Business Commons^™

Segment Disaggregation And Equity-Based Pay Contracts, Young Jun Cho, Hojun Seo

Research Collection School Of Accountancy

We study the role of segment disaggregation in equity-based pay contracts in diversified firms. Disaggregated segment disclosures can improve the observability of managerial actions in internal capital markets and thus increase implicit incentives for managers to allocate resources as desired by shareholders, substituting for explicit incentives provided to CEOs. We use the adoption of Statement of Financial Accounting Standards No. 131 as an identification strategy and find that firms affected by this segment reporting mandate significantly decreased the provision of equity-based incentives in the post-adoption period, especially for firms with higher operating volatilities. This effect is also more pronounced for …

Regulatory Interventions In Response To Noncompliance With Mandatory Derivatives Disclosure Rules, Neil Bhattacharya, Hye Sun Chang, Raluca Chiorean

Research Collection School Of Accountancy

We investigate regulatory actions in response to violations of mandatory derivatives disclosure rules (SFAS 161) and the outcomes of these regulatory interventions using a hand-collected sample of derivatives disclosures. Derivatives are used by nearly two-thirds of U.S. nonfinancial firms, and they are one of the most complex types of financial contracts. Consequently, inadequate derivatives disclosures could pose significant challenges to financial statement users in assessing the risk and financial health of enterprises. First, we document that firms with high proprietary and agency costs are less likely to comply with SFAS 161. Next, by examining derivatives-related SEC comment letters, we further …

The Effects Of Carbon Emissions And Agency Costs On Firm Performance, Muhammad Nurul Houqe, Solomon Opare, Muhammad Kaleem Zahir-Ul-Hassan, Kamran Ahmed

All Works

Carbon emissions and agency costs can have an impact on firms' financial performance. However, limited attention has been paid to the combined and gradual effects of these two factors on firms' performance. We explore the separate and combined effects of carbon emissions and agency costs on firms' financial performance by utilizing data from 2323 US firms that disclosed their environmental information to CDP from 2007 to 2016. The results indicate that firms with higher carbon emissions experience lower performance as the market reacts negatively. Further, firms with both higher carbon emissions and higher agency costs have lower performance. We also …

Small Business Debt Financing: The Effect Of Lender Structural Complexity., Jaume Franquesa, David Vera

Business Administration Faculty Scholarship

Small- and medium-sized enterprises (SMEs) depend on a large measure on commercial banks for external capital, and US SMEs are increasingly experiencing bank credit constraints and resorting to costly alternatives. The purpose of this paper is to investigate the impact of lender organizational complexity on SME financing shortfalls. In particular, it examines the credit shortage effects associated with the SME's reliance on bank holding company (BHC) owned, as opposed to independent, lenders.

Disaster Relief, Inc., Hao Liang, Cara Vansteenkiste

Research Collection Lee Kong Chian School Of Business

We investigate the motivations and value implications of corporate philanthropy by exploiting a global sample of publicly listed firms from 45 countries that provide disaster-relief grants to affected communities. We argue that, while in general corporate philanthropy entails agency concerns, the saliency of large, attention-grabbing natural disasters amplifies the strategic benefits of donating. We find that the returns from donating increase with disaster severity and become positive for firms that rely more on reputation and social image. Returns are also higher for countries with low government relief support, for medium-sized donations, and for in-kind donations. Overall, our results highlight the …

Shareholder Protection And Agency Costs: An Experimental Analysis, Jacob Lariviere, Matthew J. Mcmahon, William Neilson

Economics & Finance Faculty Publications

Two competing principal–agent models explain why firms pay dividends. The substitute model proposes that corporate insiders pay dividends to signal and build trust with outside shareholders who lack legal protection. The outcome model, in contrast, surmises that when shareholders have legal protection, they demand dividends from insiders to prevent them from expropriating corporate funds. Either way, dividends represent an agency cost paid to align the interests of shareholders and insiders. Expropriations by insiders and reduced investment by shareholders are also agency costs, but they are difficult to identify with archival data. Using a laboratory experiment, we identify the impact of …

