The costs and benefits associated with inventor CEOs

This paper examines various firm policies that highlight the potential tradeoffs associated with hiring CEOs with hands-on innovation experience. In addition to generating more patents, innovative CEOs also convert those patents into new services and products, as proxied by new trademark registrations. On the other hand, innovative CEOs do not receive higher pay compared to non-innovative CEOs, suggesting that innovative CEOs may receive other nonpecuniary benefits. Furthermore, innovative CEOs invest more in R&D leading to lower efficiency, hold more cash, and utilize less debt. In spite of these costs, it appears that hiring innovative CEO is still optimal for firms. We find that the improvements in corporate governance do not lead to changes in firm policies, suggesting that shareholders are willing to tolerate the potential costs associated with innovative CEOs.     

CEO Turnover and Retention Light: Retaining Former CEOs on the Board

Prior CEO turnover literature characterizes the board's decision as a choice between retaining versus replacing the CEO. We focus instead on the CEO's decision rights and introduce a third option in which the incumbent CEO is removed but retained on the board for an extended period, which we call Retention Light. Firms may benefit from Retention Light because former CEOs possess unique monitoring and advising abilities, but the former CEO could also exploit available decision rights for personal benefit. A Retention Light CEO's decision rights generally exceed those of CEOs who exit the firm entirely but fall short of the rights of a retained CEO. We find that when prior firm performance is better, the former CEO is more likely to be retained on the board (Retention Light) than to exit the firm. However, this relation is weaker when the CEO reaches normal retirement age at which time CEO power becomes more important. We also provide evidence on how the nature of the CEO's bargaining power varies with his personal attributes and board characteristics in its influence on the Retention Light decision. Retention Light firms are more likely than CEO‐exit firms to select a successor CEO with relatively weaker bargaining power. Finally, Retention Light involving a nonfounder CEO is negatively associated with the firm's postturnover financial performance. Overall, Retention Light is a distinct CEO turnover option that has important consequences for board decisions and firm performance.     

CEO prior uncertainty and pay–performance sensitivity

A CEO's pay–performance sensitivity (PPS) is higher in the first year of their tenure than in the following years. I explain this finding with reference to chief executive officer (CEO) prior uncertainty: Because of information asymmetry and/or uncertainty about the quality of the match between a CEO and a firm, first-year compensation is often arranged to depend largely on performance. Consistent with this explanation, CEOs with higher prior uncertainty exhibit higher first-year PPS. Also, PPS is higher for outsider CEOs than insider CEOs. Among outsider CEOs, first-year PPS is lower for former executives of large public firms. An insider CEO's service time in a firm before becoming the CEO reduces first-year PPS.     

Feeling right at home: Hometown CEOs and firm innovation

Extending the theories of social and place identity, we predict that CEO hometown identity has a positive and significant influence on firm innovation. Our empirical evidence, from publicly traded firms in China during 2002–2016, suggests that a firm whose CEO's hometown is in the same province or city as the firm's headquarters tends to invest more in R&D and generate more patent applications. Our results are robust to the firm fixed effects and we use difference-in-differences analysis and instrument variable regressions to mitigate endogeneity concerns. CEOs' hometown identity still has a strong and positive impact on innovation after we control for measures of social capital of CEOs. We identify the mechanisms behind the positive relation between firm innovation and CEO hometown identity: hometown CEOs enjoy more support from the board of directors, they are more willing to take risks, and they are more likely to have long-term visions.     

Are more able CEOs getting more compensated? Evidence from the pay-for-performance sensitivity of equity-based incentives

This study investigates whether the managerial ability of a chief executive officer (CEO) is associated with the CEO's pay-for-performance sensitivity (PPS) of the equity-based compensation. We predict that more talented CEOs receive a higher PPS of equity incentives. Using the managerial ability score (Demerjian, Lev, & McVay, 2012) and PPS measures of options and stocks (Core & Guay, 1999), we find that a CEO's PPS of the equity-based compensation is significantly increasing in the CEO's ability. We also find that the association between managerial ability and the PPS of stock incentives is more evident for small firms. Furthermore, our results show that high ability CEOs are associated with a steeper PPS of option incentives, especially when they are not near retirement. Together, our findings suggest that firms generally incorporate the relative efficiency factor of CEO's ability in designing the CEO's equity-based compensation contracts, and thus the cross-sectional variation in the CEO's PPS is positively influenced by the CEO's ability.Data availability: Data used in this study are available from public sources identified in the study.     

How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model

This paper uses data on detected misstatements—earnings restatements—and a dynamic model to estimate the extent of undetected misstatements that violate GAAP. The model features a CEO who can manipulate his firm's stock price by misstating earnings. I find the CEO's expected cost of misleading investors is low. The probability of detection over a five‐year horizon is 13.91%, and the average misstatement, if detected, results in an 8.53% loss in the CEO's retirement wealth. The low expected cost implies a high fraction of CEOs who misstate earnings at least once at 60%, with 2%–22% of CEOs starting to misstate earnings in each year 2003–2010, inflation in stock prices across CEOs who misstate earnings at 2.02%, and inflation in stock prices across all CEOs at 0.77%. Wealthier CEOs manipulate less, and the average misstatement is larger in smaller firms.     

