Browsing by Subject "Corporate governance"

Now showing 1 - 11 of 11

Contesting capital allocation : a sociological perspective on the interaction among hedge fund activists, CEOs, and directors
(2016-05) Sitko, Robert Thomas; Glass, Jennifer; Adut, Ari; Cunningham, William; Lin, Ken-Hou; Williams, Christine
Using ninety-nine semi-structured interviews with S&P1500 CEOs, directors, and hedge fund managers, this study examines why and how hedge funds pursue activism with target companies, and why and how firms either acquiesce to or resist these pressures. When including friendly activism together with hostile activism, it finds that the degree of engagement of hedge funds with their targets is substantial. Likewise, the degree of engagement of CEOs with their preferred institutional investors is also nearly constant. Together, this level of interaction strongly suggests that the idea of the separation of ownership and control is an increasingly anachronistic concept describing the current relationship between managers and their shareholders. It also finds that, because hedge funds represent a distilled form of capitalist action, CEOs and boards have little space to engage in symbolic management. Because of the loss of power to institutional shareholders over the past several decades, epitomized by hostile hedge fund activism, the substantially increased engagement of management with their shareholders can be seen as a mechanism for recouping power. Dedicated hostile hedge fund activists derive their power not from exercising social influence over their targeted firms, with whom they have no history of repeated and recurring interactions, but from exercising social influence over other institutional investors by cultivating reputations based on legitimate action. Similarly, dedicated hostile hedge fund activists’ expertise, a second source of power, is also not attained from repeated interactions with their targets but from their greater experiences in capital allocation, from past business experiences, and from hiring analysts and consultants with the necessary expertise. By contrast, friendly hedge fund activists do exercise social influence over their target firms derived from longer-term recurring interactions with them. While this accords them shareholder power, this power is limited by their aversion to exercising coercive tactics. Paradoxically, management can appropriate the shareholder power of friendly activists to the extent that such allies can counter the power of hostile activists. Directors were found to be severely disadvantaged by the paucity of their interactions with shareholders, a circumstance that they are beginning to rectify through increasing their dialogue with them.
Determinants and consequences of board-level human and social capital
(2006-05) Boivie, Steven Robert, 1975-; Westphal, James D.
Dubai, debt, and dependency : the political and economic implications of the bailout of Dubai
(2011-05) Frasca, Alexandra Marguerite; Henry, Clement M., 1937-; Leeds, Sandy
The goal of this thesis is to identify the main political and economic implications of Dubai’s debt crisis and subsequent bailout by her wealthier and more powerful sister emirate Abu Dhabi. This paper examines the implications of the bailout of Dubai on two levels: Dubai’s relationship with Abu Dhabi and Dubai’s relationship with the international investment community. The paper first provides a brief background on Dubai, one of the seven emirates that make up the United Arab Emirates (UAE), and discusses Dubai’s key characteristics that helped give Dubai her nickname Dubai Inc. – an opportune location, the Al-Maktoum ruling family, and state-led entrepreneurship. It then discusses Dubai’s historically competitive relationship with Abu Dhabi and Dubai’s push to diversify economically away from oil. The paper outlines two key economic developments – the rise of Dubai’s real estate and tourism sectors and the creation of Dubai’s government-related enterprises (GREs), which helped finance the real estate bubble. This thesis suggests that Abu Dhabi now holds unquestionable power over Dubai and can control Dubai’s GREs and their subsidiaries such as Dubai World. This paper also argues that the international investment community will demand increased transparency and higher standards of corporate governance of Dubai’s businesses in light of the entrenched poor practices that the bailout exposed within the tiny-city state's GREs and companies.
Essays on contracts and corporate governance structure in the information technology industry
(2002) Lin, Lihui; Whinston, Andrew B.