The Separation Of Corporate Law And Social Welfare, William W. Bratton

All Faculty Scholarship

A half century ago, corporate legal theory pursued an institutional vision in which corporations and the law that creates them protect people from the ravages of volatile free markets. That vision was challenged on the ground during the 1980s, when corporate legal institutions and market forces came to blows over questions concerning hostile takeovers. By 1990, it seemed like the institutions had won. But a different picture has emerged as the years have gone by. It is now clear that the market side really won the battle of the 1980s, succeeding in entering a wedge between corporate law and social …

Socially Responsible Firms, Allen Ferrell, Hao Liang, Luc Renneboog

Research Collection Lee Kong Chian School Of Business

In the corporate finance tradition, starting with Berle and Means (1932), corporations should generally be run to maximize shareholder value. The agency view of corporate social responsibility (CSR) considers CSR an agency problem and a waste of corporate resources. Given our identification strategy by means of an instrumental variable approach, we find that well-governed firms that suffer less from agency concerns (less cash abundance, positive pay-for-performance, small control wedge, strong minority protection) engage more in CSR. We also find that a positive relation exists between CSR and value and that CSR attenuates the negative relation between managerial entrenchment and value.

Agency Costs In Law-Firm Selection: Are Companies Under-Spending On Counsel?, Elisabeth De Fontenay

Faculty Scholarship

A growing body of literature examines whether corporate clients derive sufficient value from the law firms that they engage. Yet little attention has been paid to whether clients optimally select among law firms in the first place. One entry-point is to identify discrepancies in the quality of counsel selected by different corporate clients for the very same work. Using a large sample of loans, this Article finds that major U.S. public companies select lower-ranked law firms for their financing transactions than do private equity-owned companies, controlling for various deal characteristics. While some of this discrepancy can be attributed to value-maximizing …

The Future Of Community Banks And Their Role In The Changing Economy, Alisha R. Defatta

Honors Theses

This paper is a survey of the current literature concerning community banks, the current challenges faced by community banks, and the role community banks play in the economy. Currently technological and regulatory changes are creating challenges for community banks. To combat these issues many community banks are increasing their merger and acquisition activity to avoid closing. This objective of this paper is to discuss the reasons community banks are so important to our economy and to define the hardships they are currently facing. It is also important to identify the next steps we should take to ensure the stability of …

Acquisitions Driven By Stock Overvaluation: Are They Good Deals?, Fangjian Fu, Leming Lin, Micah Officer

Micah S. Officer

Theory and recent evidence suggest that overvalued firms can create value for shareholders if they exploit their overvaluation by using their stock as currency to purchase less overvalued firms. We challenge this idea and show that, in practice, overvalued acquirers significantly overpay for their targets. These acquisitions do not, in turn, lead to synergy gains. Moreover, these acquisitions seem to be concentrated among acquirers with the largest governance problems. CEO compensation, not shareholder value creation, appears to be the main motive behind acquisitions by overvalued acquirers.

Private Equity Firms' Reputational Concerns And The Costs Of Debt Financing, Rongbing Huang, Jay R. Ritter, Donghang Zhang

Faculty and Research Publications

A popular view is that private equity (PE) firms tend to expropriate other stakeholders of their portfolio companies. Bonds offered during 1992-2011 by companies after their initial public offerings (IPOs) do not reflect this view. We find that yield spreads on bonds offered by PE-backed companies are on average 70 basis points lower, holding other things constant. We also find that PE-backed companies have more conservative investment and dividend policies after bond offerings compared to non-PE-backed companies. These results suggest that PE firms’ reputational concerns dominate their wealth expropriation incentives and help their portfolio companies reduce the costs of debt.

