Managerial compensation and corporate spinoffs

Research summary : This article investigates how corporate spinoffs affect managerial compensation. These deals are found to improve the alignment of spinoff firm managers' incentive compensation with stock market performance, especially among spinoff firm managers that used to be divisional managers of the spun‐off subsidiary, and particularly when the spun‐off subsidiary performs better than or is unrelated to its parent firm's remaining businesses. By contrast, incentive alignment does not improve for the parent firm managers running the divesting companies. This finding appears to be driven by a significant post‐spinoff increase in these managers' incentive compensation, the magnitude of which is inversely related to governance quality in their firms. Together, these results elucidate how spinoffs influence managerial compensation in diversified firms and the companies they divest. Managerial summary : This article explores how spinoffs affect incentive alignment: the correlation between incentive compensation and stock market performance. The incentive alignment of spinoff firm managers improves following these deals. These gains are the largest when spinoff firm managers used to be divisional managers of the spun‐off subsidiary and when the spun‐off subsidiary performs better than or is unrelated to the other businesses in the parent firm. By contrast, incentive alignment does not improve for parent firm managers. Instead, the level of these managers' incentive compensation rises significantly post‐spinoff, and the magnitude of this increase is inversely related to governance quality in these firms. Together, these results shed light on the ways in which spinoffs influence managerial compensation in diversified firms and in the companies they divest. Copyright © 2015 John Wiley & Sons, Ltd.     

The impact of earnings expectations on corporate downsizing

Research Summary: We propose that due to financial market pressures, managers are forward‐looking in their search and decision processes and focus on meeting performance targets set by the financial community. Using panel data on S&P 100 companies, we find that pressure felt by management to meet the analyst consensus earnings estimate influences the extent of corporate downsizing. Moreover, our results show that high levels of institutional investor stock ownership and CEO power attenuate managers’ sensitivity to financial market pressures, while high levels of analyst coverage increase their sensitivity. Managerial Summary: In this study we examine how financial market pressures influence managers’ downsizing decisions. We argue that investment analysts’ earnings estimates represent important performance targets to which managers aspire. If firms fail to meet analysts’ expectations, the stock price will suffer. This study shows that managers utilize corporate downsizing to address the potential shortfall between a firm's future performance and the analyst consensus earnings estimate. In addition, we find that managers’ concerns over meeting analysts’ earnings estimates are influenced by various contextual factors such as institutional investor stock ownership, CEO power, and high levels of analyst coverage.     

Do analysts add value when they most can? Evidence from corporate spin‐offs

This article investigates how securities analysts help investors understand the value of diversification. By studying the research that analysts produce about companies that have announced corporate spin‐offs, we gain unique insights into how analysts portray diversified firms to the investment community. We find that while analysts' research about these companies is associated with improved forecast accuracy, the value of their research about the spun‐off subsidiaries is more limited. For both diversified firms and their spun‐off subsidiaries, analysts' research is more valuable when information asymmetry between the management of these entities and investors is higher. These findings contribute to the corporate strategy literature by shedding light on the roots of the diversification discount and by showing how analysts' research enables investors to overcome asymmetric information. Copyright © 2013 John Wiley & Sons, Ltd.     

Corporate social performance,analyst stock recommendations,and firm future returns

This study posits that security analysts heed corporate social performance information and factor it into their recommendations to general investors. In particular, as corporate social performance is often uncertain and ambiguous to general investors, analysts may serve as the informational pathway connecting corporate social performance to firm stock returns. Thus, we argue that analyst recommendations mediate the relationship between corporate social performance and firm stock returns. On the basis of not only a qualitative study with literature searches and interviews of stock analysts but also a quantitative study with two longitudinal samples of large firms, we find support for these arguments. Our findings uncover an information‐based underlying mechanism for the link between corporate social performance and financial performance. Copyright © 2013 John Wiley & Sons, Ltd.     

The impact of corporate social responsibility on investment recommendations: Analysts' perceptions and shifting institutional logics

We explore the impact of corporate social responsibility (CSR) ratings on sell‐side analysts' assessments of firms' future financial performance. We suggest that when analysts perceive CSR as an agency cost they produce pessimistic recommendations for firms with high CSR ratings. Moreover, we theorize that, over time, the emergence of a stakeholder focus shifts the analysts' perceptions of CSR. Using a large sample of publicly traded U.S. firms over 15 years, we confirm that, in the early 1990s, analysts issue more pessimistic recommendations for firms with high CSR ratings. However, analysts progressively assess these firms more optimistically over time. Furthermore, we find that analysts of highest status are the first to shift the relation between CSR ratings and investment recommendation optimism. Copyright © 2014 John Wiley & Sons, Ltd.     