This dissertation consists of three essays that explore contracts and corporate governance structure issues in the information technology (IT) industry. The first essay shows that when the information technology service being provided is critical to the buyer, it is optimal for the buyer and seller to sign flexible contracts that incorporate future renegotiations. The second essay studies contracts for procuring information technology. With a game theoretic model, it shows that when uncertainty unfolds over time and contracts complete in the specification of timing are infeasible (or transaction costs of writing complete contract are prohibitively high), information asymmetry between contracting parties leads to inefficient investment decisions. In particular, premature investments will occur under certain conditions. The third essay studies the issue of corporate governance in the technology sector. Shareholders of technology companies can only form beliefs on the financial health of technology firms and rely on the information provided by the firms to update their expectations, while the executives of these firms have access to firsthand information regarding the real potential of the new technology. A multi-period game-theoretical model with asymmetric information-updating process is developed and in equilibrium executives compensated with stocks and stock options will manipulate and untruthfully report the information, causing the public to discount strong companies with superior technologies due to expectations of possible frauds.
Executive equity incentives, earnings management and corporate governance
(2004) Weber, Margaret Liebenow; Freeman, Robert Noel, 1946-
This paper investigates whether executive wealth sensitivity to stock price fluctuations or executive equity transactions serve as incentives for earnings management. I find that increasing wealth sensitivity, most notably the sensitivity arising from stock holdings, is associated with CEO abnormal accrual usage. Further, the relation between abnormal accruals and stock-based wealth sensitivity is consistent with incomesmoothing earnings management. Since smooth earnings are associated with higher stock valuations my findings suggest that wealth exposure arising from stock ownership is effective in aligning the interests of CEOs and shareholders. I also analyze whether governance quality influences the wealth sensitivityabnormal accrual relation. While strong governance is associated with lower overall levels of abnormal accruals, governance does not significantly influence the association between CEO stock-based wealth sensitivity and earnings smoothing. The failure of governance to curb earnings management supports the proposition that income smoothing is an expected outcome of efficient contracting consistent with incentive alignment. I also examine whether executives opportunistically manage earnings in order to maximize the value of their stock transactions. My findings suggest managers behave opportunistically. Specifically, I find an increase in income-decreasing accruals preceding large stock purchases by CEOs as well as an increase in income-increasing accruals following, but not preceding, large stock sales by CEOs; both suggest trading on private information. I also document that governance does not materially affect CEO use of abnormal accruals around transactions.
How symbolic action affects the media as a governance mechanism
(2008-08) Bednar, Michael Kay, 1978-; Westphal, James D.; Kilduff, Martin
This dissertation examines the potential for the media to act as a corporate governance mechanism and suggests how corporate leaders, through the use of symbolic action, can influence the media’s ability to effectively enact this role. Specifically, I examine how media scrutiny may prompt firms to adopt governance structures that increase the structural independence of the board and thus, according to the prevailing agency logic of corporate governance, are thought to increase the board’s ability to monitor and control corporate leaders. However, the adoption of structurally independent boards may be largely symbolic wherein formal structural changes in board independence are made without increases in the social independence of the board. I argue that symbolic responses to scrutiny will meet the media’s expectations for proper governance and engender more positive subsequent evaluations in the media of the firm and its leaders. I conclude by showing why the effects of symbolic action on media coverage are important for a range of outcomes relevant to firms and CEOs including the likelihood of strategic change, CEO dismissal and compensation, and subsequent board appointments. By influencing the manner in which they and their firms are portrayed in the media, firm leaders may enhance their reputations in the press and garner personal benefits. Thus, while agency theory focuses on the media’s ability to curb agency costs, this study points out that because of the media’s susceptibility to symbolic action, the press may actually perpetuate agency costs in some cases. Longitudinal analysis of a sample of S&P 500 firms provides some support for these ideas.
