The Role of Lending Banks in Forced CEO Turnovers

This article investigates the governance role of banks exercised through the replacement of underperforming CEOs in borrowing firms. An average level of bank loans outstanding implies a 22% to 47% increase in the forced turnover probability of a borrowing firm’s CEO if a firm’s industry adjusted performance is one standard deviation below average. This increase is much larger, 68% to 92%, when an underperforming firm violates its loan covenants. Overall, the paper’s findings suggest that banks play a key role in the governance of underperforming firms, especially when covenants are violated.     

CEO inside debt holdings and risk-shifting: Evidence from bank payout policies

Bank payouts divert cash to shareholders, while leaving behind riskier and less liquid assets to repay debt holders in the future. Bank payouts, therefore, constitute a type of risk-shifting that benefits equity holders at the expense of debt holders. In this paper, we provide insights on how CEO incentives stemming from inside debt (primarily defined benefit pensions and deferred compensation) impact bank payout policy in a manner that protects debt holder interests. We show that CEOs with higher inside debt relative to inside equity are associated with more conservative bank payout policies. Specifically, CEOs paid with more inside debt are more likely to cut payouts and to cut payouts by a larger amount. Reductions in payouts occur through a decrease in both dividends and repurchases. Our results also hold over a subsample of TARP banks where we expect the link between risk-shifting and payouts to be of particular relevance because it involves wealth transfers from the taxpayer to equity holders. We conclude that inside debt can help in addressing risk-shifting concerns by aligning the interests of CEOs with those of creditors, regulators, and in the case of TARP banks, the taxpayer.     

Charitable inclination and the chief executive officer's pay package

Using chief executive officers’ (CEOs’) lifetime nonemployment experience in prominent charitable organizations to create a proxy for CEO charitable inclination, I find that charitably inclined CEOs receive a significant pay premium. The pay premium sensitivity to CEO charitable inclination is particularly pronounced for male, external, and specialist CEOs who are employed at firms that are undiversified, larger, less debt reliant, poor performing, facing high product‐market competition, and that keep nonmanipulative financial statements and demonstrate high inclination to social responsibility in the area of diversity, employee relations, and internal governance. This research contributes to the broader debate on labor market pricing of CEO characteristics.     

Stock price crash risk and CEO power: Firm-level analysis

This study examines the impact of stock price crash risk on future CEO power. Using a large panel sample with 17,816 firm-year observations, we posit and find a significant negative impact of stock price crash risk on CEO power, suggesting that CEO power becomes smaller after stock price crashes. We also find that our results are stronger for firms with female CEOs and are largely driven by firms with shorter-tenure CEOs. In addition, we find that the significant negative impact of stock price crash risk on CEO power is diminished for firms with strong corporate governance. Our study responds to the call in Habib, Hasan, and Jiang (2018) by providing more empirical evidence on the consequences of stock price crash risk.     

Firms' Off-Balance Sheet and Hybrid Debt Financing: Evidence from Their Book-Tax Reporting Differences

We match large U.S. corporations' tax returns during 1989–2001 to their financial statements to construct a firm‐level proxy of firms' use of off‐balance sheet and hybrid debt financing. We find that firms with less favorable prior‐period Standard & Poor's (S&P) bond ratings or higher leverage ratios in comparison to their industry report greater amounts of interest expense on their tax returns than to investors and creditors on their financial statements. These between‐firm results are consistent with credit‐constrained firms using more structured financing arrangements. Our within‐firm tests also suggest that firms use more structured financing arrangements when they enter into contractual loan agreements that provide incentives to manage debt ratings. Specifically, we find that after controlling for S&P bond rating and industry‐adjusted leverage, our sample firms report greater amounts of interest expenses for tax than for financial statement purposes when they enter into performance pricing contracts that use senior debt rating covenants to set interest rates. Furthermore, we find that the greatest book‐tax reporting changes occur when firms become closer to violating these debt rating covenants. These latter findings are consistent with firms' contractual debt covenants influencing their use of off‐balance sheet and hybrid debt financing.     

