Outside directors have incentives to resign to protect their reputation or to avoid an increase i... more Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.
We examine whether employee stock options motivate employees to contribute to corporate innovatio... more We examine whether employee stock options motivate employees to contribute to corporate innovation. Our analysis shows that the innovation output in a firm measured by the numbers of total patents applied, total citations of the patents, and citations per patent significantly increases with the non-executive stock options per employee after controlling for the research and development (R&D) expenditures and CEO incentives. The positive effects of employee stock options on corporate innovation are more evident in subsamples of firms in more unionized industries, firms where employees are more difficult to retain, firms with a weaker free-riding problem among employees, firms whose stock options have a longer expiration period, and firms that organize a broad-based employee stock option plan. Finally, we show that the enhancement of corporate innovation productivity is mainly from an increase in employees" risk-taking incentives (vega) rather than employees" interest-alignment incentives (delta). Taken together, these findings suggest that employee stock options enhance employees" risk-taking incentives and failure-bearing capacities in a firm"s high risk-profile innovative activities, leading to a significant improvement in the productivity of corporate innovation.
We examine how investor preferences and beliefs affect trading in relation to past gains and loss... more We examine how investor preferences and beliefs affect trading in relation to past gains and losses. The probability of selling as a function of profit is V-shaped; for short prior holding periods, investors are much more likely to sell big losers than small ones. There is little evidence of an upward jump in selling probability at zero profits. These findings provide no clear indication that realization preference helps explain investor trading behavior. Furthermore, the disposition effect is not primarily driven by a direct preference for ...
We examine the real effects of parent firm diversification on their electric utility operating co... more We examine the real effects of parent firm diversification on their electric utility operating companies over the period, 1990-2003. Since electric utility operating companies produce a single homogenous product, we can better measure their Total Factor Productivity and make valid comparisons of productivity across firms. We find that, consistent with a diversification discount, greater parent diversification is associated with lower
Using U.S. plant-level data for firms across a broad spectrum of industries, we compare how caree... more Using U.S. plant-level data for firms across a broad spectrum of industries, we compare how career concerns affect the real investment decisions of younger and older CEOs. In contrast to prior research which has examined some specialized labor markets, we find that younger CEOs undertake more active, bolder investment activities, consistent with an attempt on their part to signal confidence and superior abilities. They are more likely to enter new lines of business, as well as exit other existing businesses. They prefer growth through acquisitions, while older CEOs prefer to build new plants. This busier investment style of the younger CEOs appears to be relatively successful since younger CEOs are associated with higher plant-level efficiency compared to older CEOs.
... Angie Low Nanyang Technological University Nanyang Business School Division of Banking &a... more ... Angie Low Nanyang Technological University Nanyang Business School Division of Banking & Finance Mattias Nilsson University of Colorado at Boulder Leeds School of Business Division of Finance November 18, 2007 Abstract ...
Takeovers result in the transfer of bondholders' claims from the target to the acquiring firm, pr... more Takeovers result in the transfer of bondholders' claims from the target to the acquiring firm, providing a setting to examine the impact of shareholder power on bondholders. We find that excess returns to target bondholders at M & A announcements are positively related to the holdings of the top 5 acquirer institutional owners, a measure of shareholder power. This supports the view that stronger shareholder power, through superior monitoring of managers, can be beneficial to bondholders as well. Our findings are robust to various proxies for shareholder power, adjustments for endogeneity, controls for target shareholder power, and other controls for firm and deal characteristics that have been shown to affect bondholders' wealth during takeovers.
We examine whether employee stock options motivate employees to contribute to corporate innovatio... more We examine whether employee stock options motivate employees to contribute to corporate innovation. Our analysis shows that the innovation output in a firm measured by the numbers of total patents applied, total citations of the patents, and citations per patent significantly increases with the non-executive stock options per employee after controlling for the research and development (R&D) expenditures and CEO incentives. The positive effects of employee stock options on corporate innovation are more evident in subsamples of firms in more unionized industries, firms where employees are more difficult to retain, firms with a weaker free-riding problem among employees, firms whose stock options have a longer expiration period, and firms that organize a broad-based employee stock option plan. Finally, we show that the enhancement of corporate innovation productivity is mainly from an increase in employees" risk-taking incentives (vega) rather than employees" interest-alignment incentives (delta). Taken together, these findings suggest that employee stock options enhance employees" risk-taking incentives and failure-bearing capacities in a firm"s high risk-profile innovative activities, leading to a significant improvement in the productivity of corporate innovation.
Previous empirical work on adverse consequences of CEO overconfidence raises the question of why ... more Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms would hire overconfident managers. Theoretical research suggests a reason, that overconfidence can sometimes 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 (R&D) expenditure. Overconfident managers only achieve greater innovation than non-overconfident managers in innovative industries. Our findings suggest that overconfidence may help CEOs exploit innovative growth opportunities.