Managerial Agency Costs Of Socialistic Internal Capital Markets: Empirical Evidence From China, Jiwei Wang, Kangtao Ye

Research Collection School Of Accountancy

This study provides empirical evidence of managerial agency costs in socialistic internal capital markets. Listed Chinese companies are required to disclose the amount of resources that are reallocated to other firms of the parent company, which provides us with a direct measure of the socialistic subsidization of weak member firms by strong member firms within a business group. We hypothesize that in strong member firms, managerial compensation is less sensitive to firm performance because cross-subsidization makes it difficult for group CEOs to hold the managers in strong firms accountable for their own firms' performance, and also increases the noise in …

Acquisitions Driven By Stock Overvaluation: Are They Good Deals?, Fangjian Fu, Leming Lin, Micah Officer

Research Collection Lee Kong Chian School Of Business

Theory and recent evidence suggest that overvalued firms can create value for shareholders if they exploit their overvaluation by using their stock as currency to purchase less overvalued firms. We challenge this idea and show that, in practice, overvalued acquirers significantly overpay for their targets. These acquisitions do not, in turn, lead to synergy gains. Moreover, these acquisitions seem to be concentrated among acquirers with the largest governance problems. CEO compensation, not shareholder value creation, appears to be the main motive behind acquisitions by overvalued acquirers.

Investor Protection And Cash Holdings: Evidence From U.S. Cross-Listing, Ying Huang, Susan Elkinawy, Pankaj K. Jain

Finance Faculty Works

This paper examines (i) whether the level of firms’ cash holdings differ depending on the strength of investor protection, (ii) whether excess cash holdings are valued more with better investor protection, and (iii) whether cross-listed firms that improve investor protection through “bonding” hold relatively more cash than non-cross-listed firms. We analyze 1405 ADR firms and their corresponding matched firms from 39 different countries and document that ADR firms have significantly higher cash holdings relative to their non-cross-listed peers, especially in recent years. The increase in cash holdings is much higher for emerging market firms because of their transition from particularly …

Adapting To The New Shareholder-Centric Reality, Edward B. Rock

All Faculty Scholarship

After more than eighty years of sustained attention, the master problem of U.S. corporate law—the separation of ownership and control—has mostly been brought under control. This resolution has occurred more through changes in market and corporate practices than through changes in the law. This Article explores how corporate law and practice are adapting to the new shareholder-centric reality that has emerged.

Because solving the shareholder–manager agency cost problem aggravates shareholder–creditor agency costs, I focus on implications for creditors. After considering how debt contracts, compensation arrangements, and governance structures can work together to limit shareholder–creditor agency costs, I turn to available …

The Diminishing Returns Of Incentive Pay In Executive Compensation Contracts, Gregg D. Polsky, Andrew Lund

Scholarly Works

For the past 30 years, the conventional wisdom has been that executive compensation packages should include very large proportions of incentive pay. This incentive pay orthodoxy has become so firmly entrenched that the current debates about executive compensation simply take it as a given. We argue, however, that in light of evolving corporate governance mechanisms, the marginal net benefit of incentive-laden pay packages is both smaller than appreciated and getting smaller over time. As a result, the assumption that higher proportions of incentive pay are beneficial is no longer warranted.

A number of corporate governance mechanisms have evolved to duplicate …

Acquisitions Driven By Stock Overvaluation: Are They Good Deals?, Fangjian Fu, Leming Lin, Micah Officer

Research Collection Lee Kong Chian School Of Business

Overvaluation may motivate a firm to use its stock to acquire a target whose stock is not as overpriced (Shleifer and Vishny (2003)). Though hypothetically desirable, these acquisitions in practice create little, if any, value for acquirer shareholders. Two factors often impede value creation: payment of a large premium to the target and lack of economic synergies in the acquisition. We find that overvaluationdriven stock acquirers suffer worse operating performance and lower long-run stock returns than control firms that are in the same industry, similarly overvalued at the same time, have similar size and Tobin’s q, but have not pursued …