CEO internal experience and voluntary disclosure quality: Evidence from management forecasts

Internally‐promoted CEOs should have a deep understanding of their firm's products, supply chain, operations, business climate, corporate culture, and how to navigate among employees to get the information they need. Thus, we argue that internally‐promoted CEOs are likely to produce higher quality disclosure than outsider CEOs. Using a sample of US firms from the S&P1500 index from 2001 to 2011, we hand‐collect whether a CEO is hired from inside the firm and, if so, the number of years they worked at the firm before becoming CEO. We then examine whether managers with more internal experience issue higher quality disclosures and offer three main findings. First, CEOs with more internal experience are more likely to issue voluntary earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Second, CEOs with more internal experience issue more accurate earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Finally, investors react more strongly to forecasts issued by insider CEOs than to those issued by outsider CEOs. In additional analysis, we find no evidence that these results extend to mandatory reporting quality (i.e., accruals quality, restatements, or internal control weaknesses), perhaps because mandatory disclosure is subjected to heavy oversight by the board of directors, auditors, and regulators. Overall, our findings suggest that when managers have work experience with the firm prior to becoming the CEO, the firm's voluntary disclosure is of higher quality.     

Earnings Warnings and CEO Welfare

Some CEOs decide voluntarily to issue a warning when they expect a negative earnings surprise. Prior research suggests that warnings contain incremental information beyond actual earnings; warning firms tend to experience permanent earnings decreases. This paper investigates whether compensation committees take warnings into account in setting CEO compensation. We find that warnings are significantly negatively (positively) associated with CEO bonus (option grants), suggesting that compensation committees adjust CEO compensation towards a more high‐powered structure after warnings. However, the sensitivity of bonus or option grants to earnings and stock returns is not affected except for bonus sensitivity to stock returns. We also find weak evidence of an increase in forced CEO turnover after warnings, accompanied by a significant increase in its sensitivity to stock returns. This benefits CEOs with higher ability but imposes more risk on other CEOs. These findings provide a partial explanation of why not every CEO facing a negative surprise decides to issue a warning. Our results are robust to various specifications. In particular, the impact of warnings on compensation appears invariant to the timing or the number of warnings. Overall, these findings suggest that the signal from warnings is used in determining CEO compensation and retention.     

CEO overconfidence and the tone of press release

This paper examines how CEO overconfidence affects the tone of press releases. Using option-based proxies for CEO overconfidence, I find that over the 2000–2018 period, the press releases issued by firms with overconfident CEOs have more positive tone and receive more positive market reactions. The relation between CEO overconfidence and the tone of press releases is stronger among firms with good operating performance and concentrated in investment-related news but is insignificant for earnings news. These findings suggest that CEO overconfidence leads to biases in press releases.     

CEO gender and managerial entrenchment

This paper investigates the effect of gender on managerial authority and control over firms. The study examines S&P 1500 firms for the period of 1999–2014. Our findings suggest that accounting performance, firm value, CEO age, firm age, and board size reduce the likelihood of appointing female managers. On the other hand, the appointment of female CEOs is directly associated with the percentage of female directors, board independence, and beta. The study confirms the notion that female CEO appointments are generally associated with firms facing adverse conditions, and shows that female CEOs are more entrenched as compared to male CEOs. We find that the presence of female CEO decreases the turnover-performance sensitivity, increases the E-index, and inflates CEO compensation. Our research suggests that the level of female CEOs’ entrenchment provides them with greater job security, higher level of control, and inflated pay that compensate the risk of accepting the appointment in a high risk and poor performing firm.     

