Revise & Resubmit at Journal of Corporate Finance
Abstract: Do 13D investors incentivize CEOs to increase total firm value or to increase only equity value? By using the hand-collected data of 5,775 U.S. public companies between 2006 and 2017, my paper documents evidence that these active blockholders restructure CEO compensation in a way that benefits both shareholders and debtholders, thus increasing total firm value. Active blockholders are more like to arise when the ratios between CEO debt-like and equity-like compensations, a.k.a. the CEO inside debt-equity ratios, are not properly set up to maximize firm value. The speed of adjustment towards the appropriate ratios triples in the presence of active blockholders, but returns to the normal level once these investors ``exit". Such compensation adjustments are associated with annualized abnormal stock (bond) returns of 9.2\% (2.3\%). Superb stock-picking skill, a mean-reverting process of compensation changes, or co-founding firm characteristics cannot explain the coincidence of strong compensation adjustments and active blockholders' presence. Instead, these blockholders actively affect CEO compensation structures by appointing their favored directors into the boards of the targeted firms, especially into the Compensation or Governance committees.
FIRN PhD Symposium 2018
FMA Europe 2019
FMA Doctoral Student Consortium 2019
SWFA 2020 (accepted )
EFA 2020 Poster Session
(Old name: Cost of debt financing under simultaneous changes in shareholder rights and CEO debt-like pay )
Abstract: I document evidence that 525 S\&P 1500 companies that remove anti-takeover provisions (``ATPs") in period 2009-22017 raise their CEO inside debt afterwards to address the heightened agency problem of debt due to increased leverage. By using a difference-in-difference-in-difference analysis, I document significant increases in CEO inside debt-equity ratios after companies remove ATPs. Inside debt also rises significantly after ATP removals, which accounts for 70\% of increases in the overall ratios. In contrast, inside equity significantly decreases after companies remove ATPs, as these companies reduce the stocks and options awarded to their CEOs. These findings are robust to different explanatory variables, matching samples, and removals of certain ATPs. Further analysis displays that inside debt-equity ratios increase continually for the first three years after ATP removals. This trend coincides with the after-ATP-removal spike in leverage, which is caused by increased debt issuance. I also show that increasing inside debt-equity ratios, especially increasing inside debt, helps companies reduce the cost of borrowing after ATP removals.
Australian PhD Conference of Economics and Business 2019
Australasian Finance and Banking Conference 2019 (accepted)
Sydney Banking and Financial Stability Conference 2019 (accepted)
Eastern Finance Association Conference 2021 (accepted)
Abstract: I explore the timing strategies for bond issuance based on disclosures of CEO inside debt by using hand-collected data of 5,775 U.S. public companies from 2006 to 2017. During the months before proxy statement releases, new changes in CEO inside debt are private information to companies' insiders. Companies can exploit this information asymmetry to issue bonds when the market, based on publicly available information of inside debt, perceives these companies' debt agency problems as relatively insignificant. I find that companies cluster their bond offerings in the immediate quarters after (before) disclosures of positive (negative) inside debt changes. The tendencies to time bond issuance based on inside debt disclosures also increase with the magnitudes of the disclosed changes. In addition, the adoption of these timing strategies is more observable when the issuing firms are regular issuers or when the new issues do not include covenants, especially the debt-restriction covenants. Finally, I verify that these timing strategies help reduce the cost of borrowing, as the bonds issued at favorable times, i.e. right after positive disclosures or before negative disclosures, have lower offering yield spreads than those issued at non-favorable times.
SouthWestern Finance Association Conference 2021 (accepted)