Bankruptcy,overlapping directors,and bank loan pricing

Using a sample of loan facilities borrowed by firms that share directors with bankrupt firms, this study investigates whether the overlapping directors are a transmission channel of the bankruptcy contagion effect in the bank loan market and, if so, what the underlying mechanism is. We find that firms are charged higher loan spreads in the period following the bankruptcy filing of a firm with a common director and that overlapping directors are a relevant channel for the bankruptcy contagion effect, in addition to other channels identified in literature. We also find that the negative contagion effect on loan pricing is most likely driven by the overlapping directors' reputation loss due to their involvement in bankruptcy events, and not by competing hypotheses, such as director distraction and director career concern/experience. Further analyses reveal that the adverse contagion impact on loan spreads is more pronounced when overlapping directors have greater influence over corporate policies or when their reputation is more seriously damaged. Meanwhile, the contagion effect is mitigated when interlocked firms have a higher-quality board. These results further support our evidence of the director reputation loss hypothesis. We strengthen the identification strategy to establish causality. In sum, our study identifies common directors as a channel of bankruptcy contagion effects on loan pricing and director reputation loss as an underlying mechanism.     

An Empirical Examination of Sponsor Influence over the Board of Directors

Investment funds have a unique organization structure in which a fund's board of directors frequently contracts the management of the fund with the fund's sponsor but has a fiduciary duty to act in the interest of the fund's shareholders with regard to decisions such as the shareholder fees charged by the sponsor to manage the fund. For a large sample of closed–end funds, my findings indicate that sponsors exert considerable influence over the board of directors through a variety of mechanisms such as the installation of a sponsor–affiliated board leader, director compensation from service on multiple boards for the sponsor, and control of the director selection process. Furthermore, my examination of closed–end premiums indicates that the market perceives that the absence of sponsor involvement in the director selection process is a credible signal that new directors are not "hand–picked" by the sponsor and that this attribute is positively priced by the market.     

Length of Board Tenure and Outside Director Independence

I posit and test two competing views on the significance of outside director tenure lengths; the expertise hypothesis suggesting that extended board service time is a sign of director commitment, experience, and competence and the management‐friendliness hypothesis suggesting that extended board service time marks directors who befriend management at the expense of shareholders. I find evidence that Senior directors, defined as directors with twenty or more years of board service, are almost twice as likely to occupy a 'management‐affiliated' profession compared to the rest, and that they are also more likely to staff the firm's nominating and compensation committees. Senior director participation in the compensation committee is associated with higher pay for the CEO, especially when the CEO is more powerful in the firm. These results are consistent with the management‐friendliness hypothesis, and highlight a need for setting term limits for directors.     

Mechanisms of Board Turnover: Evidence From Backdating

Regulators and governance scholars often regard the high rates of reelection among those nominated for boards of directors (and the small percentage of nominated directors who lose elections) as persuasive evidence of limited shareholder power. To correct this perceived imbalance against shareholders, some corporate governance advocates have undertaken a number of efforts to reform the director election system, most recently by proposing “proxy access” regulation to facilitate contested board elections. The authors take a close look at the board turnover within companies implicated in stock‐option backdating to assess the effectiveness of board elections. What they find is that, despite high reelection rates among nominated directors, board turnover is in fact substantial—but it takes place almost entirely before the board elections. Because of the apparently high costs associated with losing such an election, board nominees generally are not renominated for election (or reelection) unless success is quite likely. And whereas independent directors generally leave boards by not being renominated, management directors generally resign. For this reason, reelection rates tell us very little about the effectiveness of shareholder voting. But what the authors' findings do show is that directors involved in stock‐option backdating experience reductions in both the number and prestige of their future directorships. Thus, the authors' findings suggest that the board of director election process functions more effectively than shareholder advocates typically claim, that criticism of the responsiveness of the board‐election process to shareholder interests is overstated, and that reform efforts are therefore likely to be misplaced.     

Institutional investor distraction and earnings management

In this study, we explore the implications of institutional investor distraction for earnings management. Our identification approach relies on a firm-level measure of institutional investor distraction that exploits exogenous attention-grabbing shocks to unrelated parts of institutional investors' portfolios. We find that firms with distracted institutional shareholders engage more in both accrual-based and real earnings management. Further analyses show that the association between investor distraction and earnings management is stronger in firms with low analyst coverage and weak board monitoring, as well as in firms where managing earnings upward allows meeting or just beating their earnings target. Collectively, our results suggest that managers exploit the loosening in monitoring intensity resulting from investor distraction by engaging in earnings management. Even in the presence of institutional investors with superior monitoring abilities, limited attention may induce insufficient monitoring of earnings management practices.     

