Corporate Finance Commons^™

The Choice Of Peers For Relative Performance Evaluation In Executive Compensation, Zhichuan Li, John Bizjak, Swaminathan Kalpathy, Brian Young

Business Publications

Relative performance (RPE) awards have become an important component of executive compensation. We examine whether RPE awards, particularly the peer group, are structured in a manner consistent with economic theory. For RPE awards using a custom peer group, we find that the custom group is significantly more effective than four plausible alternative peer groups at filtering out common shocks, lowering the cost of compensation, and increasing managerial incentives. For RPE awards using a market index, we find some evidence that firms could have selected a custom set of peers with better filtering properties at a lower cost with similar incentives. …

Analyst Talent, Information, And Investment Strategies, Zhichuan Li, Stephen R. Foerster, Zhenyang Tang, Chongyu Dang

Business Publications

Analyst talent, rather than the number of analysts following a firm, matters most to investors. We find: 1) Analysts with greater “natural” forecasting talent—controlling for experience, brokerage affiliation, and task complexity—contribute relatively more firm-specific rather than industry or market information; 2) Earnings forecasts by low-talent analysts may lead to substantial mispricing; 3) When earnings surprises are large, post-earnings-announcement drift is more prominent among firms covered by low-talent analysts; 4) Firms with low-talent analysts have significantly more insider trading prior to positive earnings news; and 5) Investing following insider trading is more profitable in stocks followed by low-talent analysts.

Corporate Social Responsibility And Ceo Risk-Taking Incentives, Zhichuan Li

Business Publications

We examine how firms adjust CEO risk-taking incentives in response to risk environments associated with their corporate social responsibility (CSR) standing. We find strong evidence that as a firm's CSR status improves (declines), increasing (decreasing) its risk-taking capacity, the firm responds by adjusting compensation contracts to increase (decrease) CEO risk-taking incentives (Vega). One channel of the adjustment is through stock option grants. Further analyses indicate that the positive CSR-Vega association is stronger in firms with better corporate governance and in industries where riskiness is more important. Our evidence indicates that firms are not passive in response to changes in CSR …

Drivers Of Research Impact: Evidence From The Top Three Finance Journals, Zhichuan Li, Chongyu Dang

Business Publications

We study the characteristics of all published papers in the top three finance journals (JF, JFE, and RFS) and how these paper characteristics affect the number of citations in Google Scholar and the Web of Science database. First, we find the characteristics in the universalist perspective remain constant while the characteristics in the constructivist and presentation perspectives increase over time. Second, some characteristics are significantly different between the high impact and the low impact papers. Third, paper quality, research method, journal placement, and paper age are the most important drivers. Last, different drivers play different roles in different journals.

The Role Of Mutual Funds In Corporate Social Responsibility, Zhichuan Li, Saurin Patel, Srikanth Ramani

Business Publications

This paper examines the role of mutual funds in corporate social responsibility (CSR). Using a fund-level, holdings-based CSR score, we find that CSR-friendly mutual funds improve firms’ CSR standings. This effect is more pronounced for firms with higher mutual fund ownership and stronger corporate governance. We further show that while CSR-friendly mutual funds have influence on almost all CSR categories, they focus on increasing CSR strengths rather than reducing CSR concerns. We also discover that CSR-friendly funds are more likely to vote in favor of CSR proposals, and that firms owned by CSR-friendly funds are more likely to link their …

Managerial Attributes, Incentives, And Performance, Zhichuan Li, Jeffrey L. Coles

Business Publications

We examine the relative importance of observed and unobserved firm- and manager-specific heterogeneities in determining executive compensation incentives and firm policy, risk, and performance. First, we decompose executive incentives into time-variant and time-invariant firm and manager components. Manager fixed effects supply 73% (60%) of explained variation in delta (vega). Second, controlling for manager fixed effects alters parameter estimates and corresponding inference on observed firm and manager characteristics. Third, larger CEO delta (vega) fixed effects predict better firm performance (riskier corporate policies and higher firm risk). These results suggest that the delta (vega) fixed effect captures managerial ability (risk aversion).

A Learning Curve Of The Market: Chasing Alpha Of Socially Responsible Firms, Zhichuan Li, Jun Wang, Dylan Minor, Chongyu Dang

Business Publications

This paper explores stock market reactions to corporate social performance. We find that a value-weighted portfolio based on the list of “100 Best CSR companies in the world”, published by Reputation Institute, yields statistically significant annual abnormal returns of 1.63% and 1.26%, by controlling for Carhart four factors and Fama-French five factors, respectively (2.39% and 1.84% respectively for an equal-weighted portfolio). Moreover, such abnormal returns decrease as time goes, especially after the inaugural publication of the CSR lists in 2013. The paper also indicates that companies with better social performance are more likely to have positive earnings surprises, and that …

Csr-Contingent Executive Compensation Contracts, Zhichuan Li

Business Publications

Firms have increasingly started tying their executives’ compensation to CSR-related objectives. In this paper, we attempt to understand why firms offer CSR-contingent compensation and the conditions under which such compensation improves corporate social performance. Using hand-collected data from proxy statements, we find that this emerging compensation practice varies significantly across industries and across different CSR categories. Further, well-governed firms are more likely to offer CSR-contingent compensation, and such compensation does lead to higher corporate social standing. Such firms are more likely to offer formula-based, Objective CSR-contingent compensation. However, our results suggest that non-formulaic, Subjective CSR-contingent compensation also helps improve companies’ …

