Paving the way for children: Family firm succession and corporate philanthropy in China

We investigate whether internal succession in family firms motivates founders to engage in corporate philanthropy. We argue that founders who intend to pass control of the firm to their children are likely to prepare for the internal succession by building up family assets such as reputation and political connections through corporate philanthropy. Supporting our argument, we find that both the likelihood and the amount of philanthropic donations increase when listed family firms in China are in the internal succession process. The effect of successions on philanthropic donations is stronger for family firms that have political connections or are located in areas with stronger government influence in the local economy. The effect concentrates on family firms when heirs are young and inexperienced. When heirs are established, family firms actually make fewer philanthropic donations. Our results remain robust after addressing endogeneity issues.     

A game of thrones—Dynamics of internal CEO succession and outcome

We examine the implications of chief executive officer (CEO) succession methods for firm outcomes and executive incentives. Focusing on internal CEO successions, we find that the largest U.S. firms typically rely on two types of succession methods, namely, heir apparent and horse race successions. Although heir apparent and horse race CEO candidates have similar qualifications, the consequences of these two succession methods differ significantly. We find that horse race successions induce conflict and are detrimental to firm performance but not necessarily to the newly appointed CEOs. Our findings suggest succession method influences firm performance, executive incentives and CEO labour markets.     

Adoptive expectations: Rising sons in Japanese family firms

We find inherited family firms more important in postwar Japan than generally realized, and also performing well on average. Non-consanguineous heir-run firms outperform blood heirs' firms, and roughly match founder-run listed firms, while blood heirs surpass professional managers at running family firms. Further, succession events suggest that adopted heirs “cause” elevated performance. We suggest that heir-run firms do well because non-consanguineous heirs displace the least talented blood heirs, the non-consanguineous heir “job” motivates professional managers, and the threat of displacement encourages blood heirs' effort and human capital accumulation, mitigating the “Carnegie conjecture” that inherited wealth deadens talent.     

How do managerial successions shape corporate financial policies in family firms?

Despite recent evidence on the importance of chief executive officer (CEO) successions in family firms, we still know little about the differences in corporate strategies entailed by family and professional managers around transition. We investigate the consequences of managerial successions for the financial policies of Italian family firms. Our findings indicate that the appointment of non-family professional CEOs leads to a significant increase in the use of debt, primarily driven by short-term maturities. We document substantial heterogeneity in the impact of professional successions on debt financing: the increase in debt is particularly pronounced for young firms, firms with a high level of investment, and firms in which the controlling family maintains a dominant representation on the board of directors. Examining the importance of financial flexibility, we find that the increase in debt occurs primarily when firms are cash-poor, and when incoming CEOs can exploit spare borrowing capacity.     

The effect of supplier industry competition on pay-for-performance incentive intensity

We examine how supplier industry competition affects CEO incentive intensity in procuring firms. Using Bureau of Economic Analysis data to compute a weighted supplier industry competition measure, we predict and find that higher supplier competition is associated with stronger CEO pay-for-performance incentive intensity. This effect is incremental to that of the firm's own industry competition previously documented and is robust to alternative measures of supplier competition and to exogenous shocks to competition. Importantly, we show that performance risk and product margin act as mediating variables in the relation between supplier competition and CEO incentive intensity providing support for the theory underpinning our finding. We document that CEO compensation contracts are used as a mechanism to exploit the market dynamics of upstream industries to a firm's benefit. Our findings are economically important as suppliers provide, on average, 45 percent of the value delivered by procuring firms to the market (BEA, 2016).     

Are outsiders handicapped in CEO successions?

We argue that outsiders are handicapped (chosen only if markedly better than the best insider) in Chief Executive Officer (CEO) successions to strengthen the incentive that the contest to become CEO provides inside candidates. Handicapping implies are that a firm will be more likely to choose an insider to succeed to the CEO position where insiders are more comparable to each other, where outsiders are less comparable to insiders, and where there are more inside candidates. We assess these predictions using a data set containing more than 1,000 observations on CEO succession in large U.S. firms over the period 1974–1995 and a novel measure of the comparability of insiders that identifies those firms with a product or line of business organizational structure. Our evidence is consistent with each prediction. We also explore more carefully our organizational structure variable. We find that where firms switch to a product or line of business structure (making insiders more comparable) the likelihood of outsider succession falls. And we consider the possibility that managers from firms with a product or line of business structure may be more likely to be chosen CEO because their experience as divisional head better prepares them for a CEO's duties. Two tests suggest that this is not the source of our finding that these firms are more likely to promote insiders to be CEO. The first test finds that controlling for prior experience managing a business (a division or a firm) among inside candidates to be CEO, those firms organized along product lines remain more likely to promote from within. The second test finds that when outsiders are chosen CEO, these outsiders do not come disproportionately from firms with a product or line of business structure.     

