Do Delaware CEOs get fired?

Critics have charged that state competition in corporate law, which Delaware dominates, leads to a “race to the bottom” making management unaccountable. We argue that Delaware corporate law attracts firms with particular financial and governance characteristics. We find that Delaware attracts growth firms in industries with more takeover activity. Delaware firms have smaller boards, and their directors are paid more and serve on more boards. In addition, Delaware firms attract greater institutional ownership. We also provide a bottom-line test of the race-to-the-bottom hypothesis by examining forced CEO turnover. After controlling for differences in firm characteristics, we find that firms incorporated in Delaware are more likely to terminate CEOs. We also find that that termination decision is less sensitive to poor performance. Overall, we see no clear pattern supporting the “race to the bottom” hypothesis.     

UK Vice Chancellor compensation: Do they get what they deserve?

The compensation received by UK Vice Chancellors (VCs) has been on an upward trend in recent years and attracted a lot of negative media attention. In this paper, we examine whether VCs receive the compensation they deserve. Using a panel dataset covering the academic years 2007/2008 to 2018/2019, we develop a model to predict expected VC compensation to determine whether VCs are over- or undercompensated. Our model finds that VCs are not overcompensated regarding their base salary, but some are overcompensated in terms of their benefits and pension contributions. However, there is very little difference in terms of characteristics of over- and undercompensated VCs, indicating that on average, UK VCs receive the compensation they deserve. For robustness purposes, we employ a variety of alternative model specifications and subsamples which all support our previous findings.     

Adopting residual income-based compensation plans: Do you get what you pay for?

Managers, consultants, and the financial press assert that compensation plans based on residual income change managers' behavior. This assertion is empirically tested by selecting a sample of firms that began using a residual income performance measure in their compensation plans and comparing their performance to a control sample of firms that continue to use traditional accounting earnings-based incentives. The results generally support the adage `you get what you measure and reward'. The results also support many hypothesized managerial actions associated with residual income-based performance measure incentives.     

Do ETF flows increase market efficiency? Evidence from China

Focusing on the equity exchange traded funds (ETFs) in China, we demonstrate the significant effect of ETF flows on the informativeness of the ETF index. Following the novel approach proposed by Xu et al (2019a). to identify different driving forces for ETF flows, we explore whether the forward-looking ETF flows at a day’s closing substantially improve the index’s efficiency on the next day. The mechanism behind it is inter-market information spread: the efficiency effect of the forward-looking ETF flows strengthens when ETFs share more new information; and the forward-looking ETF flows increase the information flow to the ETF index on the next day.     

The more the better? Foreign ownership and corporate performance in China

We examine the relationship between the degree of foreign ownership and performance of recipient firms, using a panel of 21,582 Chinese firms over the period 2000–2005. We find that joint-ventures perform better than wholly foreign-owned and purely domestic firms. Although productivity and profitability initially rise with foreign ownership, they start declining once it reaches a certain point. This suggests that some domestic ownership is necessary to ensure optimal performance. We referred these findings to a model of a joint-venture, where strategic interactions between a foreign and a domestic owner's inputs may lead to an inverted U-shaped ownership–performance relationship.     

The effect of CEO luck on the informativeness of stock prices: Do lucky CEOs improve stock price informativeness?

CEOs are “lucky” when they are granted stock options on days when the stock price is lowest in the month of the grant, implying opportunistic timing and severe agency problems (Bebchuk et al., 2010). Using idiosyncratic volatility as our measure of stock price informativeness, we find that lucky CEOs improve the informativeness of stock prices significantly. In particular, CEO luck raises the degree of informativeness by 4.39%. Powerful CEOs who can circumvent governance mechanisms and successfully practice opportunistic timing of options grants are so secured in their positions that they have fewer incentives to conceal information, thereby improving informativeness.     

Do Islamic stock indices perform better than conventional counterparts? An empirical investigation of sectoral efficiency

Literature is rife with studies on efficiency of stock markets and financial performance aspects. One such aspect is the measurement of sectoral efficiency amongst stock markets. While there are several studies analysing sectorial efficiency, there is no study on the efficiency of Islamic sector indexes. The rise of Islamic indices has raised the question and multiple studies have been undertaken in exploring and validating the better performance from a risk return framework for the Islamic indices. This study attempts to pioneer in this niche area by conducting a comparative analysis of 10 sectoral global indices for both conventional and Islamic counterpart spanning over 18 years. The sample time period runs from 1 January 1996 until 31 December 2014. To further validate our study, we have divided our data into four major time periods, to factor in different phases the world markets have gone through in the sample period, i.e. 1996–2000; 2001–2002; 2003–2006 and 2006 to 2014. The methodology selected in understanding the efficiency of these sectoral stock indices is the multifractal de-trended fluctuation analysis (MFDFA). Our analysis reveals that in the shorter horizon, efficiency tends to follow a similar pattern amongst the conventional and Islamic counterpart. Furthermore, Islamic sectoral indices generally tend to exhibit a higher efficiency regime across the last decade. Overall, Islamic index seems to have stayed attractive and resilient, allowing conformity with the weak form efficient market hypothesis.     

