In the Company of Others
Why Do Some Conservative CEOs Publicly Support Liberal Causes? Organizational Ideology, Managerial Discretion, and CEO Sociopolitical Activism
Adam Wowak & John Busenbark
Organization Science, forthcoming
Abstract:
The phenomenon of chief executive officers (CEOs) speaking out on contested social issues is a recent one, as CEO sociopolitical activism was seen as overly risky, and even taboo, for most of American business history. Yet, CEOs are increasingly choosing sides in societal debates despite the inherent risk of alienating stakeholders who disagree with the CEO's stance. Even more puzzlingly, conservative CEOs sometimes espouse liberal stances in such debates, which runs counter to the otherwise consistent evidence in the upper echelons literature that CEOs are guided by their own values in their actions. Our study addresses this paradox by examining the antecedents of CEO liberal activism, with an emphasis on the interplay between the CEO's ideology and the prevailing ideological tilt of the employee population in driving CEOs' activism decisions. Drawing on the concept of managerial discretion, or latitude of action, we theorize that a pronounced organizational ideology constrains a CEO's ability to act in accordance with their own values -- particularly in the highly symbolic domain of activism. We also argue that conservative CEOs are relatively more focused on instrumental rationales for activism, whereas liberal CEOs tend to prioritize more intrinsic rationales, a consequence of which is that conservative CEOs more heavily weight organizational ideology in their activism decisions. We test our theory in the context of a highly publicized letter signed by nearly 100 CEOs of public companies in opposition to North Carolina's controversial 2016 "bathroom bill." Relying on a variety of novel data sources, we find robust support for our theory.
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Big Three (Dis)Engagements
Dhruv Aggarwal, Lubomir Litov & Shivaram Rajgopal
Northwestern University Working Paper, December 2023
Abstract:
This paper uses newly available data to empirically analyze how the three largest asset managers (BlackRock, Vanguard, and State Street) engage with portfolio companies. We find that asset managers' choice of engagement targets is virtually unrelated to the firm's financial performance. Event study analysis finds that targeted firms exhibit transitory negative but tiny abnormal returns when engagements are reported. Engagement is not correlated with ex post stock return or operating performance or corporate governance outcomes at portfolio companies, including CEO compensation, dual-class stock, and the presence of female directors. Asset managers are also not more likely to vote against management at firms selected for engagement. Combined with qualitative evidence regarding the limited resources available to engagement personnel, these results cast doubt on the Big Three asset managers' ability to be active owners.
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Short selling and readability in financial disclosures: A controlled experiment
Minxing Sun & Weike Xu
Financial Review, forthcoming
Abstract:
We examine the causal effect of short-selling on a firm's annual report readability using regulation SHO, which relaxes short-sale constraints for a random sample of pilot stocks. Pilot firms produce significantly less readable annual reports than nonpilot firms during the experiment period. Our results are more pronounced for firms that receive less investor attention and those with poorer growth prospects. Furthermore, pilot firms increase the use of uncertainty words in annual reports during the experiment period. Our results suggest that firms produce less transparent financial disclosures that are more costly for investors to comprehend when short-sale constraints are less rigorous.
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Does U.S. immigration policy facilitate financial misconduct?
Ruiting(Dan) Dai et al.
MIT Working Paper, December 2023
Abstract:
We examine the impact of U.S. immigration policy, specifically the H-1B visa program, on the likelihood of financial misconduct in companies. We argue that employers have leverage over employees on an H-1B visa because such visa holders must maintain H-1B-eligible employment in order to legally reside in the U.S. We posit that companies relying on H-1B visas to hire workers in accounting roles have an increased ability to misreport their financial statements due to the greater costs H-1B employees face if they are unexpectedly fired for not following the demands of their bosses or for blowing the whistle on misconduct. Using the sharp reduction in the H-1B visa cap in 2004 as a shock to such employment, we find that companies that relied on this visa program for accounting roles pre-shock experience a 2.3 percentage point decline in accounting irregularities post-shock. Cross-sectional tests show that the reduction in irregularities is greater in companies where employees on an H-1B visa have (1) greater influence on financial reporting or (2) fewer outside job opportunities. In addition, the relation between H-1B visa use and irregularities is stronger in companies with greater ownership by short-horizon investors that are more likely to pressure managers to meet near-term earnings targets. We corroborate our findings using the outcome of H-1B visa lotteries as shocks to such employment.