Earnings management around founder CEO reappointments and successions in family firms

This paper studies reappointment of a chief executive officer (CEO) and succession events in listed family firms with an incumbent family CEO. We explore whether family firms with a founder CEO are more likely to engage in earnings management preevent than other family firms. We find evidence of preevent upward earnings management for firms that reappoint their founder CEO but no for other family firms. These findings suggest that the costs and benefits from earnings management change around founder CEO reappointments in family firms. Investors, auditors, policymakers and regulators should be aware of the temptation of founder CEOs to inflate earnings preceding their reappointment.     

CEO turnover and bankrupt firms’ emergence

This paper examines whether CEO turnover within a bankrupt firm predicts the firm's likelihood to reemerge from bankruptcy proceedings as a reorganized entity. Using 836 bankruptcy cases filed under Chapter 11 of the United States Bankruptcy Code from 1989 through 2016, we show that firms that undergo CEO turnover are significantly more likely to emerge from Chapter 11 proceedings. We conduct further analyses to examine the potential mechanisms through which CEO turnover is linked to a firm's chance of emergence. Consistent with the perspective that CEO turnover constitutes an observable event that can signal creditor support, we find that CEO turnover in bankrupt firms is positively associated with debtor-in-possession financing. Additionally, there is a significant increase in managerial quality post-turnover. Further, we document that the predictive power of CEO turnover is stronger in bankruptcy cases with greater uncertainty, such as in free-fall bankruptcies, where there is less preexisting agreement between the firm and its creditors. Overall, our findings provide valuable insight into external investors and stakeholder groups, whose interests are significantly impacted by corporate bankruptcies.     

Determinants of Managerial Stock Ownership: The Case of CEOs

Research on the determinants of managerial equity ownership in firms is scant. To a limited extent, prior researchers have examined the variations in insider ownership proportions by combining the officers and directors into one group. This paper differs from earlier studies by focusing on the CEO. The evidence suggests that agency costs, free cash flow, and potential non-diversification losses and CEO attributes are important in explaining variations in CEOs' equity proportions in firms. Specifically, the paper finds that the proportion of CEO's ownership is related positively to the firm's debt level, diversification potential of the firm's common stock, free cash flows, and earnings volatility, and related negatively to the firm size.     

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.     

The impact of family control on the use of performance measures in strategic target setting and incentive compensation: A research note

This paper deals with the impact of a firm's governance structure on its management control system (MCS). We argue that the involvement of founding family members in the top management team (TMT) as a corporate governance characteristic has an impact on how the TMT exercises control over subordinates. Based on a sample of 304 mainly small and medium-sized firms, our paper provides empirical evidence that founding family involvement in the TMT is associated with the latter making less use of performance measures in its strategic target setting and incentive practices, and that this impact of family involvement is moderated by firm size.     

Internal corporate governance,CEO turnover,and earnings management

The likelihood and speed of forced CEO turnover – but not voluntary turnover – are positively related to a firm's earnings management. These patterns persist in tests that consider the effects of earnings restatements, regulatory enforcement actions, and the possible endogeneity of CEO turnover and earnings management. The relation between earnings management and forced turnover occurs both in firms with good and bad performance, and when the accruals work to inflate or deflate reported earnings. These results indicate that boards tend to act proactively to discipline managers who manage earnings aggressively, before the manipulations lead to costly external consequences.     

CEO characteristics,firm performance,and corporate political contributions

We investigate if CEO characteristics determine the choice of Political Action Committee (PAC) contributions by firms and if such participation leads to better firm performance. Using a unique, hand‐collected database, we also focus on the identity of the politicians receiving PAC contributions to examine the impact of the value‐relevance of such contributions. Examining data on corporate contributions made to candidates seeking federal office during the 2002, 2004, and 2006 election cycles, we find that CEO dominance and interest alignment influence strategic choices of firms with regards to establishing PACs. Our analysis of value‐relevant contributions shows that firms prefer to donate to politicians representing the state of a firm's headquarters, validating the truth to the adage that all politics is local. However, these targeted political contributions do not have a discernible impact on firm performance.     

Why do firms appoint CEOs as outside directors?

Companies actively seek to appoint outside CEOs to their boards. Consistent with our matching theory of outside CEO board appointments, we show that such appointments have a certification benefit for the appointing firm. CEOs are more likely to join boards of large established firms that are geographically close, pursue similar financial and investment policies, and have comparable governance to their own firms. The first outside CEO director appointment has a higher stock-price reaction than the appointment of another outside director. Except for a decrease in operating performance following the appointment of an interlocked director, CEO directors do not affect the appointing firm's operating performance, decision-making, and CEO compensation.     

