Eco-efficiency and firm value

Eco-efficiency refers to a process that seeks to maximize the effectiveness of business processes while minimizing their impacts on the environment. Fundamental to eco-efficiency is adoption of a management philosophy that stimulates the search for environmental improvements that yield parallel economic benefits [President’s Council on Sustainable Development, 1996a. Sustainable America: A New Consensus for Prosperity, Opportunity, and a Healthy Environment. Government Printing Office, Washington DC; President’s Council on Sustainable Development, 1996b. Eco-efficiency: Task Force Report. Government Printing Office, Washington DC; World Business Council for Sustainable Development (WBCSD), 2000. Eco-efficiency: Creating More Value with Less Input. Geneva]. Eco-efficiency is increased by activities that create economic value while continuously reducing ecological impacts and the use of natural resources [DeSimone, L., Popoff, F., 1997. Eco-efficiency: The Business Link To Sustainable Development. MIT Press, Cambridge, MA]. This study empirically examines the proposition that implementation of eco-efficient business strategies is associated with higher firm value. We posit that, firms which adopt eco-efficient business strategies and, as a consequence, achieve reduced costs and increased profits should be more highly valued by the market than similar firms that do not adopt eco-efficient business strategies. Our empirical testing supports this proposition.     

Staggered boards,corporate opacity and firm value

We explore the effect of corporate opacity on the relation between staggered boards and firm value. We find that through mitigating takeover pressure, staggered boards become increasingly beneficial to firm value as opacity increases. In addition, we document that staggered boards reduce value only in transparent firms. Additional tests indicate that, as opacity increases, staggered boards bear an increasingly positive relation to research and development and CEO pay-performance sensitivity. Taken together, these results suggest that corporate opacity affects the value impact of takeover protection.     

Classified boards,firm value,and managerial entrenchment

This paper shows that classified boards destroy value by entrenching management and reducing director effectiveness. First, I show that classified boards are associated with a significant reduction in firm value and that this holds even among complex firms, although such firms are often regarded as most likely to benefit from staggered board elections. I then examine how classified boards entrench management by focusing on CEO turnover, executive compensation, proxy contests, and shareholder proposals. My results indicate that classified boards significantly insulate management from market discipline, thus suggesting that the observed reduction in value is due to managerial entrenchment and diminished board accountability.     

Board diversity,firm risk,and corporate policies

We examine the effects of diversity in the board of directors on corporate policies and risk. Using a multidimensional measure, we find that greater board diversity leads to lower volatility and better performance. The lower risk levels are largely due to diverse boards adopting more persistent and less risky financial policies. However, consistent with diversity fostering more efficient (real) risk-taking, firms with greater board diversity also invest persistently more in research and development (R&D) and have more efficient innovation processes. Instrumental variable tests that exploit exogenous variation in firm access to the supply of diverse nonlocal directors indicate that these relations are causal.     

Multiple founders and firm value

In this paper, we highlight the existence of multi-founder firms, which were founded by multiple individuals (with no family connections) who are still actively involved in the firm as directors and/or managers. These firms provide a unique setting to shed further light on the net valuation effects of founder involvement. In particular, multi-founder firms provide us with the opportunity to examine the benefits and costs to shareholders of multiple founders involved as directors, CEOs and managers in the same firm. Our analysis indicates that multi-founder firms are more valuable than all other types of firms, including single-founder firms and family firms, with the valuation premium positively related to the number of founders involved in the firm. Further analysis confirms that this valuation premium is linked to the direct involvement of the multiple founders as directors and CEOs. However, further founder involvement in vice president positions has a negative relationship with firm value.     

Blockholder dispersion and firm value

Multiple blockholder structures are a widespread phenomenon in the U.S. The theoretical literature, however, provides conflicting predictions on whether a single large blockholder or a set of dispersed smaller blockholders is better for firm value. Using U.S. data, we find a negative correlation between Tobin's Q and blockholder dispersion. The findings are robust to a wide variety of model specifications and controls and differ from results for other geographic regions such as Europe and Asia.     