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Standing on the shoulders of giants: Financial reporting comparability and knowledge accumulation
Kevin Tseng & Rong (Irene) Zhong
Journal of Accounting and Economics, forthcoming
Abstract:
This study examines whether and how financial statement comparability facilitates the dissemination of innovative knowledge between firms and stimulates the creation of new knowledge. Using cross-patent citations to track interfirm knowledge transfers, we find that comparability increases firms' incentives to learn from peers and create new patents that cite their peers' existing patents. The investigation into the mechanism reveals that comparability improves firms' ability to estimate the monetary value of peer knowledge and predict their own financial benefits from knowledge acquisition. The impact of comparability is more pronounced when peer knowledge is more publicly accessible or of higher monetary value. Consequently, the acquired knowledge fosters follow-on innovation, enabling firms to produce more patents with greater economic significance. Evidence from two quasi-natural experiments suggests that our findings are plausibly causal. Overall, our study highlights the important role of accounting comparability in facilitating knowledge dissemination.
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Competitive Shocks and Firm Productivity: The Role of Accounting Information Quality
Philip Berger & Rimmy Tomy
University of Chicago Working Paper, January 2024
Abstract:
We examine the role of accounting information quality in firms' responses to a competitive shock. Large bodies of research examine the role of accounting quality in recurring operating or investing decisions, but evidence is lacking on how the quality of accounting information relates to how well firms restructure in the face of a competitive shock. Our shock is the 1999 Taiwan earthquake, which increases product market competition for a subset of US high-technology manufacturing firms that have their supply inputs adversely affected. Consistent with prior work on responses to competitive shocks, we find total factor productivity increases for affected US high-tech firms relative to unaffected ones. We also find, however that affected firms with higher pre-shock accounting quality increase their productivity more than affected firms with lower pre-shock accounting quality. Finally, we investigate the channels by which the accounting quality mechanism operates in our setting and find that better accounting quality reduces information frictions related to moral hazard or to management's assessment of the investment opportunity set.
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Litigation risk and strategic M&A valuations
Claudia Imperatore et al.
Journal of Accounting and Economics, forthcoming
Abstract:
We study the role of litigation risk in M&A valuations. Specifically, we hypothesize that litigation risk leads to strategic valuations in fairness opinions (FOs) obtained in M&A transactions. Employing a regulatory shock to merger litigation risk and focusing on the most common valuation techniques - peer firm comparables and DCF analysis - we find that target-sought FOs exhibit lower valuations when litigation risk is high. The effect is concentrated in deals with greater agency conflicts between target management and outside shareholders. Furthermore, downward-biased valuations reduce appraisal litigation but are also associated with lower premiums. In contrast to prior work suggesting that target-sought FOs are used to negotiate a higher takeover price, our findings imply that they are used, at least in part, to mitigate litigation risk and facilitate successful deal completion. Our findings are relevant to academics, practitioners, and regulators interested in M&A price formation, and highlight the role litigation plays therein.
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Fraudulent financial reporting and the consequences for employees
Jung Ho Choi & Brandon Gipper
Journal of Accounting and Economics, forthcoming
Abstract:
We combine U.S. Census data with SEC enforcement actions to examine employees' outcomes, such as wages and turnover, before, during, and after periods of fraudulent financial reporting. We find that fraud firms' employees lose about 50% of cumulative annual wages, compared to a matched sample, and the separation rate is much higher after fraud periods. Yet, employment growth at fraud firms is positive during fraud periods; these firms overbuild and hire new, lower-paid employees concurrent with the fraud, unlike firms in distress which tend to contract. When the fraud is revealed, firms shed workers, unwinding this abnormal growth and resulting in most of the negative wage consequences. Wage outcomes are particularly unfavorable in thin labor markets, and lower-wage employees, though unlikely to have perpetrated the fraud, experience more severe wage losses compared to higher-wage employees.