Firm Structure And Corporate Cash Holdings, Venkat Subramaniam, Tony Tang, Heng Yue, Xin Zhou

Research Collection School Of Accountancy

We analyze whether the organizational structure of firms (i.e., whether a firm is diversified or focused) affects their cash holdings. Using Compustat firm level and segment-level data, we find that diversified firms hold significantly less cash than their focused counterparts. Our results are robust to industry adjustments at the segment level and to different factors previously found to be important determinants of cash holdings. Using time-series, cross-sectional, and additional robustness tests we are able to attribute the lower cash holdings among diversified firms to complementary growth opportunities across the different segments of these firms and the availability of active internal …

Securities Intermediaries And The Separation Of Ownership From Control, Jill E. Fisch

All Faculty Scholarship

The Modern Corporation and Private Property highlighted the evolving separation of ownership and control in the public corporation and the effects of that separation on the allocation of power within the corporation. This essay explores the implications of intermediation for those themes. The article observes that intermediation, by decoupling economic ownership and decision-making authority within the shareholder, creates a second layer of agency issues beyond those identified by Berle and Means. These agency issues are an important consideration in the current debate over shareholder empowerment. The article concludes by considering the hypothetical shareholder construct implicit in the Berle and Means …

Executive Compensation And The Maturity Structure Of Corporate Debt, Paul Brockman, Xiumin Martin, Emre Unlu

Department of Finance: Faculty Publications

Executive compensation influences managerial risk preferences through executives’ portfolio sensitivities to changes in stock prices (delta) and stock return volatility (vega). Large deltas discourage managerial risk-taking, while large vegas encourage risk-taking. Theory suggests that short-maturity debt mitigates agency costs of debt by constraining managerial risk preferences. We posit and find evidence of a negative (positive) relation between CEO portfolio deltas (vegas) and short-maturity debt. We also find that shortmaturity debt mitigates the influence of vega- and delta-related incentives on bond yields. Overall, our empirical evidence shows that short-term debt mitigates agency costs of debt arising from compensation risk.

Intra-Industry Effects Of Takeovers: A Study Of The Operating Performance Of Rival Firms, Rupendra Paliwal

WCBT Faculty Publications

This paper investigates whether the managers of industry rivals act to mitigate their agency exposure and improve operating performance when one of the firms in the industry is subject to a takeover attempt. The results indicate that rival firms in general decrease free cashflows, improve operating performance, reduce capital expenditures, and increase leverage in response to a control threat within the industry. In particular, rival firms with potentially higher agency costs i.e., fewer investment opportunities and high cash or high free cashflows exhibit a higher reduction in cash levels and free cashflows subsequent to a control threat in their industry. …

Dividend Policy, Creditor Rights, And The Agency Costs Of Debt, Paul Brockman, Emre Unlu

Department of Finance: Faculty Publications

We show that country-level creditor rights influence dividend policies around the world by establishing the balance of power between debt and equity claimants. Creditors demand and managers consent to a more restrictive payout policy as a substitute for weak creditor rights in an effort to minimize the firm’s agency costs of debt. Using a sample of 120,507 firm-years from 52 countries, we find that both the probability and amount of dividend payouts are significantly lower in countries with poor creditor rights. A reduction in the creditor rights index from its highest value to its lowest value implies a 41% reduction …

The Impact Of The Options Backdating Scandal On Shareholders, Gennaro Bernile, Gregg Jarrell

Research Collection Lee Kong Chian School Of Business

The revelation that scores of firms engaged in the illegal manipulation of stock options’ grant dates (i.e. “backdating”) captured much public attention. The evidence indicates that the consequences stemming from management misconduct and misrepresentation are of first-order importance in this context as shareholders of firms accused of backdating experience large negative, statistically significant abnormal returns. Furthermore, shareholders’ losses are directly related to firms’ likely culpability and the magnitude of the resulting restatements, despite the limited cash flow implications. And, tellingly, the losses are attenuated when tainted management of less successful firms is more likely to be replaced and relatively many …