Multipoint contact without forbearance? How coverage synergies shape equity analysts' forecasting performance

Research Summary: Scholars regularly use multipoint contact (MPC) to explain how encountering rivals in different domains shapes performance. While most explanations rely on mutual forbearance theory, I propose that competitive deterrence does not adequately explain how MPC shapes performance in knowledge intensive work and argue instead that cross-domain synergies may play a central role. I examine how security analysts' MPC with publicly traded firms captures synergies in their coverage portfolio, which improves forecasting accuracy and information leadership. The advantages of greater MPC for a focal analyst are counterbalanced by rivals' observational learning, which reduces the focal analyst's forecasting differentiation. A natural experiment helps corroborate my argument: rival analysts' forecasting accuracy dropped for firms in which high MPC analysts perished in the terrorist attack on September 11, 2001. Managerial Summary: Competition in the knowledge economy often unfolds across multiple domains including product markets, geographic locations, and customer segments. In these settings, an actor's level of multipoint contact (MPC) in a domain captures the knowledge and other synergies available to the focal actor, which can improve performance in the domain. In the equity research setting, an analyst's MPC on a focal firm captures the likelihood that the analyst also covers that firm's suppliers, customers and important competitors. Using data on analysts' forecasting performance between 2001 and 2013, I find that greater levels of MPC on a focal firm predicts greater forecasting accuracy and information leadership but also lowers forecasting differentiation by attracting rivals who observe and benefit from the focal analyst's knowledge.     

Opportunity costs,industry dynamics,and corporate diversification: Evidence from the cardiovascular medical device industry, 1976–2004

This paper examines how demand conditions across alternative markets impact diversification decisions and firm performance by influencing the opportunity costs of deploying non‐scale free capabilities. Using data within the cardiovascular medical device industry, this study shows that: (1) firms with a larger stock of pre‐entry innovation experience are more likely to diversify; (2) firms in a current market with greater relative demand maturity are more likely to diversify; (3) diversification is associated with a performance decrease in the current market; and (4) diversification is associated with a performance increase at the corporate level. These findings shed new light on the self‐selection process of corporate scope, the conceptualization of firm capabilities, and the connection between industry dynamics and resource deployment. Copyright © 2013 John Wiley & Sons, Ltd.     

Business groups and corporate transparency in emerging markets: Empirical evidence from India

This study examines the difference in corporate transparency of firms affiliated with business groups and unaffiliated firms in India. Based on previous studies we measured corporate transparency using equity analysts’ forecast error and dispersion. We find that firms affiliated with business groups are less transparent than unaffiliated firms. Lack of transparency leads to higher analyst forecast error and dispersion. This study also finds that business group-affiliated firms with more intra-group capital transactions have higher forecast error and dispersion. The findings of this study suggest that firms affiliated with business groups are less transparent due to their reliance on internal capital markets, and therefore lack incentives to disclose information to market participants. As a result, the information asymmetry between business groups and the capital market is higher, restricting the activities of information intermediaries such as equity analysts, who play an important role in the external capital market.     

Corporate divestitures and family control

This paper investigates the relationship between divestitures and firm value in family firms. Using hand‐collected data on a sample of over 30,000 firm‐year observations, we find that family firms are less likely than non‐family firms to undertake divestitures, especially when these companies are managed by family rather than non‐family‐CEOs. However, we then establish that the divestitures undertaken by family firms, predominantly those run by family‐CEOs, are associated with higher post‐divestiture performance than their non‐family counterparts. These findings indicate that family firms may fail to fully exploit available economic opportunities, potentially because they pursue multiple objectives beyond the maximization of shareholder value. These results also elucidate how the characteristics of corporate owners and managers can influence the value that firms derive from their corporate strategies. Copyright © 2014 John Wiley & Sons, Ltd.     

