Executive Turnover and Outside Directors on Two‐Tiered Boards

This paper examines the determinants of executive turnover on two‐tiered boards, emphasizing the monitoring role of supervisory board members with simultaneous outside directorships. Based on a unique sample of executives from large German firms, we find that outside supervisory board members generally increase executive turnover at the firms they monitor. This influence is especially pronounced when outside supervisory board members are simultaneously active as managers themselves and capital control is rather weak. These results suggest that external managers on supervisory boards enhance the monitoring intensity and substitute for weak capital control in the absence of large shareholders. Copyright © 2013 John Wiley & Sons, Ltd.     

Unionization and CEO turnover

This article investigates whether unions have power to influence turnover of poorly performing chief executive officers (CEOs). Employing the transparency coalition framework, we develop hypotheses regarding CEO tenure given unionization, performance-turnover sensitivity, and firm performance following CEO turnover. We use Cox regression and a data set of US firms from 1993 to 2013 to show that CEO turnover is accelerated at firms that unionize. Discontinuity analysis suggests that the relationship is causal. Overall, the results show the significance of unions in the key corporate governance event of CEO turnover and suggest that, though they may proceed independently and for their own traditional goals of good pay and job conditions for their members, unions can be allies of investors and boards or directors when it comes to removing underperforming CEOs.     

The role of the seller’s stock performance in the market reaction to divestiture announcements

Divestitures have the potential to create shareholder value. However, the extent of the market reaction should depend on the likelihood of finding more valuable uses for the divested assets or the ability on the part of the seller to eliminate negative synergies. We hypothesize that strong performers have less scope to achieve substantial improvements compared to poorly performing firms. Using the seller’s stock return in excess of the market return in the 1-year and 2-year periods preceding the divestiture announcement to expose the divesting firm’s inefficient use of its assets, we show that the market reaction to divestiture announcements is significantly higher for underperforming firms. The difference in abnormal returns can be as high as 4 %. In contrast, none of the accounting-based variables that have been used in previous studies are found to be significantly related to the announcement returns. These results suggest that the firm’s stock performance is a more useful indicator of the wealth effect associated with divestitures.     

Multiple directorships and the performance of mergers & acquisitions

The question of whether an outside director with multiple board seats creates value for a firm is a subject of continued debate in the corporate governance literature. Dozens of studies have investigated this linkage over the past decades. Unfortunately, the findings generated to date are inconclusive and contradictory. This study reconciles conflicting perspectives by synthesizing the existing insights and knowledge, and develops a new three-stage S-shaped curve proposition. We target firms’ merger and acquisition (M&A) activities to test this argument. The results show a consistent horizontal S-shaped relation between the number of directorships held per director and the wealth creation from corporate M&A investments before the enactment of the Sarbanes–Oxley Act of 2002. However, the negative relation at the highest directorship level turns insignificant in the post-SOX period, suggesting that the mandatory changes by SOX may mitigate the negative impact of overboarded directors. This study contributes to the on-going debate on the performance effect of multiple directorships by providing a more complete assessment of the full range of the advantages and disadvantages across different levels of directorships. The different association patterns found in the pre-/post-SOX periods further highlight the importance of factoring in regulative environmental change when making an inference about the effect of multiple directorships.     

Product market objectives and the formation of research joint ventures

In this paper we extend the existing literature on research and development (R&D) investments and research joint ventures (RJVs) in two important ways. First, we analyze and compare the case where firms collude in the product market to the benchmark case of competition in the output market. Second, we allow firms to form coalitions endogenously as a separate stage in the game. We develop profit functions that depend on the partition of firms into joint ventures and the nature of product competition between venture partners. Our results illustrate the restrictive nature of some assumptions made in the literature. Typically multiple RJVs of different sizes form in equilibrium. In general, RJVs should not be promoted if they entail product market collusion. Given the information available to policy‐makers, it is unlikely that an R&D policy more refined than analyzing and allowing RJVs on a case‐by‐case basis is feasible. Copyright © 1999 John Wiley & Sons, Ltd.     