From watchdog to watchman: Do independent directors monitor a CEO of their own age?

We examine the impact of age similarity between independent directors and the CEO on earnings management. Using changes in independent director composition due to same-aged director deaths and retirements for identification, we find that firms with the presence of independent directors who have the same age with the CEO are more likely to manage earnings. We further find that age similarity between these two parties increases earnings management through lowering the effectiveness of board monitoring. Additionally, this positive impact decreases as the age gap widens, but intensifies if independent directors share other characteristics with the CEO, if independent directors sit on audit or nomination committees, if firms with lower information asymmetry and if CEOs are older. Our results are robust to alternative proxies of earnings management.     

Complementary relationship between female directors and financial literacy in deterring earnings management: The case of high-technology firms

We explore whether the presence of female directors on the boards of high-technology firms has an impact on the boards' monitoring and oversight of earnings management. Using difference-in-difference analyses, we utilize an exogenous change in Israel to examine the changes in, and the effects of, female director representation in constraining earnings management in a changing accounting environment that increased managers' ability to report earnings opportunistically. We find that a high representation of women on the board does not make an incremental contribution to the explanation of earnings management over and above the presence of a female director with financial literacy. However, the presence of one financially literate female director on the board does have a significant effect on restraining earnings management. Moreover, financially literate female directors are more effective than their financially literate male counterparts in deterring earnings management. Our results are robust to controlling for firm characteristics related to the selection of a woman to participate on the BOD as well as to the selection of a financially literate woman in particular. We conclude that financial literacy is complementary to female representation on the board in constraining earnings management. An important economic implication of our findings is that a regulatory move to increase the representation of women on corporate BODs should refer specifically to the inclusion of at least one woman with financial literacy on the board.     

Governance and Funds Allocation in United States Medical Research Charities

We examine boards of directors of medical research charities and find that medical charities spend less on program activities and more on fund-raising when the executive director of the charity serves on the board of directors, especially when the board is small. Executive salaries are also higher at charities where management is represented on the board. Management and general expenses and fund balances are, however, unrelated either to the presence of an insider on the board or to the size of the board.     

Independent directors’ board networks and controlling shareholders’ tunneling behavior

As one of the channels by which board directors build important relationships, board networks can affect the governance role of independent directors. Defining director board networks as their connections based on direct ties they establish when serving on at least one common board, this paper explores the role of the network centrality of independent directors in restraining tunneling behavior by controlling shareholders in the Chinese capital market. Our empirical evidence shows that tunneling behavior by controlling shareholders is negatively related to the network centrality of independent directors and that this relationship is stronger when non-operating fund occupation is used as the measure of tunneling. The results of our study show that board networks can help independent directors to restrain tunneling behavior by large shareholders, which plays a positive role in corporate governance.     

ACCRUAL MANAGEMENT TO MEET EARNINGS TARGETS: UK EVIDENCE PRE- AND POST-CADBURY

Central to both the Cadbury Committee’s initial remit and its subsequent recommendations is the view that director integrity and board effectiveness play key roles in ensuring the quality and reliability of published financial statements. Using a constant sample, this paper tests whether the association between board composition and earnings management activity differs between the pre- and post-Cadbury periods. Earnings management is measured by the use of income-increasing abnormal accruals when unmanaged earnings undershoot target earnings. Results provide evidence of accrual management to meet earnings targets in both periods. However, while we find no evidence of an association between the degree of accrual management and the composition of the board of directors in the pre-Cadbury period, results for the post-Cadbury period indicate less income-increasing accrual management to avoid earnings losses or earnings declines when the proportion of non-executive directors is high. These results are consistent with the view that appropriately structured boards are discharging their financial reporting duties more effectively post-Cadbury.     

Board composition after mergers,does it matter to target shareholders?

This paper examines whether post-merger board composition affects the premiums paid to target shareholders. Using a sample of 207 stock-for-stock mergers from 1996 to 2004, we show that target merger premiums vary inversely with target director representation on the post-merger board. We also provide some evidence that both inside and outside target directors may trade shareholder wealth for board seats in the combined firms. However, we do not find board ownership moderates the relation between target merger premiums and post-merger board composition. Consistent with previous studies of management incentives in mergers, our empirical evidence supports the non-perfect agency theory. That is, target directors may sacrifice target shareholder interests to obtain a seat on the post-merger board.     

