Knowledge that Transforms

We find strong evidence that firms with employee-friendly workplaces achieve greater innovative success, particularly in industries where innovation is more difficult to achieve. Furthermore, employee-friendly firms were also more inclined to sustain R&D investment during the recent crisis. These findings are consistent with the view that an employee-friendly workplace helps to develop tolerance for failure, which encourages engagement in innovation. We find no support for alternative explanations, such as employee-friendly workplaces helping to attract and retain talented employees and reducing career concerns of executives, which could nurture innovation.

Information asymmetry may act as a catalyst for an association between managerial confidence and initial public offering (IPO) outcomes. This could occur if overconfident managers overinvest in producing information prior to going public, time offerings during periods when disagreement between managers and investors is low, or attempt to signal their beliefs to less informed market participants. Our evidence suggests that highly overconfident managers attempt to use underpricing to signal their beliefs to the market in an unsuccessful effort to receive greater value for their shares in follow-on offerings. This further suggests managerial overconfidence can be harmful to the firm.

This paper extends our knowledge of corporate debt maturity structure by examining whether and to what extent overconfident CEOs affect maturity decisions. Consistent with a demand side story, we find that firms with overconfident CEOs tend to adopt a shorter debt maturity structure by using a higher proportion of short-term debt (due within 12months). This behavior of overconfident CEOs is not deterred by the high liquidity risk associated with such a financing strategy. Our demand side explanation remains robust even after considering six possible alternative drivers including a competing supply side explanation (in which creditors are reluctant to extend long-term debt to overconfident CEOs).

I compare the wealth of private firm owners that exit their firms through reverse mergers (RMs) to the wealth that could have been obtained in initial public offerings (IPOs), sellouts, or by remaining private. Private firm owners that use the RM exit mechanism have significantly less post-exit wealth than the wealth that could have been obtained in an IPO. This result is driven by differences in the pre-exit characteristics of firms that choose a RM compared to an IPO (a selection effect), not by use of the RM exit mechanism itself (a treatment effect). The gap between post-exit wealth and the wealth that could have been obtained in an IPO disappears for owners of RM firms whose pre-exit characteristics are sufficiently similar to propensity-score matched IPO firms. The post-exit wealth of RM firm owners is approximately the same as the wealth that could have been obtained in a sellout. The median change in private firm owner wealth as a result of the RM is positive when pre-exit private firm values are inferred from valuations in private–private takeovers. However, the median change in wealth is negative when pre-exit private firm values are obtained from valuations provided in fairness opinions. These conflicting findings appear to be driven by upwardly biased fairness opinion valuations.

Building on recent theory, we find strong and robust evidence that external labor market incentives motivate CEOs to adopt more aggressive tax policies in order to improve firm performance and their own labor market value. In addition, we find that the tax aggressiveness-labor market incentives relation varies in the cross-section consistently with theory. We find that the relation is attenuated in industries for which the CEO has fewer outside employment options, and we find it to be amplified in industries for which competition for CEO talent is likely greatest, and also among CEOs estimated to have greater ability. Overall, our results suggest that the market for CEOs – an incentive device external to the firm – has a meaningful impact on corporate tax policy.

I examine the influence of sell-side financial analysts on corporate social responsibility (CSR) and find that firms with greater analyst coverage tend to be less socially responsible. To establish causality, I employ a difference-in-differences (DiD) technique, using brokerage closures and mergers as exogenous shocks to analyst coverage, as well as an instrumental variables approach. Both identification strategies suggest that analyst coverage has a negative causal effect on CSR. Analyst coverage seems to influence CSR activities via analysts' influence on the value of managerial ownership and discretionary spending. My findings are consistent with the view that spending on CSR is a manifestation of an agency problem and that financial analysts curb such discretionary spending by disciplining managers.

We examine the relation between the level of trust in a country and corporate cash holdings. The precautionary savings motive predicts that firms located in countries with less trusting societies will hoard more cash in order to compensate for reduced access to capital markets. The agency hypothesis predicts that shareholders in countries with low levels of societal trust will pressure firms to disgorge cash. The first theory predicts a negative relation between trust and corporate cash holdings while the second theory predicts a positive relation between these two variables. Using data on firms located in 54 countries around the world, we find evidence in favor of the agency-based explanation for the relation between trust and corporate cash holdings. Overall, our results highlight the role played by informal institutions in shaping corporate financial management.

Upon examining the language used in recent SEC filings, we find that severance agreements are often paid whether or not the CEO leaves the firm due to a change in control. We hypothesize that since severance agreements compensate CEOs in the event of termination, CEOs with these agreements will have an incentive to increase firm risk and decrease effort. Consistent with this hypothesis, we document a significant positive relation between the use of severance agreements and the cost of debt (10% higher yield spreads for firms with severance agreements). The results hold after controlling for the probability of takeover, the probability of CEO turnover, and whether the firm has investment or non-investment grade debt. These results can be explained by an increase in firm risk and a higher likelihood of CEO turnover associated with severance agreements. Overall, the evidence suggests that the effects of severance agreements extend beyond takeovers, and that these additional implications are primarily negative for the firm and for debt holders in particular.

We extend the literature on how managerial traits relate to corporate choices by documenting that firms run by female CEOs have lower leverage, less volatile earnings, and a higher chance of survival than otherwise similar firms run by male CEOs. Additionally, transitions from male to female CEOs (or vice versa) are associated with economically and statistically significant reductions (increases) in corporate risk-taking. The results are robust to controlling for the endogenous matching between firms and CEOs using a variety of econometric techniques. We further document that this risk-avoidance behavior appears to lead to distortions in the capital allocation process. These results potentially have important macroeconomic implications for long-term economic growth.

In this paper, we investigate the influence of CEO political orientation on corporate lobbying efforts. Specifically, we study whether CEO political ideology, in terms of manager-level campaign donations, determines the choice and amount of firm lobbying involvement and the impact of lobbying on firm value. We find a generous engagement in lobbying efforts by firms with Republican leaning-managers, which lobby a larger number of bills and have higher lobbying expenditures. However, the cost of lobbying offsets the benefit for firms with Republican CEOs. We report higher agency costs of free cash flow, lower Tobin's Q, and smaller increases in buy and hold abnormal returns following lobbying activities for firms with Republican managers, compared to Democratic and Apolitical rivals. Overall, our results suggest that the effects of lobbying on firm performance vary across firms with different managerial political orientations.