Large Shareholders,the Board of Directors and the Allocation of Cash Proceeds from Corporate Asset Sell‐offs

Recent finance literature suggests that managers of divesting firms may retain cash proceeds from corporate asset sell‐offs in order to pursue their own objectives, and, therefore, shareholders' gains due to these deals are linked to a distribution of proceeds to shareholders or to debtholders. We add to this literature by examining the role of various corporate governance mechanisms in the context of the allocation of sell‐off proceeds. Specifically, we examine the impact of directors' share‐ownership and stock options, board composition and external large shareholdings on (1) shareholders' abnormal returns around asset sell‐off announcements, and (2) managers' decision to either retain or distribute (to shareholders or to debtholders) sell‐off proceeds. We find that non‐executive directors' and CEO's share‐ownership and stock options are related to shareholders' gains from sell‐offs for firms that retain proceeds. However, corporate governance mechanisms are not significantly related to shareholders' gains for firms that distribute sell‐off proceeds. Furthermore, we find that the likelihood of a distribution of proceeds, relative to the retention decision, is increasing in large institutional shareholdings, executive and non‐executive directors' share‐ownership and non‐executive representation in the board.     

Risk Shifts Following Sarbanes‐Oxley: Influences of Disclosure and Governance

The Sarbanes‐Oxley Act of 2002 (SOX) aimed to improve financial reporting by enhancing corporate disclosure and governance. We find statistically significant increases, from before to after the passage of SOX, in total return variance, market risk and idiosyncratic risk. The risk increases are consistent with predictions that the legislation would cause firms to disclose more negative information, resulting in increased investment risk. However, in cross‐sectional tests, post‐SOX improvements in information certainty, board independence and monitoring are associated with smaller increases or greater decreases in risk. If SOX is responsible for these improvements, its effects are consistent with its purpose.     

Determinants of bond tender premiums and the percentage tendered

We analyze a large sample of US corporate bond tender offers to understand what affects tender premiums as well as the percentage of bonds tendered. For the average (median) tender offer, the tender price is 5.55% (3.24%) greater than the pre-tender market price while the percentage of bonds tendered is 82.3% (94.6%). Premiums offered by firms are greater when the firm is simultaneously soliciting consents to amend restrictive covenants and when the bond has a greater number of restrictive covenants. Premiums are also greater when long-term risk-free yields are low and the yield curve is flatter – conditions where a firm might want to lock in favorable long-term rates by issuing new debt and retiring old debt. Bondholders respond to higher tender premiums by tendering a greater percentage of their bonds – a 1% increase in tender premium increases the tendering rate by approximately 9%. Bondholders also tender a greater percentage of bonds possessing less desirable characteristics such as a short remaining maturity or bonds that are simultaneously undergoing consent solicitations. Finally, we find that tender offers are easier to complete when bond ownership concentration is greater.     

Ownership and the Value of Political Connections: Evidence from China

Research has found that political connectedness can have both positive and negative effects on firm value. To resolve these mixed findings, we investigate the impact of political ties conditional on ownership for a sample of Chinese firms over the period 1999–2006. We find that private firms with politically connected managers have a higher value and obtain more government subsidies than those without connected managers, whereas local state‐owned enterprises with connected managers have a lower value and employ more surplus labour than those without connected managers. Our results indicate that the effect of political ties is subject to firm ownership.     

Liability Risk for Outside Directors: a Cross‐Border Analysis

Much has been said recently about the risky legal environment in which outside directors of public companies operate, especially in the USA, but increasingly elsewhere as well. Our research on outside director liability suggests, however, that directors’ fears are largely unjustified. We examine the law and lawsuit outcomes in four common law countries (Australia, Canada, Britain, and the USA) and three civil law countries (France, Germany, and Japan). The legal terrain and the risk of ‘nominal liability’(a court finds liability or the defendants agree to a settlement) differ greatly depending on the jurisdiction. But nominal liability rarely turns into ‘out‐of‐pocket liability,’ in which the directors pay personally damages or legal fees. Instead, damages and legal fees are paid by the company, directors’ and officers’(D&O) insurance, or both. The bottom line: outside directors of public companies face a very low risk of out‐of‐pocket liability. We sketch the political and market forces that produce functional convergence in outcomes across countries, despite large differences in law, and suggest reasons to think that this outcome might reflect sensible policy.     

Corporate Governance and the Goal of the Firm: In Defense of Shareholder Wealth Maximization

This essay is based on my keynote address at the 2016 annual meeting of the Eastern Finance Association. I propose that misunderstandings about the traditional model of corporate governance, with its emphasis on shareholder wealth maximization, contribute to negative societal attitudes about corporations. I discuss the implications of shareholder wealth maximization for other corporate stakeholders, the dangers of deviating from shareholder wealth maximization, and the roles that the media and the government play in the governance of corporations.     