CEO inside debt holdings and credit ratings

In this paper we investigate the relationship between chief executive officer (CEO) inside debt holdings (pension benefits and deferred compensation) and long-term credit ratings. We provide evidence that firms with a higher level of inside debt holdings enjoy better credit ratings. Our results are robust to the use of alternative regression estimation and alternative measures of key variables. We employ instrumental variable–based two-stage least squares regression and instrumental variable regression estimation using heteroskedasticity-based instruments to mitigate the endogeneity concern. In addition, we employ propensity-matched sample and entropy balancing estimates to alleviate endogeneity concerns. Our cross-sectional analyses reveal that the relationship between CEO inside debt holdings and credit ratings is more pronounced in firms with a poor information environment, a weak monitoring mechanism, and powerful CEOs. Overall, findings from our study suggest that credit rating agencies evaluate CEO insider debt holdings positively in assessing the creditworthiness of a firm.     

The Incidence of Accounting-based Covenants in UK Public Debt Contracts: An Empirical Analysis

Accounting-based covenants are of particular interest to accounting researchers in view of their potential to influence management's accounting policy choices and their attitudes to new accounting standards. This exploratory paper provides evidence on the incidence of accounting-based covenants in 108 UK public debt contracts for the period 1987-1990. Thirty percent of the agreements contain such covenants, the majority of which are affirmative gearing covenants. Focusing on the institutional differences between the UK and the US, the paper examines relationships between the presence of accounting-based covenants and (a) characteristics of the issuing firm, and (b) other control mechanisms included in the debt agreement. UK firms raising public debt are of good credit quality and UK insolvency procedures afford unambiguous protection to secured creditors. As a result, accounting-based covenants are associated with long-term unsecured debt and with firms having high values for assets-in-place but, in contrast with US findings, are unrelated to gearing. Convertibility appears to reduce the need for accounting-based covenants, especially when the debt is also subordinated. The relationship between accounting- based covenants and security depends on the nature of the security (fixed or floating). Longer term non-convertible debt agreements are, therefore, particularly likely to contain covenants that could influence management's accounting behaviour. This paper provides a starting point for further research into these issues.     

Does market power discipline CEO power? An agency perspective

We examine how product market competition (PMC) shapes chief executive officer's (CEO) power. Using various measures to capture both PMC and CEO power, our analyses, which include a quasi‐natural experiment, find evidence that CEOs have less power when the product market is more competitive. Furthermore, the impact of PMC on CEO power is more pronounced for firms with entrenched management, lower CEO ownership, lower analyst coverage, and for firms experiencing good ‘luck’ (windfall performance). Our results suggest that market power can act as a substitute for corporate governance in disciplining CEO power, particularly when prone to agency problems.     

Impact of proximity to debt covenant violation on earnings management

We examine the impact of differential incentives arising from proximity to debt covenant violation on earnings management. We reason that firms with loans close to violation or in technical default of their debt covenants have a stronger incentive to engage in earnings management than firms that are far from violating their debt covenants. We find results consistent with this expectation. Firms close to violation or in technical default of their debt covenants engage in higher levels of accounting earnings management, real earnings management, and total earnings management than far-from-violation firms. In additional analysis, we find that firms with a stronger incentive to avoid covenant violation switched from using more accounting earnings management before the Sarbanes–Oxley Act to using more real earnings management and more total earnings management afterwards. We also document that the earnings management implications of debt covenant violation are observed primarily for firms with poor credit ratings and for firms that do not meet analyst forecasts.     

Chief executive officer trustworthiness and green innovation

This study examines the influence of chief executive officer (CEO) trustworthiness on green innovation. We argue that firms led by trustworthy CEOs have a higher likelihood of adopting socially acceptable policies in response to environmental issues. Drawing on social norms perspective, we find that CEO trustworthiness is positively associated with green innovation using a sample of Chinese manufacturing firms from 2003 to 2018. Findings suggest that hiring trustworthy CEOs allows firms to cope with environmental issues.     

Pay Me Later: Inside Debt and Its Role in Managerial Compensation

Though widely used in executive compensation, inside debt has been almost entirely overlooked by prior work. We initiate this research by studying CEO pension arrangements in 237 large capitalization firms. Among our findings are that CEO compensation exhibits a balance between debt and equity incentives; the balance shifts systematically away from equity and toward debt as CEOs grow older; annual increases in pension entitlements represent about 10% of overall CEO compensation, and about 13% for CEOs aged 61–65; CEOs with high debt incentives manage their firms conservatively; and pension compensation influences patterns of CEO turnover and cash compensation.     