Do directors perform for pay?

Many corporations reward their outside directors with a modest fee for each board meeting they attend. Using a large panel data set on director attendance behavior in publicly-listed firms for the period 1996–2003, we provide robust evidence that directors are less likely to have attendance problems at board meetings when board meeting fees are higher. This is surprising since meeting fees, on average roughly $1,000, represent an arguably small fraction of the total wealth of a representative director in our sample. Thus, corporate directors appear to perform for even very small financial rewards.     

Independent director incentives: Where do talented directors spend their limited time and energy?

We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally based on the directorship's relative prestige. When directors experience an exogenous increase in a directorship's relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced Chief Executive Officer departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors.     

Directors skill and financial reporting quality

Motivated by theoretical models in economics which show that there is matching between CEO skill and firm size, we introduce a new measure of director skill which is based on the aggregate size of firms on which the director serves as an independent director. We validate our measure by showing that it is positively associated with director experience, financial expertise, industry expertise and managerial experience. We then examine whether our average measure of skill across board members is positively associated with monitoring quality. Controlling for the endogenous relationships between board composition and financial reporting quality, we find a positive association between our board measure for skill and monitoring quality, and we show that directors have a causal impact on monitoring effort and outcomes. Furthermore, consistent with the enhanced monitoring provided by skilled directors, we document a positive association between the level of and changes in our measure and firm value.     

Does independent directors’’ monitoring affect reputation? Evidence from the stock and labor markets

Using novel data on independent directors’ opinions in China, we investigate the stock and labor market effects prompted by independent directors publicly saying “no” to major board decisions. We find that the market reacts negatively to modified director opinions, but positively to firms interlocked with the directors who said “no.” We further find substantial turnover and decline in board seats after independent directors issue modified opinions. Overall, we identify a dilemma in China whereby the labor market does not reward vigilant directors for standing up to firm insiders, although investors add a premium to effective board monitoring.     

The retention of directors on the audit committee following an accounting restatement

Prior research suggests that corporate directors suffer the loss of outside board positions following a financial reporting failure. This loss of board positions, however, does not occur at the same rate for all outside directors. To examine this apparent discrepancy between director actions and consequences, I examine whether the retention of individual directors on the audit committee is related to director characteristics and/or CEO influence over the board of directors. Results indicate that the retention of directors on the audit committee is positively related to the influence of the CEO and weakly related to the qualitative characteristics of the audit committee member. I then classify my sample of restatements based on their underlying cause and re-examine the retention of audit committee members at restating firms. Results suggest that the involvement of the CEO in the nominating process can affect the composition of the audit committee at firms where restatements are the result of intentional misapplications of GAAP.     

External Networking and Internal Firm Governance

We use panel data on S&P 1500 companies to identify external network connections between directors and CEOs. We find that firms with more powerful CEOs are more likely to appoint directors with ties to the CEO. Using changes in board composition due to director death and retirement for identification, we find that CEO‐director ties reduce firm value, particularly in the absence of other governance mechanisms to substitute for board oversight. Moreover, firms with more CEO‐director ties engage in more value‐destroying acquisitions. Overall, our results suggest that network ties with the CEO weaken the intensity of board monitoring.     

产品市场竞争、董事会结构与公司绩效——基于中国上市公司的实证分析

本文采用沪、深两市10大行业共计525个样本公司数据,对处于不同竞争度的产品市场的上市公司,就其董事会规模、独立董事比例、总经理与董事长是否两职合一与公司绩效间关系进行实证检验。结果表明:在不同竞争度的产品市场中,董事会发挥的治理功能也不相同。在产品市场竞争度低的行业中,由于外部市场监管不便或不利,客观上需要董事会发挥其应有的监管作用;而在产品市场竞争度高的行业中,市场能够起到较好的监督作用,董事会仅起到一定的辅助监管作用。从我国的实际情况来看,产品市场竞争度有待进一步提高,强化董事会的监管作用有利于完善公司治理,提高公司绩效。     

Choice of acquisition form in Australia and the post‐takeover employment of target firm directors on the acquiring firm board

In Australia, a corporate acquisition can be structured as either a scheme of arrangement or a takeover. We investigate the association between deal structure and the retention of target directors on the merged entity board. We find that the odds of a target director subsequently sitting on the merged entity's board are significantly higher in schemes. The results also show that premiums are lower in schemes of arrangement when additional target directors are appointed to the board of the acquiring firm. The findings indicate that target director appointment is unrelated to the merged entity's post‐acquisition performance.