Foreshadowing as Impression Management: Illuminating the Path for Security Analysts

Research summary: Managers can disclose information to security analysts as a form of impression management, but doing so is problematic because competitors can use that same information at the expense of the firm. We identify an impression management technique we call foreshadowing, which refers to hinting about future potential strategic activity. Foreshadowing provides information of value to analysts that can influence their evaluations of a firm, but not so much information as to put the firm at a competitive disadvantage. We hypothesize and find that managers who foreshadow acquisition announcements receive fewer analyst downgrades following the announcements, especially when there is more analyst uncertainty about the firm. We also hypothesize and find that analysts' responses to foreshadowing positively influence the likelihood that managers eventually acquire other firms. Managerial summary: Security analysts are often suspicious when firms announce acquisitions as those announcements are cumbersome to analyze on short notice and raise questions about managerial motivations that might not represent the best interests of the firm. We find that managers can improve analyst reactions to acquisition announcements by disclosing some information of value to analysts—specifically by hinting that an acquisition could occur in the future. We refer to such hints as foreshadowing. Foreshadowing entails giving analysts information to reduce their suspicions and facilitate their analyses, but not so much information as to degrade the firm's competitive information advantage over other firms. Foreshadowing also allows managers the option to reconsider actually executing the acquisition if analysts respond negatively to its possibility. Copyright © 2017 John Wiley & Sons, Ltd.     

Labor market evaluation versus legacy conservation: What factors determine retiring CEOs' decisions about long‐term investment?

Do CEOs nearing retirement attempt to boost short‐term firm performance or do they care more about what type of legacy they will leave behind? The two opposing predictions about the behavior of CEOs upon retirement suggest that retiring CEOs' decisions about certain long‐term investment items may be more complex than suggested in the literature. In search of an answer to this question, we examine the relationship between CEO retirement and the level of firm commitment to corporate social responsibility (CSR). The results show that CEO retirement has a negative effect on firm commitment to CSR. However, we found that the negative effect becomes weaker when CEOs retire at relatively older ages or are retained on the board of directors of their own firms. Our finding suggests that CEOs who face weaker pressure from the labor market for corporate directors may pay more attention to preserving their legacy. Copyright © 2014 John Wiley & Sons, Ltd.     

Windfalls of emperors' sojourns: Stock market reactions to Chinese firms hosting high‐ranking government officials

Research summary: We contribute to the corporate political activity (CPA ) literature by showing that investors value companies that host visits of high‐ranking government officials (P resident and P remier). We argue that investors may value host official visits for two reasons: (1) the signal received about possibility of firm accessing government‐controlled resources via promotion or protection; and (2) the certification effect from such high‐powered visitors elevating the firm's reputation and legitimacy. Results from an event study analysis of 84 high‐ranking government official visits in C hina from 2003 to 2011 indicate that investors responded positively to host firms as reflected by stock market performance. Furthermore, the greatest positive reactions accrued to firms experiencing weaker prior period financial performance and to firms that are privately compared to state‐controlled . Managerial summary: Do visits by high‐ranking government officials influence firm stock market performance? Studying a sample of C hinese public firms that hosted 84 visits by the C hinese P resident and the P remier from 2003 to 2011, we find that investors reacted positively to such visits compared with a group of non‐host firms from the same industry and with similar financial performance and size. In addition, firms with weaker prior financial performance and private firms benefit the most from hosting such visits. Our findings imply that hosting visits of high‐ranking government officials can signal future government‐controlled resource inflows and boost host firms' reputation and legitimacy . Copyright © 2016 John Wiley & Sons, Ltd.     

How Do Social Media Affect Analyst Stock Recommendations? Evidence from S&P 500 Electric Power Companies' Twitter Accounts

