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Firms in the same networks tend to have similar corporate governance practices. However, it is difficult to distinguish between peer effects, where governance practices propagate from one firm to another, and selection effects, where... more
Firms in the same networks tend to have similar corporate governance practices. However, it is difficult to distinguish between peer effects, where governance practices propagate from one firm to another, and selection effects, where firms with similar governance preferences self-select into linked groups. Studying board-interlocked firms, we utilize a novel instrument based on staggered adoptions of universal demand laws across states to identify causal peer effects in firms' decisions to adopt various governance provisions. We find that a firm's propensity to adopt these provisions increases after other firms in the same board interlock network choose to adopt similar policies. The impact of universal demand laws on the incentives faced by directors as they seek to maximize their career outcomes is a likely mechanism explaining these effects.
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We investigate the link between abnormal CEO compensation and firm performance, asking whether high unexplained compensation relative to several benchmarks is a sign of hard‐to‐measure but desirable executive attributes or is instead a... more
We investigate the link between abnormal CEO compensation and firm performance, asking whether high unexplained compensation relative to several benchmarks is a sign of hard‐to‐measure but desirable executive attributes or is instead a symptom of unsolved agency problems. We find that abnormally high CEO pay predicts worse future firm performance. Abnormally high compensation that is performance‐contingent is a less ominous signal about the future success of the firm. But abnormal levels of even performance‐contingent compensation predict worse future performance. We conclude that abnormally high CEO pay can be useful as an independent indicator of agency problems.
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Research Interests:
The market views bad-news management earnings forecasts as more credible than good-news forecasts not because good-news forecasts are biased, but rather because they are noisier than bad-news forecasts. After controlling for noise, the... more
The market views bad-news management earnings forecasts as more credible than good-news forecasts not because good-news forecasts are biased, but rather because they are noisier than bad-news forecasts. After controlling for noise, the difference in market response disappears. Bad-news forecasts have unconditionally lower dispersion around final earnings and, unlike good-news forecasts, bad-news forecasts become more accurate and contain higher magnitude updates as earnings announcement dates approach. The results provide new direct evidence that management differentially seeks to verify bad news, and withholds greater amounts of bad news while it seeks verification. Consistent with rational markets, this mitigation of noise provides a novel explanation for the asymmetric market response to management earnings forecasts.
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ABSTRACT Post-IPO banks are far more likely to initiate dividends than nonfinancial firms. Moreover, dividend initiation has a major impact on the ultimate disposition of a newly public bank, increasing its likelihood of subsequent... more
ABSTRACT Post-IPO banks are far more likely to initiate dividends than nonfinancial firms. Moreover, dividend initiation has a major impact on the ultimate disposition of a newly public bank, increasing its likelihood of subsequent acquisition by around 40 percent and reducing the expected time until acquisition by 92 percent. Further, conditional on being acquired, dividend initiation significantly increases the takeover premium. Average premiums for post-IPO dividend initiators exceed those on non-dividend payers by about 50 percent of the market value of the bank in the month prior to the takeover announcement. Positive associations between bank performance and dividend initiation and between dividend initiation and both takeover likelihood and premium appear consistent with a signaling role for dividends. Dividend initiation seems to speed up and amplify the rewards to owners that may be reaped through an ultimate sale of the institution.
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Research Interests:
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We show that a pattern of earnings management in bank financial statements has little bearing on downside risk during quiet periods, but seems to have a big impact during a financial crisis. Banks demonstrating more aggressive earnings... more
We show that a pattern of earnings management in bank financial statements has little bearing on downside risk during quiet periods, but seems to have a big impact during a financial crisis. Banks demonstrating more aggressive earnings management prior to 2007 exhibit substantially higher stock market risk once the financial crisis begins as measured by the incidence of large weekly stock price “crashes” as well as by the pattern of full‐year returns. Stock price crashes also predict future deterioration in operating performance. Bank regulators may therefore interpret them as early warning signs of impending problems.