The Young and the Restless: A Study of Age and Acquisition Propensity of CEOs of UK Firms

Using a large sample of CEOs of UK firms, we show that CEO age is a key determinant of acquisition activity. We find that younger CEOs are more likely to acquire another firm and spend more on large capital expenditures. We argue that while younger CEOs of both UK and US firms undertake more acquisitions than their older peers, their motivations for acquisitions might differ. We find that the stock market perceives acquisitions by younger CEOs to be of a higher quality. Following previous studies, we use CEO tenure as a proxy for reputation, and find that large acquisitions enhance CEO reputation, especially for younger CEOs. In contrast to the previous findings for CEOs of US firms, we determine that the compensation of CEOs in the UK does not increase after acquisitions. This absence of a compensation incentive for CEOs of UK firms is consistent with the idea that the UK compensation structure is more restrictive and has a smaller equity‐based component. Our evidence is also inconsistent with an overconfidence effect. Overall, our results provide consistent evidence of executive signaling by younger CEOs of UK firms eager to distinguish themselves.     

Mandatory CSR disclosure,monitoring and investment efficiency: evidence from China

This study investigates the effect of mandatory corporate social responsibility (CSR) disclosure on firms’ investment efficiency in China. Using the CSR regulation that mandates a group of listed firms to disclose stand‐alone CSR reports after 2008 as a natural experiment, we find that firms subject to the mandatory CSR regulation have decreased investment inefficiency subsequent to the mandate, especially in cases of overinvestment. This effect is more pronounced for firms with a control‐ownership wedge, state‐owned enterprises (SOEs), and firms having lower institutional ownership. Further analyses find that the reduction of overinvestment is much more significant in industries with high pollution and that the reduction in investment is not due to the CSR spending siphoning off capital used in other projects. We argue that mandatory corporate social responsibility disclosure improves monitoring over firms in China, especially when firms are characterised as having severe agency problems.     

Terrorist attacks and corporate investment: The beneficial value of CEO overconfidence

This study examines whether terrorist attacks influence corporate investments and firm value. We expect that overconfident CEOs can mitigate the underinvestment problem caused by terrorist attacks because they overestimate the returns on investment. Using measures of terrorist attack proximity in the U.S., we find that firms with non-overconfident CEOs significantly decrease their investment growth when terrorist attacks affect them, while firms with overconfident CEOs do not. Consequently, the impact of terrorist attacks on firm value varies between firms with overconfident and non-overconfident CEOs. Overall, this study suggests that CEO overconfidence can benefit shareholder value under certain conditions, such as terrorist attacks.     

Are Overconfident CEOs Better Innovators?

Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms hire overconfident managers. Theoretical research suggests a reason: overconfidence can benefit shareholders by increasing investment in risky projects. Using options‐ and press‐based proxies for CEO overconfidence, we find that over the 1993–2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development expenditures. However, overconfident managers achieve greater innovation only in innovative industries. Our findings suggest that overconfidence helps CEOs exploit innovative growth opportunities.     

Segment Disclosure Transparency and Internal Capital Market Efficiency: Evidence from SFAS No. 131

Using the adoption of SFAS 131, I examine the effect of segment disclosure transparency on internal capital market efficiency. SFAS 131 requires firms to define segments as internally viewed by managers, thereby improving the transparency of managerial actions in internal capital allocation. I find that diversified firms that improved segment disclosure transparency by changing segment definitions upon adoption of SFAS 131 experienced an improvement in capital allocation efficiency in internal capital markets after the adoption of SFAS 131. In addition, I find that the improvement in internal capital market efficiency was greater for firms that suffered more severe agency problems before the adoption of SFAS 131 and also for firms whose managers faced stronger incentives to improve efficiency after the adoption of SFAS 131. My results suggest that more transparent segment information can help resolve agency conflicts in the internal capital markets of diversified firms, thus improving investment efficiency.     

The dark side of CEO ability: CEO general managerial skills and cost of equity capital

CEOs with substantial general managerial ability (generalist CEOs) possess a substantial share of organization (human) capital and have different risk-taking incentives than do their counterpart specialist CEOs. Using an index increasing in CEO general managerial skills as a proxy for general managerial ability, we find that investors require higher returns from firms featuring CEOs who have profuse general managerial ability. Furthermore, expected returns are significantly increasing with CEO general managerial ability in firms with high organization capital, that belong to M&A-intensive industries and that have complex operations, high agency problems and high anti-takeover provisions. These findings are consistent with arguments that organization (human) capital has significant expected return implications and that CEOs with higher general managerial skills may lead to higher agency problems, feature different risk-taking incentives and be more costly to retain in times of need.     