The Effect Of Corporate Visibility On Corporate Social Responsibility, Zhichuan Li, Taylor Morris, Brian Young

Business Publications

Outside of direct ownership, the general public may feel it is an implicit stakeholder of a firm. As the public becomes more vested in a firm’s actions, the firm may be more likely to engage in Corporate Social Responsibility (CSR) activities. We proxy for the public’s stake in a firm with public visibility. Based on 3,400 unique newspaper publications from 1994 to 2008, we measure visibility for the U.S. S&P 500 firms with the frequency of print articles per year concerning the firm. We find that visibility has a signficant, positive relationship with the CSR rating. Evidence also suggests this …

Industry Tournament Incentives, Zhichuan Li

Business Publications

We empirically assess industry tournament incentives for CEOs, as measured by the compensation gap between a CEO at one firm and the highest-paid CEO among similar (industry, size) firms. We find that firm performance, firm risk, and the riskiness of firm investment and financial policies are positively associated with the external industry pay gap. The industry tournament effects are stronger when industry, firm, and executive characteristics indicate high CEO mobility and a higher probability of the aspirant executive winning.

Risk-Adjusted Inside Debt, Zhichuan Li, Shannon Lin, Shuna Sun, Alan Tucker

Business Publications

Compensation theory holds that executive aggression is related to both the level and riskiness of “inside debt” - promises from firms to pay their executives fixed sums of cash in the future, including pensions and deferred compensation. However, previous researchers have only examined the level of inside debt. We provide an inside debt metric that is conceptually superior to previously used metrics, as it incorporates the riskiness of inside debt. For the entire sample, our metric offers modest improvement in fit over past metrics, where the dependent variable is future equity return volatility. Furthermore, the relation between future volatility and …

Revisiting M&M With Taxes: An Alternative Equilibrating Process, Zhichuan Li, Kenneth J. Kopecky, Timothy F. Sugrue, Alan Tucker

Business Publications

Modigliani and Miller present an equity-quantity shifting equilibrating process to achieve an optimal firm value in the presence of corporate taxes. However, in the era in which they derived their various propositions regarding the relation between a firm’s value and its capital structure, well-capitalized takeover specialists including private equity firms and sovereign funds did not exist, at least by today’s standards. In this paper we develop a simple arbitrage strategy, made viable by the presence of takeover firms, which presents an alternative equilibrating process to achieve the same optimal firm value. This alternative process is markedly different from that of …

Measuring Firm Size In Empirical Corporate Finance, Zhichuan Li, Chongyu Dang, Chen Yang

Business Publications

In empirical corporate finance, firm size is commonly used as an important, fundamental firm characteristic. However, no research comprehensively assesses the sensitivity of empirical results in corporate finance to different measures of firm size. This paper fills this hole by providing empirical evidence for a “measurement effect” in the “size effect”. In particular, we examine the influences of employing different proxies (total assets, total sales, and market capitalization) of firm size in 20 prominent areas in empirical corporate finance research. We highlight several empirical implications. First, in most areas of corporate finance the coefficients of firm size measures are robust …

Ceo Power, Corporate Social Responsibility, And Firm Value: A Test Of Agency Theory, Zhichuan Li

Business Publications

Purpose

The purpose of this paper is to explore whether firms with powerful chief executive officers (CEOs) tend to invest (more) in corporate social responsibility (CSR) activities as the over-investment hypothesis based on classical agency theory predicts.

Design/methodology/approach

This paper tests an alternative hypothesis that if CSR investment is indeed an agency cost like the over-investment hypothesis suggests, then those activities may destroy firm value.

Findings

Using CEO pay slice (Bebchuk et al., 2011), CEO tenure, and CEO duality to measure CEO power, the authors show that CEO power is negatively correlated with firm’s choice to engage in CSR …

Corporate Governance And Executive Compensation For Corporate Social Responsibility, Zhichuan Li

Business Publications

We link the corporate governance literature in financial economics to the agency cost perspective of corporate social responsibility (CSR) to derive theoretical predictions about the relationship between corporate governance and the existence of executive compensation incentives for CSR. We test our predictions using novel executive compensation contract data, and find that firms with more shareholder-friendly corporate governance are more likely to provide compensation to executives linked to firm social performance outcomes. Also, providing executives with direct incentives for CSR is an effective tool to increase firm social performance. The findings provide evidence identifying corporate governance as a determinant of managerial …

Endogeneity In Ceo Power: A Survey And Experiment, Zhichuan Li

Business Publications

The endogeneity problem has always been one, if not the only, obstacle to understanding the true relationship between different aspects of empirical corporate finance. Variables are typically endogenous, instruments are scarce, and causality relations are complicated. As the first attempt to summarize different econometric methods that are commonly used to address endogeneity concerns in the context of corporate governance, we explore the relation between CEO power and firm performance, as an experiment, to illustrate how these methods can be used to mitigate the endogeneity problem and by how much. After carefully dealing with the endogeneity issues, we find strong evidence …

Le Mouvement De L’Investissement Socialement Responsable: Une Mise En Perspective Historique (The Sri Movement: An Historical Perspective), Diane-Laure Arjaliès

Business Publications

French Abstract: Ce chapitre offre un panorama historique de l'ISR en France et dans le reste du monde.

English Abstract: This chapter provides an historical overview of the SRI movement in France and worldwide.