Golden Parachutes And Shark Repellents And Shareholders' Interests: Some New Evidence, Atreya Chakraborty

Atreya Chakraborty

In this paper we test for the motives for adopting golden parachutes and Anti-Takeover Amendments (ATAs). Firms that exhibited financial characteristics that were associated with a greater probability of hostile raids were also more likely to adopt golden parachutes or ATAs. We also find evidence to support the hypothesis that the adoption of golden parachutes and poison pills may in fact complement each other.

Do Analysts Influence Corporate Financing And Investment?, John A. Doukas, Chansog (Francis) Kim, Christos Pantzalis

Finance Faculty Publications

We examine whether abnormal analyst coverage influences the external financing and investment decisions of the firm. Controlling for self-selection bias in analysts' excessive coverage, we find that firms with high (low) analyst coverage consistently engage in higher (lower) external financing than do their industry peers of similar size. Our evidence also demonstrates that firms with excessive analyst coverage overinvest and realize lower future returns than do firms with low analyst coverage. Our findings are consistent with the hypothesis that analysts favor the coverage of firms that have the potential to engage in profitable investment-banking business.

What Drives Firms To Diversity?, Rong Guo

Finance Dissertations

WHAT DRIVES FIRMS TO DIVERSITY? By RONG GUO Committee Chair: Dr. Omesh Kini Major Department: Finance This paper examines whether corporate governance structures, serving as proxies for agency costs, can explain firms’ decision to diversify. Specifically, it has been hypothesized that firms with worse corporate governance structures are more likely to diversify. The extant literature usually compares the governance characteristics of multi-segment firms to those of single segment firms to address this issue. However, different governance characteristics may simply reflect differences in firm characteristics of diversified firms and focused firms. Furthermore, industry factors may affect both the propensity of firms …

Accounting Conservatism And Managerial Incentives, Young Koan Kwon

Research Collection School Of Accountancy

There are two sources of agency costs under moral hazard: (1) distortions in incentive contracts and (2) implementation of suboptimal decisions. In the accounting literature, the relation between conservative accounting and agency costs of type (1) has received considerable attention (cf. Watts 2002). However, little appears to be known about the effects of accounting conservatism on agency costs of type (2) or trade-offs between agency costs of types (1) and (2). The purpose of this study is to examine this void. In a principal-agent setting in which the principal motivates the agent to expend effort using accounting earnings, this study …

Ceo Succession Processes And Agency Costs, Zeynep Ayca Altintig

LSU Doctoral Dissertations

In the 'passing the baton' succession process, the incumbent CEO/Chairman relinquishes the CEO title, but retains the Chairman title to facilitate monitoring the new CEO during a probationary period. The new CEO eventually wins the Chairman title if he is successful during the probationary period. We argue that this type of succession process can lead to managerial conformism and conservatism because reputation concerns give the retiring CEO incentives to pressure the new CEO to continue existing policies and to avoid making major changes that could substantially improve performance or increase firm value. Consistent with this hypothesis, we find no changes …

The Valuation Effects Of Corporate Investment Decisions: Evidence From Domestic And Foreign Plant Announcements, Bum Suk Kim

Theses and Dissertations in Business Administration

This study examines the effects of corporate investment decisions--announcements of plants--on the value of the firm, using event-study methodology. This paper consists of two parts. Essay I discusses the valuation effects of domestic investments, while Essay II analyses the valuation effects of foreign investments undertaken by U.S. firms and compares the valuation effects between the two investments. Specifically, this study examines the validity of the overinvestment hypothesis and whether focus-increasing investments enhance the value of the firm.

First, the evidence shows that the valuation effects of the investment decision depend on the firm's investment opportunities, proxied by Tobin's q. That …