Company name fluency,investor recognition,and firm value

Research from psychology suggests that people evaluate fluent stimuli more favorably than similar information that is harder to process. Consistent with fluency affecting investment decisions, we find that companies with short, easy to pronounce names have higher breadth of ownership, greater share turnover, lower transaction price impacts, and higher valuation ratios. Corporate name changes increase fluency on average, and fluency-improving name changes are associated with increases in breadth of ownership, liquidity, and firm value. Name fluency also affects other investment decisions, with fluently named closed-end funds trading at smaller discounts and fluent mutual funds attracting greater fund flows.     

Capital structure,equity ownership and firm performance

This paper investigates the relationship between capital structure, ownership structure and firm performance using a sample of French manufacturing firms. We employ non-parametric data envelopment analysis (DEA) methods to empirically construct the industry’s ‘best practice’ frontier and measure firm efficiency as the distance from that frontier. Using these performance measures we examine if more efficient firms choose more or less debt in their capital structure. We summarize the contrasting effects of efficiency on capital structure in terms of two competing hypotheses: the efficiency-risk and franchise-value hypotheses. Using quantile regressions we test the effect of efficiency on leverage and thus the empirical validity of the two competing hypotheses across different capital structure choices. We also test the direct relationship from leverage to efficiency stipulated by the Jensen and Meckling (1976) agency cost model. Throughout this analysis we consider the role of ownership structure and type on capital structure and firm performance.     

Board, audit committee and restatement-induced class action lawsuits

We examine the influence of monitoring provided by the board and audit committee on the probability of restatement-induced securities class action lawsuits using a sample of firms that have restated earnings in the period of 1997-2002. Logistic regression of the probability of restatement-induced class action lawsuits indicates a negative association between proportion of independent board members and the likelihood of restatement-induced class action lawsuits. We also find that when the market reacts more negatively to restatement announcements, shareholders are more likely to initiate a class action lawsuit. Finally, we document that restatement of revenues is positively associated with the likelihood of restatement-induced shareholder litigation. Our results are robust after controlling for the restatement initiator, restatements categorized as irregularities and Blue Ribbon Recommendations.     

Stock market liquidity and firm value

This paper investigates the relation between stock liquidity and firm performance. The study shows that firms with liquid stocks have better performance as measured by the firm market-to-book ratio. This result is robust to the inclusion of industry or firm fixed effects, a control for idiosyncratic risk, a control for endogenous liquidity using two-stage least squares, and the use of alternative measures of liquidity. To identify the causal effect of liquidity on firm performance, we study an exogenous shock to liquidity—the decimalization of stock trading—and show that the increase in liquidity around decimalization improves firm performance. The causes of liquidity's beneficial effect are investigated: Liquidity increases the information content of market prices and of performance-sensitive managerial compensation. Finally, momentum trading, analyst coverage, investor overreaction, and the effect of liquidity on discount rates or expected returns do not appear to drive the results.     

Managerial ownership dynamics and firm value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well and more likely to increase their ownership when their firms become financially constrained. When controlling for past stock returns, we find that large increases in managerial ownership increase Tobin's q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We rely on the dynamics of the managerial ownership/firm value relation to mitigate concerns in the literature about the endogeneity of managerial ownership.     

Dominant institutional owners and firm value

This research analyzes the impact of control by dominant institutional owners (banking institutions and investment funds) on firm value. The analysis considers the level of voting rights in the hands of the dominant institutional owner and other large shareholders. The results reveal a different effect on value depending on whether the dominant institutional investor is a banking institution or an investment fund. Moreover, the results show that the presence of other large shareholders affects firm value when a dominant institutional owner controls the firm.     

