04 Managerial (MAN)
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ItemDoes Socially Responsible Investing Change Firm Behavior?( 2021)Socially responsible investment (SRI) funds are increasing in popularity. Yet, it is unclear if these funds improve corporate behavior. Using novel micro-level data, we find that SRI funds select firms with higher environmental and social standards: the firms they hold exhibit lower pollution, greater board diversity, higher employee satisfaction, and higher workplace safety. Yet, using an exogenous shock to SRI capital, we find no evidence that SRI funds improve firm behavior. The results suggest SRI funds invest in a portfolio consistent with the fund's objective, but they do not significantly improve corporate conduct.
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ItemOutside investor access to top management: market monitoring versus stock price manipulation( 2021)This paper studies the role of voluntary disclosure in crowding out independent research about firm value. In the model, when inside firm owners make it easier for outside investors to obtain inexpensive biased information from the manager, then investors rely less on costly unbiased research. As a result, managers are tempted to manipulate the firm stock price more, but investors are better informed because they anticipate manager manipulation. An increase in stock-price informativeness, therefore, has to be traded off against an increase in resources wasted on manipulation. I find that, surprisingly, firm owners grant investors more access to managers that manipulate more strongly. An implication is that the firm cost of capital is negatively related to manager manipulation.
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ItemAn Examination of Firm-Manager Match Quality in the Executive Labor Market( 2021)We use a three way mixed-effects model to quantify firm-manager match effects in executive compensation, and find that unobservable match heterogeneity explains a considerable proportion of the compensation variation. Firms compensate managers for productivity generated by the efficient match, so we propose a measure of firm-manager match quality based on the match effects in executive pay. We validate the proposed measure by showing that it captures systematic firm-manager complementarities and that it is positively and significantly associated with firm operating performance. We also find significant negative stock market reactions to the news of sudden deaths of CEOs with higher match quality, which helps address the concern that our match quality measure captures managerial rent extraction. Further, we show that match quality is an economically significant factor in CEO turnover decisions, an aspect of the executive labor market that features matching consideration prominently.
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ItemCEO compensation contract homogeneity among industry peers( 2021)This paper examines the similarity of firms’ CEO compensation contracts among industry peers. We find that although the practice of adopting CEO compensation contracts similar to industry peers is consistent with optimal contracting theory under certain circumstances, there is significant costs to such practice motivated by management entrenchment. Rather than focusing on individual contractual components such as performance measure choices or risk-sharing arrangement, we study the overall compensation contract structure. We construct our measure of CEO compensation contract homogeneity using distance measures based on a comprehensive set of contract elements derived from firms’ proxy statements. Our study indicates that, firms tend to adopt CEO compensation contracts that are more similar to the industry practice when sharing more common risks or common investors with other firms in the same industry, consistent with the predictions under optimal contracting theory. We also find board of directors’ ability to communicate and obtain inside information contribute to compensation structure homogeneity unexplained by general CEO/firm specific characteristics, consistent with inefficient contracting. Last, we find evidence that CEO compensation structure homogeneity is associated with excessive CEO pay and has a negative impact on shareholders’ wealth in the subsequent period.
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ItemThe Effects of Market Concentration and Market Power on Cost Structure( 2021)This study investigates the association between market structure and cost structure using a national sample of U.S. hospitals. Cost structure, which is difficult to alter in the short run, determines operating risk; therefore, it is important to understand factors that influence managerial choices on cost structure. Market structure is a potentially important determinant of cost structure because managers’ investment decisions are influenced by how the firm interacts with rival firms and suppliers (e.g., Caballero 1991; Grenadier 2002; Novy-Marx 2007). Yet, market structure has received little attention from accounting researchers. We measure market structure with market concentration and market power. Market concentration, which is the same for all market participants, reflects the overall competitiveness of the market. Market power, which varies by market participant, captures each market participant’s competitive standing relative to the market. Results indicate that: 1) hospitals in more concentrated markets adopt more rigid cost structures, 2) hospitals with market power adopt more elastic cost structures, and 3) market power magnifies the positive relation between demand uncertainty and cost elasticity. The market concentration result is consistent with the premise that higher margins in more concentrated markets provide a larger incentive for these hospitals to invest. The market power results suggest that hospitals with market power face lower transaction costs, which enable them to maintain more elastic cost structures and alter their cost structures more easily in response to changes in demand uncertainty.
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ItemInclusive Managers( 2021)Many organizations acknowledge that inclusiveness, or the practice of directly engaging colleagues in activities, is becoming increasingly important as businesses become more complex. However, inclusive managers remain significantly understudied in large-sample archival research, largely because inclusiveness is difficult to measure. We overcome this barrier and develop a measure of managers’ inclusiveness by observing the interactions among corporate managers during conference calls, the only circumstance where interactions among managers can regularly be observed. We examine inclusive managers’ characteristics, individual career outcomes, leadership team outcomes and firm outcomes. We find that inclusive managers are more likely to be female and older. They are twice as likely as the average manager to be promoted to CEO, and teams composed of inclusive managers have greater retention. In addition, firms where inclusive managers are promoted to CEO experience more positive stock market reactions to the promotion announcements.
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ItemOutside investor access to top management: market monitoring versus stock price manipulation( 2021)This paper studies the role of voluntary disclosure in crowding out independent research about firm value. In the model, when inside firm owners make it easier for outside investors to obtain inexpensive biased information from the manager, then investors rely less on costly unbiased research. As a result, managers are tempted to manipulate the firm stock price more, but investors are better informed because they anticipate manager manipulation. An increase in stock-price informativeness, therefore, has to be traded off against an increase in resources wasted on manipulation. I find that, surprisingly, firm owners grant investors more access to managers that manipulate more strongly. An implication is that the firm cost of capital is negatively related to manager manipulation.