The joint impact of commitment to disclosure and prior forecast accuracy on managers' forecasting credibility
(2008-08) Venkataraman, Shankar, 1969-; Koonce, Lisa Lynn, 1959-; Hirst, Eric
Although managers rate concerns about being seen as committed disclosers as an important consideration in their voluntary disclosure decisions, prior research has paid limited attention to how investors view commitment to disclosure. This study experimentally tests two competing perspectives relating to how managers' commitment to disclosure and prior forecast accuracy jointly influence managers' forecasting credibility. The first perspective (the normative perspective) draws on economic theory and the second perspective (the omission bias perspective) draws on theory from psychology. The normative perspective suggests that commitment to disclosure and prior forecast accuracy will independently influence managers' forecasting credibility. In contrast, the omission bias literature suggests that the influence of commitment to disclosure on managers' forecasting credibility depends on managers' prior forecast accuracy. In other words, the normative perspective suggests two main effects, whereas the omission bias perspective suggests a commitment to disclosure x accuracy interaction. To test the competing predictions relating to the joint impact of commitment to disclosure and prior forecast accuracy on managers' forecasting credibility, I conduct an experiment. Results of this experiment support the omission bias perspective. Participants in the role of investors rate more (less) committed managers as more (less) credible, but only when they are also accurate. When managers are inaccurate, however, this relationship reverses. That is, more committed managers are viewed as less credible relative to their less committed peers. These results suggest that managers' concerns about commitment to disclosure are indeed valid, but only when they are accurate. When managers are less accurate, commitment to disclosure hurts, rather than helps, managers' credibility. Participants' valuation judgments as well as their judgments relating to a current disclosure are positively associated with their judgments of managers' forecasting credibility, suggesting that their assessment of managers' credibility may have significant valuation consequences. This study contributes to the voluntary disclosure literature and has implications for managers who provide earnings forecasts and for investors who use these forecasts in their investment decisions.
Managing earnings through tax expense : how effective are monitors and governance mechanisms at constraining last-chance earnings management?
(2016-05) Powers, Kathleen Marie; Clement, Michael B.; Robinson, John Richard; Jennings, Ross; Seidman, Jeri; Starks, Laura; Mills, Lillian
Prior literature suggests that market participants struggle to understand changes in firms’ tax expense (Chen and Schoderbek 2000; Plumlee 2003; Weber 2009), making this account attractive for earnings management. Findings in the corporate governance literature suggest that monitors and disciplining governance mechanisms constrain earnings management at firms (Bushee 1998; Edmans 2009; Klein 2002). I join these literatures by examining whether traditionally effective corporate monitors and governance mechanisms also constrain tax expense management. I find little evidence that institutional investors, high quality auditors, or board independence constrain tax expense management, as measured by the change between the Q3 year-to-date GAAP effective tax rate (ETR) and annual ETR. However, consistent with Jensen and Meckling (1976), higher levels of CEO ownership deter tax expense management. These results contribute to our understanding of potential boundaries to monitoring by institutional investors and the effectiveness of disciplining corporate governance mechanisms and advance our understanding of the use of earnings management through tax expense.
The quality of disclosure and governance and their effect on litigation risk
(2006-08) Mohan, Saumya; Starks, Laura T.
This dissertation examines the relationship between three sets of variables: corporate governance and monitoring, the quality of disclosure in annual reports and securities class action litigation. In the first section, I present a game-theoretic model in which shareholders select from ex ante monitoring or ex post litigation mechanisms available to them in order to mitigate the agency problem. Firm characteristics determine the choice of which of these two mechanisms is appropriate for a particular company. I then test predictions from this model and find that firms with poor monitoring are much more likely than those with good monitoring to be sued even after controlling for the common determinants of a lawsuit. The second section of the dissertation relates the quality of disclosure in annual reports to litigation. I use a dataset containing annual reports filed electronically with the SEC in the period 1996-2005. Using two content analysis software programs that analyze the categories of words used in these annual reports, I find that firms that use more numbers, past and future words, and other informative words are much less likely to be sued, even after controlling for the common determinants of lawsuits. In order to avoid subjectively choosing categories, I use principal components analysis to identify the major components of annual report disclosure. When these components are used as regressors to identify causative factors of lawsuits, one component named 'informativeness' has significant power to explain subsequent lawsuits. In head-to-head comparisons of the 'informativeness' principal component with Standard & Poor's Transparency and Disclosure score, my informativeness measure is more effective than the S&P score in predicting the likelihood of a lawsuit. Finally, in cross-sectional tests, I find support for the theory that firms with good boards and managers who are not entrenched have better disclosure practices. Further, monitoring by institutional investors, independent boards and analysts appears to induce better corporate disclosure.