Untangling the relationships among growth,profitability and survival in new firms

The performance of new firms is important for economic development but research has produced limited knowledge about the key relationships among growth, profitability, and survival for new firms. Based on evolutionary theory, we develop a model about how new firms resolve uncertainty about their ability to prosper in a market by monitoring changes in profitability. Our model predicts selection pressures to weed out underperforming firms and learning in order to allow survivors to improve performance and grow. We test our theory using a unique panel of knowledge-intensive new firms in Sweden. We find strong support for the notion that profitability enhances both survival and growth, and growth helps profitability but has a negative effect on survival. Implications are discussed.     

The Effect of Performance Standards on Health Care Provider Behavior: Evidence from Kidney Transplantation

Performance standards are designed to ensure a basic level of quality, and through public reporting of firm performance, encourage firms to compete on quality thus allowing the market to determine the optimal level of quality. In markets with substantial excess demand, however, demand effects may be insufficient to induce any change in firm behavior and enforcement may be required to ensure high quality. Even with enforcement, quality still may not improve at underperforming firms if gaming the system is less costly than improving quality. We test whether information alone or with regulatory enforcement improves outcomes or elicits gaming behavior in our study of 266 kidney transplant centers between 2001 and 2012. In a context of excess demand induced by price controls, we show that information alone has no impact and enforcement may actually increase market inefficiencies; firms respond to costly quality requirements, not by improving quality, but by reducing supply, which exacerbates the disequilibrium between supply and demand, and by cream‐skimming, which reduces access to transplantation among sicker patients.     

Competing Platforms

Why do competing platforms or networks exist? This paper focuses on instances where the value of a platform depends on the adoption decisions of a small number of firms, and analyzes the strategic competition among platforms to get this oligopolistic side on‐board. I study a bilateral contracting game among platforms and firms that allows for general externalities across both contracting and noncontracting partners, and examine when a market will sustain a single or multiple platforms. When firms can join only one platform, I provide conditions under which market‐tipping and/or market‐splitting equilibria may exist. In particular, even without coordination failure, congestion effects, or firm multihoming, multiple platforms can co‐exist in equilibrium despite being inefficient from the perspective of the contracting parties. Expanding the contracting space to include contingent contracts may exacerbate this inefficiency.     

Are institutional investors colluding with manipulators?

This paper examines the trading behavior of institutional investors in Taiwan before, during, and after a manipulation event and determines whether institutional investors benefit from their trading behavior during the period from the year 2000 to 2020. We find that stocks with a low turnover and small market capitalization are the main targets of price manipulators. In addition, the stock price of manipulated firms increases from the start date of the manipulation event, peaks at the end of the event, then falls after the event. Foreign institutions collude with manipulators to exaggerate stock prices for self-benefit. In contrast, securities dealers counter the trading behavior of manipulators and act as market stabilizers, causing them to suffer losses. Moreover, foreign institutions earn higher returns on stocks of manipulated firms with a low turnover during and soon after manipulation; however, they earn a higher return on stocks of manipulated firms with a high turnover in the long run after manipulation.     

Risk reporting and stock return in the UK: Does market competition Matter?

This study examines the extent to which market competition influences risk reporting practice. It also explores how market competition affects the usefulness of risk reporting. The automated textual analysis measures the level of risk reporting [how much to report] and its tone [how it is reported] of UK FTSE 350 firms. The abnormal stock return is used as a proxy for the usefulness of risk reporting. In contrast to the proprietary cost hypothesis, our results indicate that the level of risk reporting is a positive function of market competition. Besides, UK firms are likely to disseminate more (less) negative (positive) news about their risks when market competition increases. However, after examining the informativeness of this reporting, we provide evidence that the level of reported risk information does not significantly enhance the abnormal stock returns of UK firms. Nevertheless, the tone of the reported risks carries incremental information indicative of a firm’s abnormal stock return, especially when market competition decreases. The findings suggest that firms are likely to alleviate their proprietary costs by framing their reporting of risk information in a way that deters potential competitors from entering their market and that market competition diminishes the perceived informativeness of such reporting. The results provide implications for investors as they should not acknowledge the disclosure of higher risk information when asking for more corporate transparency, as it lacks informativeness. Besides, policymakers may impose extra compulsory requirements on the UK firms to avoid reporting overly optimistic risk news to protect investors and avoid the adverse effects of this reporting.     