A Breakdown of the Valuation Effects of International Cross‐listing*

It is well known that cross‐listing domestic stocks in foreign exchanges has significant valuation effects on the listed company's shares. Using a sample of firms with dual shares, we explore the differential effects of cross‐listing on prices and we are able to separate the different sources of the benefits of cross‐listing. These sources include market segmentation, liquidity, and the bonding of controlling shareholders to lower expropriation of firm resources. Our results show that even though the market segmentation and bonding effects are both statistically significant, the economic significance of segmentation is more than double that of bonding. Furthermore, we document an economically and statistically significant increase in the liquidity of both share classes after the listing. Overall, our results explain why less and less firms are willing to list in the USA: Sarbanes Oxley has increased the cost of adopting better governance while its benefits are not substantial; and market segmentation has decreased significantly in the last years.     

Management Going‐concern Disclosures: Impact of Corporate Governance and Auditor Reputation

The UK regulatory requirements relating to going‐concern disclosures require directors to report on the going‐concern status of their firms. Such directors have incentives not to report fairly in the case of financially‐distressed firms. We expect effective corporate governance mechanisms will encourage directors to report more truthfully in such situations. This paper tests this proposition explicitly using a large sample of going‐concern cases over the period 1994–2000. We find that whereas auditors' going‐concern opinions predict the subsequent resolution of going‐concern uncertainties directors' going‐concern statements convey arbitrary and unhelpful messages to users. However, robust corporate governance structures and high auditor reputation constrain directors to be more truthful in their going‐concern disclosures, bringing these more into line with the more credible auditor opinions.     

It is a Sweetheart of a Deal: Political Connections and Corporate‐Federal Contracting

We examine whether political connections measured by political contributions influence the choice of terms included in government contracts awarded to firms. We construct an index of four “sweetheart” contract terms and find that firms making larger political contributions more frequently have these favorable terms included in their contracts. We also find that political contributions have explanatory power for contract design after controlling for lobbying, negotiation power, and the employment of former government employees. These results are robust to alternative model specifications, different estimation techniques, various variable measurements, and adjustments for possible endogeneity.     

Equity‐Based Incentives,Risk Aversion,and Merger‐Related Risk‐Taking Behavior

We find that post‐merger equity risk is negatively related to the sensitivity of CEO wealth to stock return volatility (vega), but is concentrated in CEOs with high proportions of options and options that are more in‐the‐money. The probability of industrial diversification also increases in vega. Additional tests show that the decline in post‐merger equity risk results in a significant decrease in shareholder wealth. This decrease is concentrated among firms with CEOs having the highest delta and the highest delta and vega. Our results suggest that the increased convexity provided by option‐based compensation does not necessarily increase risk‐taking behavior by CEOs.     

Long‐Run Stock Performance and Its Determinants for Asset Buyers

This paper examines the long‐term stock performance of asset purchasers and the determinants of cross‐sectional differences in performance. Our findings show that buyers’ stocks, on average, underperform following purchases. Buy‐and‐hold abnormal returns of buyers acquiring related assets are significantly higher than those acquiring unrelated assets, consistent with the focus hypothesis. Asset buyers with superior prior stock performance experience poorer long‐run performance than buyers with inferior prior stock performance, consistent with the prior performance hypothesis. Asset buyers that manage earnings upward, experience poorer long‐term abnormal stock performance than acquirers with downward earnings management, consistent with the earnings management hypothesis. The long‐term return evidence is to some degree consistent with the governance hypothesis but we find little support for the free cash flow hypothesis.     

Determinants of Sovereign Wealth Fund Cross‐Border Investments

Using a sample of 1,590 purchases of stock by sovereign wealth funds (SWFs) in listed firms in 78 target countries between 1985 and 2011, we study the country‐level determinants of SWF cross‐border investment. We find that SWFs from countries with high levels of openness and economic development, but with less developed local capital markets, will make more cross‐country transactions, while target countries with higher levels of investor protection and more developed capital markets will attract more SWF investment. Our findings support the investment facilitation hypothesis, suggesting that SWFs act purely or principally as commercial investors facilitating cross‐border corporate investment.     

The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis

We analyze the roles of bank ownership, management, and compensation structures in bank failures during the recent financial crisis. Our results suggest that failures are strongly influenced by ownership structure: high shareholdings of lower‐level management and non‐chief executive officer (non‐CEO) higher‐level management increase failure risk significantly. In contrast, shareholdings of banks’ CEOs do not have a direct impact on bank failure. These findings suggest that high stakes in the bank induce non‐CEO managers to take high risks due to moral hazard incentives, which may result in bank failure. We identify tail risk in noninterest income as a primary risk‐taking channel of lower‐level managers.     

Corporate Governance and Asset Sales: The Effect of Internal and External Control Mechanisms

We investigate firms that sell assets to determine whether corporate governance mechanisms are effective at controlling agency problems. Our evidence shows that these firms have lower managerial ownership and are more likely to make unrelated acquisitions, suggesting weak internal controls. Analysis of insider trading activity shows that, on average, net buying increases before the asset sale and shareholders benefit more when this occurs. Results suggest that how managers reach a given level of ownership provides more information about incentive alignment than just the level of ownership. Our results also highlight the dynamic nature of corporate restructuring as firms acquire and then sell assets.     