Research summary : The importance of firm‐stakeholder relationships is gaining increasing attention. Although a theory of the drivers and consequences of stakeholder pressure has been developing, it focuses on pressures from organized stakeholders such as shareholders, NGOs, and activists, and does not incorporate the emerging possibility that individual voices may matter. By exploring corporate Twitter, which facilitates movement of individual stakeholders such as customers to a higher stakeholder class by providing them with a greater sense of power and urgency, we study the circumstances under which customer voices significantly affect analyst stock recommendations. We find that favorable reactions to firm‐initiated messages matter, directly or indirectly, depending on the messages' growth implications. Customer‐initiated negative messages have a significant impact only with high volume and formal institutions that support customer opinions. Managerial summary : Social media is increasingly used by firms for disclosing information and engaging stakeholders. Yet, we know little about whether and how social media usage matters. We show how corporate Twitter usage may influence analyst stock recommendations. Our interviews of securities analysts suggest that social media is not institutionalized yet, but increasingly used as a source of channel checks, especially for vibes, validations, and so on. Our analyses of corporate Twitter accounts show that both firm‐initiated and customer‐initiated tweets can have significant impact on analyst recommendations under certain conditions. For firm‐initiated tweets, the extent of retweets is an important factor, along with the content of tweets, in particular, growth implications. For customer‐initiated tweets, negative tweets matter, but only with high volume and regulatory structure that supports customer protection. Copyright © 2017 John Wiley & Sons, Ltd.     

Japanese spinoffs: Unexplored survival strategies

This paper analyzes spinoffs of Japanese firms and the use of the spinoff as an instrument to achieve corporate growth objectives. The initial separation of the organizations and its governance mode are analyzed in the context of transaction costs theory. Spinoffs may be created in order to (1) balance costs associated with managing diversified businesses, (2) generate growth based on core competencies of a firm, and (3) pursue an efficient internal labor market. In a changing environment, the spinoff has been a widely used flexible organizational arrangement that is suitable to survival and offers an alternative way of diversification.     

Home Alone: The Effects of Lone‐Insider Boards on CEO Pay,Financial Misconduct,and Firm Performance

Research summary: Corporate scandals of the previous decade have heightened attention on board independence. Indeed, boards at many large firms are now so independent that the CEO is “home alone” as the lone inside member. We build upon “pro‐insider” research within agency theory to explain how the growing trend toward lone‐insider boards affects key outcomes and how external governance forces constrain their impact. We find evidence among S&P 1500 firms that having a lone‐insider board is associated with (a) excess CEO pay and a larger CEO‐top management team pay gap, (b) increased likelihood of financial misconduct, and (c) decreased firm performance, but that stock analysts and institutional investors reduce these negative effects. The findings raise important questions about the efficacy of leaving the CEO “home alone.” Managerial summary: Following concerns that insider‐dominated boards failed to protect shareholders, there has been a push for greater board independence. This push has been so successful that the CEO is now the only insider on the boards of more than half of S&P 1500 firms. We examine whether lone‐insider boards do in fact offer strong governance or whether they enable CEOs to benefit personally. We find that lone‐insider boards pay CEOs excessively, pay CEOs a disproportionately large amount relative to other top managers, have more instances of financial misconduct, and have lower performance than boards with more than one insider. Thus, it appears that lone‐insider boards do not function as intended and firms should reconsider whether the push towards lone‐insider boards is actually in shareholders' best interests. Copyright © 2017 John Wiley & Sons, Ltd.     

Activist‐impelled divestitures and shareholder value

Research Summary : This study analyzes how the divestitures that are impelled by activist investors in their campaigns against public corporations affect shareholder value. Using hand‐collected data on the activist campaigns that were launched against and the divestitures that were undertaken by Fortune 500 companies between 2007 and 2015, we find that activist‐impelled divestitures are more positively associated with immediate and longer‐term measures of shareholder value than comparable manager‐led divestitures. These performance differences persist for nearly two years after the completion of these deals. Our results empirically test the idea that firms with agency problems unlock shareholder value when they divest, and support the notion that activist investors fulfill an important external governance function. Our work also opens new research opportunities and offers practical implications as well. Managerial Summary : This study investigates how divestitures that are undertaken at the behest of activist investors affect shareholder value. We find that divestitures that were undertaken under pressure from activist investors are associated with more positive shareholder returns than comparable divestitures that were undertaken voluntarily by managers. These performance differences persist for nearly two years after the completion of these deals, alleviating concerns about the purported short‐termism of activist investors. Our findings suggest that activist investors may fulfill an important governance function by inducing managers to undertake strategies that they might not otherwise pursue, thereby unlocking shareholder value.     