Do Publicly Signalled Earnings Management Incentives Affect Analyst Forecast Accuracy?

Using a panel of listed Australian firms for the years 1999–2007, this paper investigates whether analysts' forecast efficiency is improved by the occurrence of a publicly observable event, such as a CEO appointment, which signals a firm's earnings management incentives. Two supporting hypotheses are also tested: first, that CEO appointments are associated with income‐decreasing earnings management; and second, that analyst forecast errors increase with the level of earnings management present in current period financial statements. Consistent with prior literature, we find income‐decreasing earnings management in the year of CEO appointment. Earnings management, as a general phenomenon, is found to be significantly related to analyst forecast errors in the period in which the earnings management occurs. However, we present evidence that analyst forecasts for current year earnings are significantly more accurate with respect to earnings management in cases where a CEO is appointed during the current financial period.     

Disproportional ownership structure and pay–performance relationship: Evidence from China's listed firms

This paper examines the impact of ownership structure on executive compensation in China's listed firms. We find that the cash flow rights of ultimate controlling shareholders have a positive effect on the pay–performance relationship, while a divergence between control rights and cash flow rights has a significantly negative effect on the pay–performance relationship. We divide our sample based on ultimate controlling shareholders' type into state owned enterprises (SOE), state assets management bureaus (SAMB), and privately controlled firms. We find that in SOE controlled firms cash flow rights have a significant impact on accounting based pay–performance relationship. In privately controlled firms, cash flow rights affect the market based pay–performance relationship. In SAMB controlled firms, CEO pay bears no relationship with either accounting or market based performance. The evidence suggests that CEO pay is inefficient in firms where the state is the controlling shareholder because it is insensitive to market based performance but consistent with the efforts of controlling shareholders to maximize their private benefit.     

Information-based stock trading and managerial incentives: evidence from China's stock market

This paper uses stock price informativeness, or information-based stock trading, to help explain the pay–performance sensitivity (PPS) of chief executive officer (CEO) compensation in China's listed firms. We argue that higher stock price informativeness, which we measure by the probability of informed trading, helps and encourages shareholders to incentivize the top management team based on stock market performance. The regression results support our argument and show that a higher level of stock price informativeness is associated with higher CEO PPSs. Moreover, the impact of stock price informativeness on CEO incentives is stronger for privately controlled listed firms than it is for state-controlled listed firms. The results also hold when information asymmetry is approximated by the accuracy and dispersion of the earnings forecasts made by financial analysts.     

The determinants of CEO compensation: Rent extraction or labour demand?

CEO compensation is topical and controversial and accordingly receiving considerable attention by various stakeholders. We investigate whether rent extraction or labour demand explains CEO compensation level in Australia. We do so by examining the determinants (economic, governance and ownership) of CEO compensation level and explore the relationship between predicted excess compensation and subsequent firm performance. Our results suggest that governance and ownership attributes, in addition to economic attributes, are significant determinants of CEO compensation. However, these attributes differentially determine the various components of CEO compensation. Our evidence is consistent with: (1) the determination of fixed salary and share-based compensation reflecting a firm's demand for a high-quality CEO; and (2) the CEO's ability to extract rent through bonus and options compensation, particularly for smaller firms or firms with above average performance. However, the rent extraction is not economically significant and does not persist beyond one year. This is in sharp contrast to the US evidence where rent extraction through CEO compensation is pervasive, economically significant and persistent [Core, J., Holthausen, R., Larcker, D., 1999. Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics 51, 371–406].     

Dupes or Incompetents? An Examination of Management's Impact on Firm Distress

This article examines whether managers impact firm performance. We conservatively define managerial ability as the manager's capacity to deploy the firm's resources. We verify the validity of our metric using a manager–firm matched panel data set that allows us to track managers (CEOs) across different firms over time. We find managerial ability is inversely related to the amount of time a firm spends in distress, the likelihood of a firm's failure, and the cost of failure. These results suggest that the managers of failed firms are less skilled than their counterparts. But even within failed firms there is heterogeneity in the talents of managers.     

Corporate boards' political ideology diversity and firm performance

We investigate whether diversity in points of view within corporate boards, as captured by the diversity in political ideology of board members, can affect a firm's performance. We employ personal political contributions' data to measure political ideology distance among groups of inside, outside directors and the CEO. Our empirical evidence strongly supports the notion that outside directors' monitoring effectiveness is more likely to be enhanced when their viewpoints are distinct from those of management. We find that ideologically diverse boards are associated with better firm performance, lower agency costs and less insiders' discretionary power over the firm's Political Action Committee (PAC) spending. Taken together, our results lead us to conclude that multiplicity of standpoints in corporate boardrooms is imperative for board effectiveness.