Forthcoming Articles

Can Strong Corporate Governance Selectively Mitigate the Negative Influence of ‘Special Interest’ Shareholder Activists? Evidence from the Labor Market for Directors

Diane Del Guercio and Tracie Woidtke

Union and public pension funds, the most prolific institutional activists employing low-cost targeting methods, are often accused of pursuing private benefits. Extant literature finds that unions representing workers, as stakeholders, are not aligned with shareholders. Limiting shareholder power may mitigate “special interest” activism but can also exacerbate managerial agency problems. In two different settings, majority approved and withdrawn shareholder proposals, we examine and find supportive evidence that the director labor market as a corporate governance mechanism can selectively mitigate the negative influence that conflicted stakeholder-shareholder union funds have over firms without stifling all influence of low-cost activists.

The Relation between Corporate and Government Debt Maturity in Europe

Stefano Lugo and Giulia Piccillo

This paper investigates the gap-filling explanation for corporate debt maturity choices in a multi-country setting. We argue that companies adjust their debt maturity in response to shocks in government debt maturity both at home and abroad; the difference between the two effects depends on the markets’ relative size and level of integration. Focusing on the European case and treating the Economic and Monetary Union as a shock in market integration, we find strong empirical support for our predictions. Our results have relevant implications for the opportunity for individual governments to use their debt maturity structure as a policy tool.

Top Management Human Capital, Inventor Mobility, and Corporate Innovation

Thomas J. Chemmanur, Lei Kong, Karthik Krishnan, and Qianqian Yu

Using panel data on top management characteristics and a management quality factor constructed using common factor analysis on individual management quality measures, we analyze the relation between top firm management quality and corporate innovation inputs and outputs. We show that top management quality is an important determinant of corporate innovation, with different individual aspects of management quality affecting innovation in younger and older firms differently. Further, firms with higher top management quality engage in more risky (“explorative”) innovation strategies. Finally, hiring more and higher quality inventors is an important channel through which higher management quality firms achieve greater innovation output.

Does Option-Based Compensation Affect Payout Policy? Evidence from FAS123R

Fabrizio Ferri and Nan Li

Does option-based compensation affect payout policy? To address this question we examine the adoption of mandatory expensing of stock options. Our identification strategy exploits the fact that the reduction in option-based compensation subsequent to the accounting change varies with the firm-specific expected accounting impact. Across a battery of tests we do not find that (accounting-driven) reductions in option-based pay cause dividends to increase or repurchases to decrease. Our results contrast with the widely held belief that option-based pay has a significant causal influence on payout policy and cast doubts on its role in the shift from dividends to repurchases.

When Does the Family Govern the Family Firm?

Øyvind Bøhren, Bogdan Stacescu, Line F. Almli, and Kathrine L. Søndergaard

We find that the controlling family holds both the chief executive officer and chair positions in 79% of Norwegian family firms. The family holds more governance positions when it owns large stakes in small, profitable, low-risk firms. This result suggests that the family trades off expected costs and benefits by conditioning participation intensity on observable firm characteristics. We find that the positive effect of performance on participation is twice as strong as the positive effect of participation on performance. The endogeneity of participation should therefore be carefully accounted for when analyzing the effect of family governance on the family firm’s behavior.

Early Exercise Decision in American Options with Dividends, Stochastic Volatility, and Jumps

Antonio Cosma, Stefano Galluccio, Paola Pederzoli, and Olivier Scaillet

Using a fast numerical technique, we investigate a large database of investor suboptimal non-exercise of short maturity American call options on dividend-paying stocks listed on the Dow Jones. The correct modelling of the discrete dividend is essential for a correct calculation of the early exercise boundary, as confirmed by theoretical insights. Pricing with stochastic volatility and jumps instead of the Black–Scholes–Merton benchmark cuts the amount lost by investors through suboptimal exercise by one quarter. The remaining three quarters are largely unexplained by transaction fees and may be interpreted as an opportunity cost for the investors to monitor optimal exercise.

Distracted Institutional Investors

Daniel Schmidt

We investigate how distraction affects the trading behavior of professional asset managers. Exploring detailed transaction-level data, we show that managers with a large fraction of portfolio stocks exhibiting an earnings announcement are significantly less likely to trade in other stocks, suggesting that these announcements absorb attention which is missing for the choice of which stocks to trade. This distraction effect is more pronounced for non-passive managers that engage in active stock selection choices. Finally, we identify three channels through which distraction hurts managers’ performance: distracted managers trade less profitably, incur slightly higher transaction costs and are less likely to close losing positions.

Hometown Biased Acquisitions

Feng Jiang, Yiming Qian, and Scott E. Yonker

We show that CEOs exhibit a hometown bias in acquisitions. Firms are over twice as likely to acquire targets located in the states of their CEOs’ childhood homes than similar targets domiciled elsewhere. Small, private home-state deals underperform other small, private deals, and the bias is stronger when acquirer governance is lax, suggesting that CEOs acquire private home-state targets for their own benefits. In contrast, large, public home-state acquisitions are value-enhancing. CEOs create value in public home-state acquisitions by avoiding extremely poor deals and through deals with higher synergies. Thus, both agency issues and hometown advantages drive home-state acquisitions.