Privatisation or Competition?

Market competition is essential for any economy to be efficient. In order to develop competition in a transition economy, it is conventionally thought that privatisation should take place first. This wisdom has been challenged by the Chinese reform experience of the last two decades, which modified the incentive structure of state enterprises and created markets and market competition in the absence of large scale privatisation. China's experience, however, raises the question of whether its chosen type of reform is sufficient to promote competition in a market dominated by public firms. To answer this, we need to know what kind of markets were created – regional markets closed to trade or unified markets with easy access – and whether or not improved incentives for state firms have led to competition. This paper investigates these questions on the basis of a survey of both theory and empirical evidence; and finds that the Chinese reform policies did succeed in stimulating competition among state firms.     

Executive succession as an antecedent to corporate restructuring

One of the most visible adjustments in company strategies in recent years was the dramatic increase in the level of corporate restructuring activity that took place during the 1980s. Strategic decisions that result in the realignment of firms with their environments are likely to be influenced by the composition of the top management team. This study found that firms experiencing non-routine executive succession events within the management team subsequently underwent more restructuring activity than did firms without non-routine executive turnover. These findings suggest that unexpected executive turnovers can significantly alter managerial perspectives within top teams and may thus provide an important mechanism by which firms adapt to their competitive environments. © 1995 by John Wiley & Sons, Inc.     

Market Reactions to the Regulation of Executive Compensation

Abstract

This paper investigates equity market reactions to the regulation of executive compensation. We exploit a natural experimental setting in Germany, where recent legislation introduces restrictions on the amount and on the components of board executive compensation packages, and invokes liability for the supervisory board in case of inappropriate remuneration arrangements. We use this exogenous shock to the contracting environment to infer market perceptions of the usefulness of the regulation. Using event study methodology, we investigate market reactions for the first-time announcement of regulatory intent and for a pooled sample of seven events leading to the adoption of the law act. We find weak evidence of an average negative market reaction to the proposed regulation. Multivariate analyses reveal that firms which were particularly affected by the regulation because board members received high abnormal remuneration experienced larger stock price discounts on average. Consistent with this, we find a positive relation between pay-performance sensitivity and the equity market reaction. Taken together, these findings indicate that the regulation was not considered beneficial from a shareholder perspective. This result is consistent with the market perceiving the regulation of executive compensation to impose potentially inefficient contractual arrangements for some firms.     

Multiple equilibria model with intrafirm bargaining and matching frictions

In this paper, we combine a matching model derived from Pissarides (2000) in the case of large firms with monopolistic competition on the product market and the model of intrafirm bargaining à la Stole and Zwiebel (1996). Moreover, we allow for increasing returns to scale in the aggregate production function leading to multiple equilibria. We study the dynamics of such a framework and propose numerical simulations. We show that labour market regulation can make unlikely the occurrence of the Pareto inferior equilibrium and that product market deregulation can have an effect on employment contrary to the expected result when the economy stands at this equilibrium. We give also some policy recommendations to reach the Pareto superior equilibrium when multiple equilibria exist.     

