPs). Treated firms with high ownership by “dedicated” or local institutional investors are less affected as these investors can monitor safety through voice and exit. Safety inputs fall in treated firms following the adoption of UD laws. Overall, the findings suggest that shareholder litigation threat plays a critical role in workplace safety.
Short Seller Monitoring and Real Earnings Management, with Tianyu Cai and Yongxian Tan. 2023, Financial Review.
Exploiting an exogenous shock to short selling costs brought by the RegSHO, we find that short seller monitoring restrains real earnings management (REM). The effect is concentrated in firms facing a lower cost of REM than accruals management. Litigation risk and reduced CEO wealth gain from REM are two plausible channels through which short seller monitoring deters REM. Lastly, we find that short interests on stocks of treated firms increase after the announcement of the RegSHO relative to that on stocks of control firms, and the increase is concentrated in the subsample of treated firms with signs of REM.
Do Employee Interests Affect Target Board Decisions About Acquisition Offers? Evidence from Changes in Unemployment Insurance, with Jing Kong and Ronald Masulis, 2024, Management Science.
We explore whether employee interests affect the evaluation of acquisition offers by target boards of directors. Exploiting changes in state unemployment insurance (UI) as sources of exogenous variation in worker unemployment costs, we find that lower unemployment costs increase acquisition activity. The adoption of state constituency statutes strengthens this relation. Boards of target firms having high labor intensity, low short-term institutional ownership, headquartered in low population or high social capital counties, and with female independent directors, more often strongly weight employee interests. Higher UI levels are also associated with larger post-acquisition layoffs. Our evidence supports theories rationalizing target boards’ consideration of employee interests.
Working Papers:
Corporations and COVID-19 in the Workplace, with Jonathan Cohn and Zhiyan Wang
Using novel workplace COVID infection data, we document large variation in workplace infection rates across industries, firms, and establishments in 2020. Firms with higher infection rates experienced larger declines in operating performance in 2020, which is inconsistent with firms trading off employee infection risk with profitability. Both workplace infection rates and COVID-related employee complaints increase with pre-pandemic workplace injury rates, suggesting that general workplace safety capabilities make an organization more resilient to COVID as a workplace safety threat. The relationship between workplace infection rate and pre-pandemic injury rate holds even across establishments within the same firm, suggesting an important role for decentralized capabilities, and is stronger in industries where employees work in closer physical proximity to one another. Infection rates are unrelated to measures of a firm's financing capacity. The stock market appears to have priced in resiliency due to workplace safety capabilities, as firms with lower pre-pandemic injury rates experienced smaller stock price declines early in the pandemic. Our results have implications for organizations and policymakers preparing for potential future epidemics.
2. Globalization and Insider Trading: Evidence from Cross-Border Mergers and Acquisitions, with Xueting Zhang
We investigate whether globalization has led to more aggressive insider trading by foreigners on the domestic market due to barriers to cross-border law enforcements. Using a sample of 10,600 M&As around the world between 1990 and 2017, we find that the answer is yes. Abnormal trading in target firm securities prior to the announcements of cross-border deals is systematically higher than that prior to the announcements of domestic deals. The difference is mainly driven by cross-border deals in which the acquirer is from a country with weak legal institutions, high corruption and low social norms, and where the target is in a country with strong legal institutions against insider trading. Using the staggered entry into the Multilateral Memorandum of Understanding (MMoU) of 2002 by securities regulators around the world as a shock to the degree of cooperation among securities regulators, we find that entry into the MMoU by an acquirer-target country pair significantly reduces abnormal trading prior to cross-border M&As between the country pair relative other country pairs. Our evidence reveals an unnoticed effect of globalization on insider trading and suggests that the divergence in economic and legal integration presents a thorny challenge for maintaining economic order around the world.
3. Board Structure and Employee Safety and Healthy, with Zhiyan Wang
We examine how board and board committee independence can affect employee safety and health using a U.S. regulatory shock that required each publicly traded company to have more than 50% independent directors and fully independent board committees. We find that establishments of firms that were forced to increase board and audit committee independence significantly reduced workplace injuries and illnesses and the frequency of safety violations, with establishments of firms facing higher labor lawsuit risks, exposed to higher media coverage, with larger ownership by long-term and employee-friendly institutional investors, and operating in less competitive and less unionized industries exhibited greater safety improvements. Affected firms increased safety investments and the likelihood of linking CEO pay to safety. Our evidence suggests that the combination of board independence and ownership by long-term and socially responsible investors can help drive improvements in corporate social and environmental performance.