The power of the pen reconsidered: The media,CEO human capital,and corporate governance

By examining the post-retirement outside board seats held by former CEOs of S&P 1500 firms, we find that CEOs’ post-retirement outside board memberships are influenced by the level and the tone of media coverage given to the CEOs’ firms while the CEOs were “on the job.” These results provide evidence of a direct economic link between media coverage of CEOs’ performance today and CEOs’ future opportunity sets. These results lend support to the proposition that the media can play a role in corporate governance by influencing the value of CEOs’ human capital.     

The Determinants of Long‐Term Corporate Debt Issuances

A significant proportion of the debt issued by investment‐grade firms has maturities greater than 20 years. In this paper we provide evidence that gap‐filling behavior is an important determinant of these very long‐term issues. Using data on individual corporate debt issues between 1987 and 2009, we find that gap‐filling behavior is more prominent in the very long end of the maturity spectrum where the required risk capital makes arbitrage costly. In addition, changes in the supply of long‐term government bonds affect not just the choice of maturity but also the overall level of corporate borrowing.     

Short‐Term Debt as Bridge Financing: Evidence from the Commercial Paper Market

We analyze why firms use nonintermediated short‐term debt by studying the commercial paper (CP) market. Using a comprehensive database of CP issuers and issuance activity, we show that firms use CP to provide start‐up financing for capital investment. Firms’ CP issuance is driven by a desire to minimize transaction costs associated with raising capital for new investment. We show that firms with high rollover risk are less likely to enter the CP market, borrow less CP, and borrow more from bank credit lines. Further, CP is often refinanced with long‐term bond issuance to reduce rollover risk.     

Does stardom affect the informativeness of a CEO's insider trades?

This study examines whether the celebrity or star status of a chief executive officer (CEO) affects the informativeness of his insider trades. Using three different measures to identify star CEOs in a sample of S&P 1500 firms, we find that trades of non‐star CEOs predict future abnormal returns and earnings innovations and that trades of star CEOs do not. The predictive power of non‐star CEO trades is mostly attributable to opportunistic trades, not routine trades. We also find evidence suggesting that the abnormal returns associated with non‐star CEO insider trades are due to the lower visibility and consequently less scrutiny of non‐star CEOs compared with star CEOs.     

The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage

We study the causal effects of analyst coverage on corporate investment and financing policies. We hypothesize that a decrease in analyst coverage increases information asymmetry and thus increases the cost of capital; as a result, firms decrease their investment and financing. We use broker closures and broker mergers to identify changes in analyst coverage that are exogenous to corporate policies. Using a difference‐in‐differences approach, we find that firms that lose an analyst decrease their investment and financing by 1.9% and 2.0% of total assets, respectively, compared to similar firms that do not lose an analyst.     

The Impact of Mandatory International Financial Reporting Standards Adoption on Investment Efficiency: Standards,Enforcement, and Reporting Incentives

This paper investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) is followed by a decline in firms’ suboptimal investments. On average, we find that the probability of under‐investment in capital expenditure declines for firms from 23 countries requiring mandatory adoption of IFRS relative to firms from countries that do not have such requirements; meanwhile the probability of over‐investment remains unchanged. However, this real effect becomes smaller when we control for concurrent changes to the enforcement of financial reporting along with the introduction of IFRS in some countries, suggesting that the switch in standards is only one of the drivers for the observed benefits. Moreover, we find that the reduction in suboptimal investments is driven by firms with high reporting incentives to provide transparent financial reports from countries where the existing legal and enforcement systems are strong. We further show that the real effect increases with the predicted changes in accounting comparability. Finally, we find that after mandatory IFRS adoption, capital investment becomes more value‐relevant, less sensitive to the availability of free cash flows, and more responsive to growth opportunities. Our findings provide new insights into the real effects of mandatory IFRS adoption.     

CEO Overconfidence and Corporate Investment

We argue that managerial overconfidence can account for corporate investment distortions. Overconfident managers overestimate the returns to their investment projects and view external funds as unduly costly. Thus, they overinvest when they have abundant internal funds, but curtail investment when they require external financing. We test the overconfidence hypothesis, using panel data on personal portfolio and corporate investment decisions of Forbes 500 CEOs. We classify CEOs as overconfident if they persistently fail to reduce their personal exposure to company‐specific risk. We find that investment of overconfident CEOs is significantly more responsive to cash flow, particularly in equity‐dependent firms.     