Overconfidence,CEO Awards,and Corporate Tax Aggressiveness

Theory and prior research suggest that overconfidence leads managers to overestimate their own ability to generate returns, leading to riskier corporate policies. We use a novel dataset of media awards as an exogenous shock to overconfidence to test whether award‐winning CEOs adopt more aggressive corporate tax policies. Using propensity score matching and a difference‐in‐difference design, we find strong evidence that firms with an award‐winning CEO exhibit significantly greater tax aggressiveness following the award. Overall, our results suggest that CEO overconfidence has a meaningful impact on corporate tax policy.     

Stock price response to new‐CEO earnings news

New‐CEO earnings news exhibits asymmetric effects on stock prices. Stock prices rise more on good earnings news announced by firms with new CEOs compared with those with established CEOs. By contrast, stock prices tend to fall by a smaller amount on bad earnings news for new CEOs. Both the new‐CEO quality effect and the new‐CEO honeymoon effect are more pronounced for CEOs appointed during challenging situations. The new‐CEO quality effect is stronger for firms followed by fewer analysts, while the honeymoon effect is stronger for firms followed by more analysts – illustrating the importance of a transparent information environment.     

CEO incentive compensation and stock price momentum

We document strong evidence that CEO incentive compensation can predict the significance of stock price momentum through discretionary accrual and real activities manipulation. The profit of momentum strategy increases with CEO pay-for-performance incentive, but decreases with CEO risk-taking incentive. It also evaluates the effects of information uncertainty on such relationship. The evidence is more significant for firms with older and longer tenured CEOs and firms with more informed traders. The relationship between the profit of momentum strategy and CEO pay-for-performance incentive is stronger among CEOs without the risk-taking incentive. Our results are robust for different sub-samples based on before and after Reg FD and Sarbanes–Oxley Act, even after controlling for the potential endogeneity. Further, our findings are consistent with the information diffusion explanation of momentum and the agency theory that incentivised CEOs tend to manipulate information by smoothing good news, concealing mildly bad news and accelerating the disclosure of extremely bad news.     

Corporate social responsibility and inside debt: The long game

We examine the effect of CEO inside debt on corporate social responsibility (CSR). We document a positive relation between CEO inside debt and CSR. This positive relation is attenuated not only when firms face high risk, but also when firms have high short-term institutional ownership. Our evidence supports the view that CEOs with large inside debt holdings are more concerned about firm sustainability and, are therefore more likely to prefer CSR for long-term firm benefits, i.e., the long game. We also find that CSR and CEO inside debt jointly exert a significantly positive impact on long-run stock performance, particularly in the presence of a low level of short-term institutional holdings. Overall, our findings highlight the importance of aligning institutional investor preferences with CEO incentives in order to maximize shareholder benefits from CSR investment.     

Managerial risk-reducing incentives and social and exchange capital

This study investigates the impact of managerial risk-reducing incentives on the firm's social and exchange capital. Using CEO inside debt holdings to proxy for the incentives of risk-averse managers, we find that CEOs with more inside debt holdings are likely to invest more in building social capital, which targets broader society and potentially offers anti-risk protection advantages, to shield the value of their inside debt. However, our results further show that managerial risk-reducing incentives have no impact on firms' exchange capital, suggesting the need to recognize the difference between social and exchange capital. These findings corroborate the view that CEOs invest in social capital as a risk management strategy. Furthermore, this paper presents an understanding of the role that institutional investors play in moderating the impact of managerial risk-reducing incentives on social capital. Our results suggest that institutional investors constrain CEOs that have greater inside debt incentives from investing in social capital. However, they are still willing to increase the investment in social capital for risk management purposes when firm risk is high.