Do CEOs gain more in foreign acquisitions than domestic acquisitions?

This paper examines the impact of domestic and foreign acquisitions on chief executive officer (CEO) compensation packages using a sample of 147 completed bids by UK companies from 1999 to 2005. We find that foreign acquisitions lead to higher CEO compensation than domestic acquisitions. Overall, our findings suggest that CEOs have strong incentives to do foreign acquisitions rather than domestic acquisitions since they receive larger compensation following a foreign acquisition regardless of how poor firm performance is. Furthermore, we observe a positive and significant relation between CEO compensation and firm size during the pre-acquisition period for firms involved in foreign acquisitions, thus their CEOs would expect to increase their compensation package through foreign acquisitions. However, our results show that there is no significant link between firm size and CEO compensation during the pre-acquisition period for firms involved in domestic acquisitions.     

Are long-tenured CEOs rent seekers? Analysis of cash compensation and post disposal performance

Are typical long-tenured CEOs rent-seekers? Do compensation committees consider undiversified risk for veteran executives and design their cash pay to limit their risk exposure? Because an exit decision requires board approval, discontinued operations provide a unique setting to analyze intervention by compensation committees. Seasoned managers should require less oversight because their ability has been revealed over time. However, as CEOs advance in their careers, they are more likely to acquire power to influence board decisions. They are also more risk averse and potentially more myopic than younger CEOs because they hold a large undiversified portfolio. Lucrative labor markets for talented retired executives can incentivize long-tenured CEOs to maintain a solid reputation. I reexamine the previously reported differential sensitivity of CEO cash compensation to positive or negative-valued disposal decisions, which can be viewed as rent-seeking. I show that cash pay for veteran CEOs are shielded from the effect of both negative and positive-valued discontinued operations, suggesting that compensation committees alter their cash pay. This evidence does not support rent-seeking. I also find strong evidence that long-tenured CEOs make better exit decisions to improve future firm performance than less experienced executives.     

Forecasting exchange rates: Do banks know better?

We first evaluate the performance of major commercial banks in forecasting future spot exchange rates, using the random-walk model as the benchmark. We then investigate the sources of forecast errors, and the forecasting tendencies of banks. Our analysis is based on the forecasts made for the US dollar exchange rates of the British pound (BP), German mark (DM), Swiss franc (SF), and Japanese yen (JY), over 3-, 6-, 9-, and 12-month forecast horizons. Key findings include: first, a majority of banks shows some evidence of outperforming the random-walk model for the three currencies other than the JY. Second, the imperfect correlation between predicted and actual exchange rate changes is the dominant source of prediction errors of banks. Third, the home-country bank generally forecasts the country's currency rate more accurately than the other banks, suggesting a degree of information asymmetry. Fourth, the forecasts of a majority of banks exhibit a bandwagon type effect. That is, most banks are momentum forecasters, tending to extrapolate the recent currency changes. Interestingly, a “contrarian” bank is found to outperform the other banks.     

Are all CEOs above average? An empirical analysis of compensation peer groups and pay design

Companies can potentially use compensation peer groups to inflate pay by choosing peers that are larger, choosing a high target pay percentile, or choosing peer firms with high pay. Although peers are largely selected based on characteristics that reflect the labor market for managerial talent, we find that peer groups are constructed in a manner that biases compensation upward, particularly in firms outside the Standard & Poor's (S&P) 500. Pay increases close only about one-third of the gap between the pay of the Chief Executive Officer (CEO) and the peer group, however, suggesting that boards exercise discretion in adjusting compensation. Preliminary evidence suggests that increased disclosure has reduced the biases in peer group choice.     

Hidden Gems: Do market participants respond to performance expectations revealed in compensation disclosures?

We find that a new compensation disclosure item on expected payouts from performance-based stock grants reveals unique information regarding future firm performance. Extracting inferred performance expectations from the disclosures, we find that firms disclosing the highest expected grant payout significantly outperform in ROA, Q, sales growth, and profit margin over the next two years, while those disclosing the lowest expected payout underperform. The embedded information is not captured by other information channels, such as managerial earnings guidance, 10-K sentiment, insider selling activities, unexplained CEO pay, and analyst forecasts. Investors and analysts do not fully incorporate the information and are later surprised around earnings announcement days. A portfolio that buys firms with the highest performance expectation and shorts firms with the lowest expectation earns significantly positive abnormal returns. Our findings suggest that the enhanced compensation disclosure contains valuable information, but investors underreact to information that is difficult to collect and process.     

Do defaulting CEOs and directors increase the likelihood of financial distress of the firm?