Economic theories suggest that a firm's corporate culture matters for its policy choices. We cons... more Economic theories suggest that a firm's corporate culture matters for its policy choices. We construct a parent-spinoff firm panel dataset that allows us to identify culture effects in firm policies from behavior that is inherited by a spinoff firm from its parent after the firms split up. We find positive and significant relations between spinoff firms' and their parents' choices of investment, financial, and operational policies. Consistent with predictions from economic theories of corporate culture, we find that the culture effects are long-term and stronger for internally grown business units and older firms. Our evidence also suggests that firms preserve their cultures by selecting managers who fit into their cultures. Finally, we find a strong relation between spinoff firms' and their parents' profitability, suggesting that corporate culture ultimately also affects economic performance. These results are robust to a series of robustness checks, and cannot be explained by alternatives such as governance or product market links. The contribution of this paper is to introduce the notion of corporate culture in a formal empirical analysis of firm policies and performance.
We examine the determinants of appointments of outside CEOs to boards and how these appointments ... more We examine the determinants of appointments of outside CEOs to boards and how these appointments impact the appointing companies. We find that CEOs are most likely to join boards of large established firms that are geographically close, pursue similar financial and investment policies, and have comparable governance mechanisms to their own firms. It is also more likely that CEOs join firms with low insider ownership and firms with boards that already have other CEO directors. Except for the case of board interlocks, there is no evidence supporting the view that CEO directors have any impact on the appointing firm during their tenure, either positively or negatively. Appointments of CEO directors do not have a significant impact on the appointing firm's operating performance, its decision-making, the compensation of its CEO, or on the monitoring of management by the board. However, operating performance drops significantly for CEO director appointments when the CEO of the appointing firm already sits on the board of the appointee's firm.
Journal of Business Finance <html_ent glyph="@amp;" ascii="&"/> Accounting, 2004
This study investigates the impact of trustee stock status announcements on shareholders&#39;... more This study investigates the impact of trustee stock status announcements on shareholders&#39; wealth in Singapore. An event study methodology is used to ascertain the abnormal returns around the announcement day. The results show that there is a positive and permanent wealth effect on trustee stocks resulting from designation announcements. Conversely, when trustee stocks lose their status, the significant negative abnormal
Outside directors have incentives to resign to protect their reputation or to avoid an increase i... more Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following surprise director departures, affected firms have worse stock and operating performance, are more likely to suffer from an extreme negative return event, are more likely to restate earnings, and have a higher likelihood of being named in a federal class action securities fraud lawsuit.
We examine whether employee stock options motivate employees to contribute to corporate innovatio... more We examine whether employee stock options motivate employees to contribute to corporate innovation. Our analysis shows that the innovation output in a firm measured by the numbers of total patents applied, total citations of the patents, and citations per patent significantly increases with the non-executive stock options per employee after controlling for the research and development (R&D) expenditures and CEO incentives. The positive effects of employee stock options on corporate innovation are more evident in subsamples of firms in more unionized industries, firms where employees are more difficult to retain, firms with a weaker free-riding problem among employees, firms whose stock options have a longer expiration period, and firms that organize a broad-based employee stock option plan. Finally, we show that the enhancement of corporate innovation productivity is mainly from an increase in employees" risk-taking incentives (vega) rather than employees" interest-alignment incentives (delta). Taken together, these findings suggest that employee stock options enhance employees" risk-taking incentives and failure-bearing capacities in a firm"s high risk-profile innovative activities, leading to a significant improvement in the productivity of corporate innovation.
We examine how investor preferences and beliefs affect trading in relation to past gains and loss... more We examine how investor preferences and beliefs affect trading in relation to past gains and losses. The probability of selling as a function of profit is V-shaped; for short prior holding periods, investors are much more likely to sell big losers than small ones. There is little evidence of an upward jump in selling probability at zero profits. These findings provide no clear indication that realization preference helps explain investor trading behavior. Furthermore, the disposition effect is not primarily driven by a direct preference for ...
We examine the real effects of parent firm diversification on their electric utility operating co... more We examine the real effects of parent firm diversification on their electric utility operating companies over the period, 1990-2003. Since electric utility operating companies produce a single homogenous product, we can better measure their Total Factor Productivity and make valid comparisons of productivity across firms. We find that, consistent with a diversification discount, greater parent diversification is associated with lower
Using U.S. plant-level data for firms across a broad spectrum of industries, we compare how caree... more Using U.S. plant-level data for firms across a broad spectrum of industries, we compare how career concerns affect the real investment decisions of younger and older CEOs. In contrast to prior research which has examined some specialized labor markets, we find that younger CEOs undertake more active, bolder investment activities, consistent with an attempt on their part to signal confidence and superior abilities. They are more likely to enter new lines of business, as well as exit other existing businesses. They prefer growth through acquisitions, while older CEOs prefer to build new plants. This busier investment style of the younger CEOs appears to be relatively successful since younger CEOs are associated with higher plant-level efficiency compared to older CEOs.