The effect of CEO social capital,CEO duality and state-ownership on corporate innovation

This study explores the effects that CEO social capital has on firm innovation. Among the different aspects that affect firm innovation, this aspect has been overlooked, even though it may play a crucial role, given the fact that CEOs are important decision-makers within firm boundaries. Therefore, in this study we address the following research question: What effect does the CEO's social capital have on corporate innovation? This study dissects the effects of CEO social capital into its internal and external dimensions, and it looks at related moderating effects. Grounding our study in social capital theory, using a sample of Chinese listed firms between 2007 and 2016, we propose and provide empirical evidence that both the internal and external social capital of CEOs play a critical role for the innovation of firms. In addition, we have also explored the boundary conditions of these effects, considering the way CEO duality and state ownership moderate the effects brought about by CEO internal and external social capital on corporate innovation. Our findings contribute to the scientific understanding of the conditions in which CEO social capital may benefit firm innovation to a greater extent, by also considering the effects of CEO duality and state ownership. Moreover, the results of this study provide managers with clear indications about the optimal conditions under which firm innovation may be benefited by CEO social capital, which is in the case of CEO duality and state-owned enterprises (SOEs).     

Corporate performance and CEO compensation in China

This paper examines the compensation of CEOs in China's listed firms. First, we discuss what is known about the setting of CEO compensation and then we go on to examine factors that may help explain variations in the use of performance related pay. In China, listed firms have a dominant or controlling shareholder and we argue that the distinct types of controlling shareholder have different impacts on the use of incentive pay. We find that firms that have a State agency as the major shareholder do not appear to use performance related pay. In contrast, firms that have private blockholders or SOEs as their major shareholders relate the CEO's pay to increases in stockholders' wealth or increases in profitability. However the pay–performance sensitivities for CEOs are low and this raises questions about the effectiveness of firms' incentive systems.     

Politically connected CEOs,corporate governance,and Post-IPO performance of China's newly partially privatized firms

Almost 27% of the CEOs in a sample of 790 newly partially privatized firms in China are former or current government bureaucrats. Firms with politically connected CEOs underperform those without politically connected CEOs by almost 18% based on three-year post-IPO stock returns and have poorer three-year post-IPO earnings growth, sales growth, and change in returns on sales. The negative effect of the CEO's political ties also show up in the first-day stock return. Finally, firms led by politically connected CEOs are more likely to appoint other bureaucrats to the board of directors rather than directors with relevant professional backgrounds.     

Generalists versus specialists: Lifetime work experience and chief executive officer pay

We show that pay is higher for chief executive officers (CEOs) with general managerial skills gathered during lifetime work experience. We use CEOs' résumés of Standard and Poor's 1,500 firms from 1993 through 2007 to construct an index of general skills that are transferable across firms and industries. We estimate an annual pay premium for generalist CEOs (those with an index value above the median) of 19% relative to specialist CEOs, which represents nearly a million dollars per year. This relation is robust to the inclusion of firm- and CEO-level controls, including fixed effects. CEO pay increases the most when firms externally hire a new CEO and switch from a specialist to a generalist CEO. Furthermore, the pay premium is higher when CEOs are hired to perform complex tasks such as restructurings and acquisitions. Our findings provide direct evidence of the increased importance of general managerial skills over firm-specific human capital in the market for CEOs in the last decades.     

CEOs' general managerial skills and corporate risk taking subject to the moderator of CEO tenure

In this study, we examine the relation between chief executive officers' (CEOs') general managerial skills and firms' risk-taking behaviour. We find that generalist CEOs are associated with significantly higher firm risk, with the association decreasing significantly with CEO tenure. We propose the following managerial skills transformation explanation: the longer a CEO stays with a firm, the less general and more firm specific the CEO's skills and knowledge become; therefore, any effect of the CEO's general managerial skills only appears in the early years of tenure.     

Star CEOs or Political Connections? Evidence from China's Publicly Traded Firms

This paper studies China's “star CEOs” defined as members of the National People's Congress (NPC) or the National Committee of the Chinese People's Political Consultative Conference (CPPCC) and “politically connected” CEOs who have previous government or military experience. We evaluate the effect of “star CEOs” and “politically connected” CEOs on firm performance and CEO compensation. We find that announcement date returns, CEO compensation and incentives are all higher in firms that appoint “star CEOs”. However, the mechanism explaining these various premiums is largely political connectedness of these star CEOs. Our study finds only modest evidence that star‐CEO status directly determines firm performance. Our analysis strongly suggests that compensation and performance premiums are mostly driven by CEO political connections, as opposed to CEO talent/star effects.     

Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs

We explore how compensation policies following mergers affect a CEO's incentives to pursue a merger. We find that even in mergers where bidding shareholders are worse off, bidding CEOs are better off three quarters of the time. Following a merger, a CEO's pay and overall wealth become insensitive to negative stock performance, but a CEO's wealth rises in step with positive stock performance. Corporate governance matters; bidding firms with stronger boards retain the sensitivity of their CEOs' compensation to poor performance following the merger. In comparison, we find that CEOs are not rewarded for undertaking major capital expenditures.     

Reductions in CEO career horizons and corporate policies

We provide evidence on the effect of personal shocks that reduce a CEO's expected career horizon on corporate policies. The timing of these events is not predictable based on observable characteristics, and affected CEOs experience greater turnover rates and shorter residual time-in-office. Following the shock, these firms moderate both R&D and capital expenditures and increase cash distributions. While these changes are consistent with greater short-term orientation, they are not detrimental to shareholders, as performance increases after the shock. Earnings management and firm risk remain unchanged, while both CEO total compensation and equity-based compensation decline. Overall, our results indicates that the improved performance comes from the implementation of more efficient firm policies, likely driven by an internal tournament effect after the shock rather than from opportunistic behavior.     

CEO wage dynamics: Estimates from a learning model

The level of Chief Executive Officer (CEO) pay responds asymmetrically to good and bad news about the CEO's ability. The average CEO captures approximately half of the surpluses from good news, implying CEOs and shareholders have roughly equal bargaining power. In contrast, the average CEO bears none of the negative surplus from bad news, implying CEOs have downward rigid pay. These estimates are consistent with the optimal contracting benchmark of Harris and Hölmstrom (1982) and do not appear to be driven by weak governance. Risk-averse CEOs accept significantly lower compensation in return for the insurance provided by downward rigid pay.     

The Relationship between Shareholder Return and CEO Pay over a CEO's Full Period of Service

The author reports the findings of his examination of the relationship between CEO pay and performance, as measured by shareholder returns, using measures of compensation and returns that span a CEO's full period of service. Unlike studies that look at annual measures of CEO pay and stock returns—which are distorted by the widespread use of options and the arbitrary effects of when CEOs choose to exercise their options—the author finds a statistically significant connection between total compensation and shareholder return measured over full periods of service for 521 S&P 500 CEOs. Indeed, after one adjusts for differences in the length of a CEO's service, shareholder return is arguably the most important determinant of variation in the amount paid CEOs over their complete tenures. Besides answering the legion of critics of CEO pay, the author's analysis refutes the claim that bull markets are the main force driving executive pay by demonstrating that the increases in career pay attributable to increases in shareholder returns are almost exactly offset by reductions in pay when the Value‐Weighted (S&P 500) Index increases by the same amount. In other words, CEOs’ cumulative career pay is effectively driven by the extent to which their stock returns outperform the broad market. The analysis also casts doubt on the popular claim that the link between CEO pay and corporate size provides incentives to undertake even value‐reducing acquisitions to boost size. As the author's analysis shows, the estimated losses in career CEO pay associated with even small declines in shareholder returns are likely to be offset by the pay increases attributable to size.     

Are Overconfident CEOs Better Innovators?

Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms hire overconfident managers. Theoretical research suggests a reason: overconfidence can benefit shareholders by increasing investment in risky projects. Using options‐ and press‐based proxies for CEO overconfidence, we find that over the 1993–2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development expenditures. However, overconfident managers achieve greater innovation only in innovative industries. Our findings suggest that overconfidence helps CEOs exploit innovative growth opportunities.     

CEO political preference and credit ratings

This study investigates whether a CEO's personal political ideology, as captured by his or her political contributions, is associated with a firm's credit ratings. Republican CEOs, we find, are associated with higher credit ratings, especially when their firms are headquartered in conservative areas. In addition, the link between political ideology and credit rating is more pronounced in firms that exhibit high financial distress or weak corporate governance. Changes in political ideology are associated with changes in credit rating. Our results support the behavior consistency, upper echelon, and social identity theories, as well as the risk acceptance hypothesis, and are robust to a number of alternative specifications as well as when alternate approaches and measures of credit risk are introduced. Using Republican CEOs as a proxy for conservative CEOs, our evidence implies that credit rating agencies justifiably view a CEO's political ideology and conservatism as indicative of corporate policies and, therefore, as an important determinant of the firm's credit ratings.     

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.     

Trust and innovation: Evidence from CEOs' early-life experience

Using CEOs' early-life experience during China's Cultural Revolution (1966–1976) to distinguish the trust level of CEOs, we employ a difference-in-differences identification strategy to show that the CEO's trust level exhibits significantly positive impacts on corporate innovation. We then use an alternative dataset from the survey of the Chinese Enterprise Survey System in 2000 to measure the trust at the firm level and subsequently achieve highly consistent findings. We further demonstrate that the substitution effect between informal and formal institutions also exists in relation to the impact of trust on innovation. Trust plays a more important role in promoting innovation when formal institutions are lacking. Overall, this study enriches our understanding on the effects of the CEO's trust level on corporate innovation and provides a micro-level evaluation of China's Cultural Revolution in the long run.