We hypothesize that the information on a CEO’s and directors’ (board members) past personal payment default entries in public credit data files significantly increases the predictive power of Altman’s (in J Fin 23(4):589–609, 1968) and Ohlson’s (In J Acc Res 18(1):109–131, 1980) distress prediction models. We base our hypothesis on the literature showing that (1) managerial traits such as overconfidence, over-optimism, and the illusion of control affect corporate decisions and that (2) these same personal traits explain personal over-indebtedness and credit defaults. Our results of analyzing the credit data files of more than 100,000 CEOs and directors of the Finnish private limited liability companies support this hypothesis. Our results remain materially unchanged when using the bootstrapping method to assess their significance and when excluding small firms (firm size below the sample median). Collectively, our results imply that creditors should recognize the increased distress risk of firms appointing defaulting CEOs and directors.     

A survey of executive compensation contracts in China’s listed companies

We analyze 228 executive compensation contracts voluntarily disclosed by Chinese listed firms and find that central-government-controlled companies disclose more information in executive compensation contracts than local-government-controlled and non-government-controlled companies. Cash-based payments are the main form of executive compensation, whereas equity-based payments are seldom used by Chinese listed companies. On average, there are no significant differences in the value of basic salaries and performance-based compensation in executive compensation contracts. But, compared with their counterparts in non-government-controlled companies, executives in government-controlled companies are given more incentive compensation. Accounting earnings are typically used in executive compensation contracts, with few firms using stock returns to evaluate their executives. However, the use of non-financial measures has increased significantly since 2007.     

Do women directors improve firm performance in China?

This paper examines the effect of board gender diversity on firm performance in China's listed firms from 1999 to 2011. We document a positive and significant relation between board gender diversity and firm performance. Female executive directors have a stronger positive effect on firm performance than female independent directors, indicating that the executive effect outweighs the monitoring effect. Moreover, boards with three or more female directors have a stronger impact on firm performance than boards with two or fewer female directors, consistent with the critical mass theory. Finally, we find that the impact of female directors on firm performance is significant in legal person-controlled firms but insignificant in state-controlled firms. This paper sheds new light on China's boardroom dynamics. As governments increasingly contemplate board gender diversity policies, our study offers useful empirical guidance to Chinese regulators on the issue.     

Crossing the River by Touching Stones?: The Reform of Corporate Ownership in China

The privatization of Chinese enterprises in a low-legal-protection environment raises the question as to how minority shareholders are assured that their capital will not be expropriated. This paper sheds some light on this issue by examining the influence of controlling shareholders on the corporate performance of listed firms from 1997 to 2006. The first main finding is that firms controlled by local governments are more valuable to minority shareholders, whereas firms controlled by individuals are less valuable. The second main finding is that the post-WTO-accession relinquishment of control from local governments to private shareholders appears to have reduced corporate performance.     

The Landscape of Economic Growth: Do Middle-Income Countries Differ?

We review the growth experience of middle-income countries. Economic factors associated with growth appear to differ between middle-income and other countries. The efficiency of the financial system is importantly related to the growth rate in low- and middle-income countries, but appears to matter less as one moves up the income scale. Demographic variables also matter importantly in low-income countries. In middle-income countries, in contrast, measures of the financial system no longer appear to matter as importantly, as if inefficiencies in banking and financial systems are no longer as binding a constraint as at earlier stages of financial development; nor are demographic variables as important as before. At this point, other variables gain a growing role: these include whether the country experiences a banking or currency crisis, the extent of non-foreign direct investment capital inflows, and government debt as a share of gross domestic product.     

The performance of venture capital investments: Do investors overreact?

Using a unique proprietary data set of over 5400 realized and unrealized venture capital investments between 1980 and 2005, we examine the impact of demand-related factors, e.g. entrepreneurial activity, as well as supply-related factors, i.e. money provided by VC investors, on the return of individual VC investments. This way, we are able to shed more light on the question whether volatile VC investment returns are rather driven by fundamental changes with regard to the number of attractive investment opportunities or by the overreaction by investors. We find that rising demand for VC, i.e. an increase in entrepreneurial activity, results initially in higher returns. However, our results also indicate that overreaction on the supply side can be observed, destroying deal-level results. Overfunding, specifically overinvesting seems to be a recurring characteristic of the VC industry. In fact, contra-cyclical investment strategies yield highest deal-level returns.     

Bank efficiency and foreign ownership: Do good institutions matter?

This paper contributes to the literature on foreign ownership and bank efficiency by examining whether the efficiency of foreign banks depends on the institutional quality of the host country and on institutional differences between the home and host country. Using stochastic frontier analysis for a sample of 2095 commercial banks in 105 countries for the years 1998–2003, we find that foreign ownership negatively affects bank efficiency. However, in countries with good governance this negative effect is less pronounced. We also find that higher quality of the institutions in the home country and higher similarity between home and host country institutional quality reduce foreign bank inefficiency.