The Long‐Term Effect of the Sarbanes‐Oxley Act on Cross‐Listing Premia

This paper uses a triple difference approach to assess whether the adoption of the Sarbanes‐Oxley Act predicts long‐term changes in cross‐listing premia of affected foreign firms. I measure cross‐listing premia as the difference between the Tobin's q of a cross‐listed company and a non‐cross‐listed company from the same country matched on propensity to cross‐list (first difference). I find that average premia for firms cross‐listed on levels 2 or 3 (subject to SOX) declined in the year of SOX adoption (2002) and remained significantly below their pre‐SOX level through year‐end 2005 (second difference). Firms listed on levels 2 or 3, which are subject to SOX, experienced larger declines in premia than firms listed on levels 1 or 4, which are not subject to SOX (third difference). The estimated decline is 0.15–0.20 depending on specification. Riskier firms and firms from high‐disclosing and high‐GDP countries suffered larger post‐SOX declines. Firm size predicts smaller declines in premia in well‐governed countries. Faster‐growing firms in poorly‐governed countries experienced smaller declines in premia. The results are robust to the use of different before‐and‐after periods; the use of annual, quarterly, or monthly data; the use of individual companies' Tobin's q's instead of matched pairs, and different regression specifications. The overall evidence is consistent with the view that SOX negatively affected cross‐listed premia, and particularly hurt riskier firms and firms from well‐governed countries, while perhaps helping high‐growth firms from poorly‐governed countries. At the same time, after‐SOX, level‐23 firms continue to enjoy a substantial premium, estimated at about 0.32.     

It Takes Two: The Incidence and Effectiveness of Co‐CEOs

This study examines the phenomenon of co‐CEOs within publicly traded firms. Although shared executive leadership is not widespread, it occurs within some very prominent firms. We find that co‐CEOs generally complement each other in terms of educational background or executive responsibilities. Our results show that firms most likely to appoint co‐CEOs have lower leverage, a more limited firm focus, less independent board structure, fewer advising directors, lower institutional ownership, and greater levels of merger activity. The governance structure of co‐CEO firms suggests that co‐CEOships can serve as an alternative governance mechanism, with co‐CEO mutual monitoring substituting for board or external monitoring and co‐CEO complementary skills substituting for board advising. An event study indicates that the market reacts positively to appointments of co‐CEOs while a propensity score analysis shows that the presence of co‐CEOs increases firm valuation.     

Managerial Behavior and the Link between Stock Mispricing and Corporate Investments: Evidence from Market‐to‐Book Ratio Decomposition

We examine the impact of mispricing on corporate investments and its components: capital expenditures, research and development, acquisitions, and asset sales. By decomposing the market‐to‐book ratio into mispricing and growth components, we show that corporate investments are linked to mispricing through market‐timing and catering, after controlling for growth and financial slack. This investment‐mispricing link is more pronounced in financially constrained firms and in firms with short‐horizon shareholders. Overall, our study indicates that the sensitivity of investments to mispricing is a function of the nature of mispricing, the type of investment, and the firm's characteristics.     

Does the type of ownership control matter? Evidence from China’s listed companies

By tracing the identity of large shareholders, we group China’s listed companies into those controlled by state asset management bureaus (SAMBs), state owned enterprises (SOEs) affiliated to the central government (SOECGs), SOEs affiliated to the local government (SOELGs), and Private investors. We argue that these distinct types of owners have different objectives and motivations and this will affect how they exercise their control rights over the firms they invest in. In particular, we contend that private ownership of listed firms in China is not necessarily superior to certain types of state ownership. To test our arguments we investigate the relative efficiency of state versus private ownership of listed firms and the efficiency of various forms of state ownership. The empirical results indicate that the operating efficiency of Chinese listed companies varies across the type of controlling shareholder. SOECG controlled firms perform best and SAMB and Private controlled firms perform worst. SOELG controlled firms are in the middle. The results are consistent with our predictions.     

Director–Liability–Reduction Laws and Conditional Conservatism

We study nonofficer directors’ influence on the accounting conservatism of U.S. public firms. Between 1986 and 2002, all 50 U.S. states enacted laws that limited nonofficer directors’ litigation risk but often left officer directors’ litigation risk unchanged. We find that conditional conservatism decreased after the staggered enactments of the laws, which we attribute to less nonofficer director monitoring of financial reporting in affected firms. Conservatism fell less when shareholder or debtholder power was high, consistent with major stakeholders moderating the influence of nonofficer directors. We verify that our results stem from reductions in the asymmetric timeliness of accruals and, specifically, its current assets components. We also show that affected firms switched away from Big N auditors more often, which reduced these firms’ commitment to conservative financial reports.