Product Market Competition,Skill Shortages and Productivity: Evidence from Canadian Manufacturing Firms

In this paper, we estimate the impacts of product market competition and skill shortages on the productivity level performance of Canadian manufacturing firms. We use firms perceptions of their competitive environment from the Statistics Canada 1999 Survey of Innovation to measure product market competition and skill shortages. We argue in the paper that such perceptions are important for productivity level performance. After controlling for other factors, we find that product market competition has a positive impact on the performance of medium-sized and large-sized firms, and that skill shortages have a negative impact on the performance of small-sized and medium-sized firms.Jel Classification: L0, O0     

Competition and innovation: The tango of the market and technology in the competitive landscape

Technology innovation can be a double‐edged sword in helping a firm to address competitive pressures. We explore the relationships among market competition, technology competition, and firms' advancement to a higher generation of production technology. Though market competition drives technology advancement as firms attempt to escape competition and technology competition also drives technology advancement as firms try to stay in the technology race, concurrent high market and technology competition lead a firm to defer advancement. We find supportive evidence with data on global flat panel display makers. Our findings shed light on how competition interacts with a firm's technology advancement decision and, in general, a firm's technology strategy.     

Is the Competitor of my Competitor also my Competitor?

This paper presents several results on multimarket competition. First, whenever a firm faces multimarket competitors that sell goods in markets to which the firm itself has no access, the firm gains a strong incentive to expand production in its own market(s). In the capacity choice model, such a firm builds larger than Cournot capacity and pushes its competitors towards other markets. Consumers always benefit from multimarket competition. In asymmetric market structures, some firms may also benefit from multimarket arrangements, but in symmetric ones, all firms are necessarily harmed by it. Second, the intensification of indirect competition is not necessarily bad for the firm. It may be the case that, the more competitors its competitors have, the higher the firm’s profit. Finally, this model also has a multiproduct interpretation which suggests that a merger of single‐product firms may be beneficial or harmful from a social welfare perspective, depending on whether the new entity will compete with several single‐product firms or another multiproduct one.     

Cash holding dynamics and competition intensity: Evidence from UK firms

Using a quasi-natural experiment and various measures of competition intensity, we examine whether an increase in product market competition is a key driver of firm cash holdings. We find that firms increase cash holdings when competition is intense. The results suggest that the degree of increase in cash holdings is magnified among firms exposed to high predatory threat and financing friction. In addition, we examine if increasing cash holdings offers a competitive advantage in the product market. Our results indicate that firms with large cash reserves make gains in market share at the expense of their rivals. Gains in the product market are more pronounced among firms with low exposure to predatory risk and financing frictions.     

Multiproduct Firms in Hotelling’s Spatial Competition

Oligopoly models are usually analyzed in the context of two firms, anticipating that market outcomes would be qualitatively similar in the case of three or more firms. The literature on Hotelling’s location‐then‐price competition is not an exception. In this paper, we show that the main finding of brand bunching in Hotelling’s duopoly no longer holds once three or more firms are allowed to enter the market. That is, in oligopoly with three or more firms, firms proliferate brands.     

Executive compensation and gender: S&;P 1500 listed firms

We examine if a gender gap persists in executive compensation and if the composition and the determinants of executive compensation for men versus women are the same for the S&P1500 listed firms during the period from 1992 to 2004. This analysis is also extended to high tech firms, where high scholarship is required both for male and female executives. The results reveal that the gender gap in executive compensation is reducing essentially after the year 2000. Also, the factors that explain the variation in executive compensation are not all the same for men and women. However, firms continue to pay women, who are considered more risk averse than men, a similar proportion of risky compensation components, such as stock options and restricted stocks, than they pay to men. In terms of technology firms, we find that the gender differences in total compensation are not statistically significant. Our study offers insight into recent data for executive compensation. The finding that the gender gap diminishes is a sign of a better functioning market for executives. Our findings could be potentially useful for compensation committees in order to develop compensation packages that take into consideration the degree of risk aversion in order to enhance performance. Compensation adjusted for risk aversion can produce a higher level of satisfaction for the employees and can lead to better performances. Future research should focus on international comparison of various dimensions of executive compensation.