... Angie Low Nanyang Technological University Nanyang Business School Division of Banking &a... more ... Angie Low Nanyang Technological University Nanyang Business School Division of Banking &amp;amp;amp;amp;amp;amp; Finance Mattias Nilsson University of Colorado at Boulder Leeds School of Business Division of Finance November 18, 2007 Abstract ...
Takeovers result in the transfer of bondholders' claims from the target to the acquiring firm, pr... more Takeovers result in the transfer of bondholders' claims from the target to the acquiring firm, providing a setting to examine the impact of shareholder power on bondholders. We find that excess returns to target bondholders at M & A announcements are positively related to the holdings of the top 5 acquirer institutional owners, a measure of shareholder power. This supports the view that stronger shareholder power, through superior monitoring of managers, can be beneficial to bondholders as well. Our findings are robust to various proxies for shareholder power, adjustments for endogeneity, controls for target shareholder power, and other controls for firm and deal characteristics that have been shown to affect bondholders' wealth during takeovers.
We examine whether employee stock options motivate employees to contribute to corporate innovatio... more We examine whether employee stock options motivate employees to contribute to corporate innovation. Our analysis shows that the innovation output in a firm measured by the numbers of total patents applied, total citations of the patents, and citations per patent significantly increases with the non-executive stock options per employee after controlling for the research and development (R&D) expenditures and CEO incentives. The positive effects of employee stock options on corporate innovation are more evident in subsamples of firms in more unionized industries, firms where employees are more difficult to retain, firms with a weaker free-riding problem among employees, firms whose stock options have a longer expiration period, and firms that organize a broad-based employee stock option plan. Finally, we show that the enhancement of corporate innovation productivity is mainly from an increase in employees" risk-taking incentives (vega) rather than employees" interest-alignment incentives (delta). Taken together, these findings suggest that employee stock options enhance employees" risk-taking incentives and failure-bearing capacities in a firm"s high risk-profile innovative activities, leading to a significant improvement in the productivity of corporate innovation.
Previous empirical work on adverse consequences of CEO overconfidence raises the question of why ... more Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms would hire overconfident managers. Theoretical research suggests a reason, that overconfidence can sometimes 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 (R&D) expenditure. Overconfident managers only achieve greater innovation than non-overconfident managers in innovative industries. Our findings suggest that overconfidence may help CEOs exploit innovative growth opportunities.
Economic theories suggest that a firm's corporate culture matters for its policy choices. We cons... more Economic theories suggest that a firm's corporate culture matters for its policy choices. We construct a parent-spinoff firm panel dataset that allows us to identify culture effects in firm policies from behavior that is inherited by a spinoff firm from its parent after the firms split up. We find positive and significant relations between spinoff firms' and their parents' choices of investment, financial, and operational policies. Consistent with predictions from economic theories of corporate culture, we find that the culture effects are long-term and stronger for internally grown business units and older firms. Our evidence also suggests that firms preserve their cultures by selecting managers who fit into their cultures. Finally, we find a strong relation between spinoff firms' and their parents' profitability, suggesting that corporate culture ultimately also affects economic performance. These results are robust to a series of robustness checks, and cannot be explained by alternatives such as governance or product market links. The contribution of this paper is to introduce the notion of corporate culture in a formal empirical analysis of firm policies and performance.
We examine the determinants of appointments of outside CEOs to boards and how these appointments ... more We examine the determinants of appointments of outside CEOs to boards and how these appointments impact the appointing companies. We find that CEOs are most likely to join boards of large established firms that are geographically close, pursue similar financial and investment policies, and have comparable governance mechanisms to their own firms. It is also more likely that CEOs join firms with low insider ownership and firms with boards that already have other CEO directors. Except for the case of board interlocks, there is no evidence supporting the view that CEO directors have any impact on the appointing firm during their tenure, either positively or negatively. Appointments of CEO directors do not have a significant impact on the appointing firm's operating performance, its decision-making, the compensation of its CEO, or on the monitoring of management by the board. However, operating performance drops significantly for CEO director appointments when the CEO of the appointing firm already sits on the board of the appointee's firm.
Journal of Business Finance <html_ent glyph="@amp;" ascii="&"/> Accounting, 2004
This study investigates the impact of trustee stock status announcements on shareholders&#39;... more This study investigates the impact of trustee stock status announcements on shareholders&#39; wealth in Singapore. An event study methodology is used to ascertain the abnormal returns around the announcement day. The results show that there is a positive and permanent wealth effect on trustee stocks resulting from designation announcements. Conversely, when trustee stocks lose their status, the significant negative abnormal
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