Executive stock options,differential risk-taking incentives,and firm value

The sensitivity of stock options' payoff to return volatility, or vega, provides risk-averse CEOs with an incentive to increase their firms' risk more by increasing systematic rather than idiosyncratic risk. This effect manifests because any increase in the firm's systematic risk can be hedged by a CEO who can trade the market portfolio. Consistent with this prediction, we find that vega gives CEOs incentives to increase their firms' total risk by increasing systematic risk but not idiosyncratic risk. Collectively, our results suggest that stock options might not always encourage managers to pursue projects that are primarily characterized by idiosyncratic risk when projects with systematic risk are available as an alternative.     

Audit committee composition and the use of an industry specialist audit firm

Independent, competent boards of directors and audit committees are said to be important mechanisms of corporate governance. The purpose of the present study is to empirically examine the association between audit committee composition and audit quality. Specifically, the link between the proportion of non‐executive directors on an audit committee, financial qualifications of directors and the number of audit committee meetings held in a year are investigated and expected to have a positive association with the quality of the audit firm used. Audit quality is proxied by industry specialization. The results support the link between a higher proportion of non‐executive directors on an audit committee and use of an industry specialist audit firm. Other measures of audit committee quality (those with a higher proportion of directors with financial qualifications and those that meet more frequently) are not significantly associated with the use of an industry specialist audit firm. Sensitivity analysis shows that the presence of an audit committee is linked to use of an industry specialist audit firm.     

CEO compensation structure and firm performance

The objectives of our study are to estimate a model of ‘efficient’ compensation structure based on firm characteristics and test the performance consequences of deviation from the efficient compensation structure. Our results are based on 3503 firm years for the period from 1999 to 2005. The results suggest that firms whose CEOs receive compensation inconsistent with their firm characteristics have a lower performance compared to those firms whose CEOs’ compensation is consistent with their firms’ characteristics. Our measure of performance is based on both accounting and market‐based performance measures. Overall, our study provides some important new insights into the links between CEO compensation structure and firm performance.     

The consequences of managerial indiscretions: Sex,lies, and firm value

Personal managerial indiscretions are separate from a firm's business activities but provide information about the manager's integrity. Consequently, they could affect counterparties’ trust in the firm and the firm's value and operations. We find that companies of accused executives experience significant wealth deterioration, reduced operating margins, and lost business partners. Indiscretions are also associated with an increased probability of unrelated shareholder-initiated lawsuits, Department of Justice and Securities and Exchange Commission investigations, and managed earnings. Further, chief executive officers and boards face labor market consequences, including forced turnover, pay cuts, and lower shareholder votes at re-election. Indiscretions occur more often at poorly governed firms where disciplinary turnover is less likely.     

Signaling firm value to active investors

Active investors provide risk-sharing and value-adding effort in form of advising, networking, monitoring, etc. This paper demonstrates a conflict between two key objectives for high-quality entrepreneurs: to elicit such investor effort and to signal the firm’s type by retaining shares. This conflict may give rise to stable (and economically meaningful) pooling equilibria for startup firms. More established firms, with access to multiple signals, can always realize both of these objectives but may still decide to forego investor effort if eliciting it would require them to deviate substantially from the cost-minimizing signal mix. In comparison with otherwise identical pure-exchange settings (with passive investors), we find that the potential for investors to be active always increases the signaling cost in case of noncontractible investor effort, whereas the effect is ambiguous if investor effort is contractible. At the same time, we identify conditions under which signaling is welfare-enhancing as it helps guide investors’ effort towards more promising ventures.     

Insider ownership and firm value in New Zealand

The relationship between insider stock ownership and firm value is examined for a sample of publicly traded companies in New Zealand. Results in this study confirm earlier findings of a curvilinear relationship reported for larger markets. Insider ownership and firm value are positively related for ownership levels below 14% and above 40% and inversely related at intermediate levels of ownership. These results are fairly robust to different measures of firm performance (Tobin's q, market to book ratio and return on equity) and to several different estimation techniques such as ordinary least squares, two stage least squares, seemingly unrelated regressions and fixed effects regressions on panel data over 1994–1998. Findings in this study contribute to the growing body of international evidence that the non-linear cubic relationship between insider ownership and firm value is robust to differences in governance structures across markets.