CEO Preferences and Acquisitions

This paper explores the impact of target CEOs’ retirement preferences on takeovers. Using retirement age as a proxy for CEOs’ private merger costs, we find strong evidence that target CEOs’ preferences affect merger activity. The likelihood of receiving a successful takeover bid is sharply higher when target CEOs are close to age 65. Takeover premiums and target announcement returns are similar for retirement‐age and younger CEOs, implying that retirement‐age CEOs increase firm sales without sacrificing premiums. Better corporate governance is associated with more acquisitions of firms led by young CEOs, and with a smaller increase in deals at retirement age.     

Enforceability of non-compete covenants,discretionary investments,and financial reporting practices: Evidence from a natural experiment

Non-compete covenants are widely used in employment contracts to promote employee stability. Using legal amendments of non-compete enforceability as a natural experiment, we find that as non-compete enforceability increases, firms display an increased likelihood of meeting short-term earnings benchmarks, lower discretionary expenditures, and declining future performance. These effects are more pronounced when CEOs have lower ability or shorter tenures, and when firms have more growth opportunities or operate in localized industries. Our results suggest that managers actively adapt investment and financial reporting practices to the changing environment that affects their contractual relations with firms.     

Characterizing the Risk of IPO Long‐Run Returns: The Impact of Momentum,Liquidity, Skewness,and Investment

We study 6,686 initial public offerings (IPOs) spanning the period 1981‐2005 and find that the new issues puzzle disappears in a Fama‐French three‐factor framework. IPOs do not underperform in the aftermarket on a risk‐adjusted basis and do not underperform a matched sample of nonissuers. IPO underperformance is concentrated in the 1980s and early 1990s, and IPOs either perform the same as the market or outperform on a risk‐adjusted basis from 1998 to 2005. We find that outperformance in the later period is driven by large firms. Factors for momentum, investment, liquidity, and skewness help to explain aftermarket returns, although size and book‐to‐market tend to proxy for skewness. IPO investors receive smaller expected returns due to negative momentum and investment exposure and in exchange for higher liquidity.     

Why Do Canadian Firms Cross‐list? The Flip Side of the Issue

We investigate the relation between managerial incentives and the decision to cross‐list by comparing Canadian firms cross‐listed on US stock exchanges to industry‐ and size‐matched control firms. After controlling for firm and ownership structure characteristics, we find a positive association between substantial holdings of vested options held by CEOs prior to cross‐listing and the decision to cross‐list. Further, firms managed by CEOs with substantial holdings of vested options exhibit positive announcement returns and negative post‐announcement long‐run returns. CEOs of cross‐listed firms seem to take advantage of the aforementioned market behaviour, because they abnormally exercise vested options and sell the proceeds during the year of listing only when their firms underperform during the subsequent year. In addition, there is a positive relation between substantial holdings of vested options and discretionary accruals during the year of listing, consistent with the view that CEOs manage earnings to keep stock prices at high levels. Overall, these results have significant implications for the cross‐listing literature, suggesting an association between cross‐listing and CEO incentives to maximize CEO private benefits.     

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.     

Law,Stock Markets,and Innovation

We study a broad sample of firms across 32 countries and find that strong shareholder protections and better access to stock market financing lead to substantially higher long‐run rates of R&D investment, particularly in small firms, but are unimportant for fixed capital investment. Credit market development has a modest impact on fixed investment but no impact on R&D. These findings connect law and stock markets with innovative activities key to economic growth, and show that legal rules and financial developments affecting the availability of external equity financing are particularly important for risky, intangible investments not easily financed with debt.     

Family Control and Financing Decisions

This study uses a comprehensive European dataset to investigate the role of family control in corporate financing decisions during the period 1998–2008. We find that family firms have a preference for debt financing, a non‐control‐diluting security, and are more reluctant than non‐family firms to raise capital through equity offerings. We also find that credit markets are prone to provide long‐term debt to family firms, indicating that they view their investment decisions as less risky. In fact, our empirical results demonstrate that family firms invest less than non‐family firms in high‐risk, research and development (R&D) projects, but not in low‐risk, fixed‐asset capital expenditure (CAPEX) projects, suggesting that fear of control loss in family firms deters risk‐taking. Overall, our findings reveal that the external financing (and investment) decisions of family firms are in greater (lesser) conflict with the interests of minority shareholders (bondholders).