Two essays on corporate finance
(2010-05) Lian, Jie, 1977-; Parrino, Robert, 1957-; Alti, Aydogan; Fredrickson, James; Hartzell, Jay; Titman, Sheridan
This dissertation consists of two essays on corporate finance. Essay one examines whether corporate governance affects firm performance after capital investments. I find that among firms with weak corporate governance, those with high abnormal capital investments have significantly lower stock performance than those with low abnormal capital investments. In addition, a significant portion of the difference in abnormal stock performance between the two subgroups occurs around earnings announcements. In contrast, the level of abnormal capital investments is not related to subsequent stock performance or earnings announcement returns at firms with strong corporate governance. These findings indicate that corporate governance structure enhances firm value by mitigating the over-investment problem. Essay two examines how insider trading activity prior to seasoned equity offerings (SEOs) is related to subsequent investment, operating, and financing decisions of the issuer. I find that SEO firms with more abnormal insider sales issue more seasoned equity, hold more cash and increase dividend payouts more. They also perform more poorly. Following the SEO, these firms also issue less equity and the effects of the SEO on their capital structures gradually reverses. These findings suggest that SEO firms with more abnormal insider sales are more likely to have overpriced stock, while those with less abnormal insider sales are more likely to have good investment opportunities. Insider trading activity prior to the SEO provides valuable information about the firm’s incentives to issue seasoned equity and help to predict the real activities of the issuer following the SEO.
Two essays on the corporate governance for real estate investment trusts (REITs)
(2006) Sun, Libo; Titman, Sheridan; Hartzell, Jay
Essay one investigates the relation between firms’ investment choices and various governance mechanisms, using a sample of Real Estate Investment Trusts (REITs). We find evidence that the responsiveness of REITs’ investment expenditures to their opportunities depends on their corporate governance structures. Within the set of governance mechanisms that we examine, we find particularly strong links between investment behavior and ownership. Specifically, we find that the investment choices of REITs are more closely tied to Tobin’s q if they have greater institutional ownership, or lower director and officer stock ownership. These results are consistent with institutional owners monitoring the firm’s investment policies, and with high insider ownership allowing managers to follow their own investment agendas. Essay two reexamines the diversification discount using a sample of REITs from 1995 to 2003. We investigate the wealth effect of diversification across property type and regional locations. We find that regional diversification has a significant negative impact on firm value. Examining the determinants of corporate diversification, we discover that past growth opportunities are negatively related to the probability of diversifying choices. Moreover, this effect is mitigated in firms with high institutional ownership. This is consistent with the agency cost hypothesis that managers engage in buying-growth diversification and institutions could reduce the probability of such behavior. The influence of institutional investors has a significant value impact as well: firms with high institutional ownership are associated with lower regional diversification discount. Within two institutional sub-groups -- potentially active and passive monitoring institutions, it is potentially active ones that display such value impact, not the potentially passive ones. We conduct several tests to distinguish two hypotheses: that institutions play a monitoring role, or they selectively hold shares of certain firms. The results from simultaneous equation models support the monitoring story. Last, we also investigate the effect of other governance variables in firms’ diversifying choices and the diversification discount. We find that direct effect of other governance variables on diversifying decision is weak. Yet, as a group they significantly influence the regional diversification discount.