Leveraging foreign institutional logic in the adoption of stock option pay among Japanese firms

Research summary : We investigate why Japanese firms have adopted executive stock option pay, which was developed with shareholder‐oriented institutional logic that was inconsistent with Japanese stakeholder‐oriented institutional logic. We argue that Japanese managers have self‐serving incentives to leverage stock ownership of foreign investors and their associated institutional logic to legitimize the adoption of stock option pay. Our empirical analyses with a large sample of Japanese firms between 1997 and 2007 show that when managers have elite education, high pay inequality with ordinary employees, and when firms experience poor sales growth, foreign ownership is more likely associated with the adoption of stock option pay. The study shows the active role of managers in facilitating the diffusion of a new governance practice embodying new institutional logic. Managerial summary : Why have Japanese firms adopted stock option pay for executives? Inconsistent with Japanese stakeholder‐oriented tradition in corporate governance, such pay has been believed to prioritize managerial attention to the interests of shareholders over those of other stakeholders. However, to the extent that shareholders' interests are legitimate in the Japanese context, executives who have self‐serving incentives to adopt such pay can leverage the need to look after shareholders' interest in their firms to legitimize their decisions. In a large sample of Japanese firms, we find that foreign ownership (representing shareholders' interests) is more likely to be associated with the adoption of stock option pay when managers are motivated to receive such pay, such as when they have elite education, high pay inequality with ordinary employees, or poor sales growth. Copyright © 2015 John Wiley & Sons, Ltd.     

Mind the gap: The interplay between external and internal actions in the case of corporate social responsibility

Research summary : We explore the effect of the interplay between a firm's external and internal actions on market value in the context of corporate social responsibility (CSR). Specifically, drawing from the neo‐institutional theory, we distinguish between external and internal CSR actions and argue that they jointly contribute to the accumulation of intangible firm resources and are therefore associated with better market value. Importantly, though, we find that, on average, firms undertake more internal than external CSR actions, and we theorize that a wider gap between external and internal actions is negatively associated with market value. We confirm our hypotheses empirically, using the market‐value equation and a sample comprising 1,492 firms in 33 countries from 2002 to 2008. Finally, we discuss implications for future research and practice. Managerial summary : Companies often accumulate intangible assets by taking internally and externally oriented CSR actions. Contrary to popular beliefs, the data show that they undertake more internal than external ones: firms do more and communicate less. How does a potential gap (i.e., a misalignment) between internal and external CSR actions affect a firm's market value? We find that although together (the sum of) internal and external actions are positively associated with market value, a wider gap has negative implications. In other words, firms do not realize the full benefits of their internal actions when such actions are not externally communicated to key stakeholders, and to the investment community in particular. This negative association with market value is particularly salient in CSR‐intensive and the natural resources and extractives industries. Copyright © 2015 John Wiley & Sons, Ltd.     

The impacts of performance relative to analyst forecasts and analyst coverage on firm R&D intensity

Taking an agency theory perspective of managers as risk averse and self‐interest seeking and focusing on externally generated analyst forecasts as the performance target, we propose that managers tend to cut R&D expenses when they are under pressure to meet analyst forecasts, especially when they face an increase in employment risk after missing the forecasts. We further argue that analyst coverage can serve as an external monitoring mechanism to help contain this agency problem. We test these arguments with data from a sample of U.S. manufacturing firms during the period of 1979 to 2005. Copyright © 2012 John Wiley & Sons, Ltd.     

The development of capabilities in new firms

This research explores evidence of corporate capabilities for conducting acquisition and alliance deals in young firms. We hypothesize that investors conjecture about the future based on information about a firm's capabilities. Each successive deal carries intrinsic value, creates experience, generates feedback, and yields information about the firm's underlying capabilities. We evaluate whether stock prices impute expectations that firms will capably pursue particular programs of acquisitions and alliances. The analysis covers how investor responses change across successive deals on the theory that firms with a concentrated program of deals may develop capabilities more intensively than those with programs that involve both acquisitions and alliances. The dataset covers the population of firms that went through an initial public offering (IPO) in the United States between 1988 and 1999. It contains information on all of their post‐IPO acquisitions and alliances, and on how their stock prices changed in response to the announcement of each deal. The results suggest that within the first year after IPO, investors expect firms to execute particular streams of alliances and acquisitions that reflect their unique histories of demonstrated capabilities. We also find evidence that investors cannot fully anticipate deal programs. The findings support a capabilities‐based view of the firm and also show that accurate inference using event‐study methods may require digging deep into the early histories of firms. Copyright © 2009 John Wiley & Sons, Ltd.