Corporate Policy Changes Research Articles

CEO turnover, product market competition, and leverage policy

We study how CEO turnover, jointly with product market competition, affects firm leverage policy. About 18% of public nonfinancial US firms in Compustat experience significant switches in their long-term leverage policy every year. Without apparent changes in their operating fundamentals. We find that CEO turnover, especially external and forced turnover, explains shifts in long-term leverage policy. In addition, utilizing the product market fluidity measure and large import tariff changes, we find that, only when coinciding with intensified product market competition, external and forced CEO turnover is significantly and positively associated with the likelihood of firms leveraging up from zero to positive. Our evidence suggests that external and forced CEO turnover is an important vehicle for accomplishing changes in corporate policies necessitated by increases in product market competition.

When CEOs adapt: An investigation of manager experience, policy and performance following recessions

We examine changes in corporate policies following recessions during CEO tenures to evaluate the value of learning. CEOs with recession experience demonstrate expertise in risk-shifting strategies that can contribute to higher firm value and performance during subsequent recessions. Specifically, Recession CEOs use conservative capital structure and allocation during expansions, providing excess capacity and financial slack to accumulate additional cash reserves during economic contractions, resulting in lower bankruptcy risk. As a result, Recession CEOs are equipped to raise more capital in recessions, which results in higher asset growth fueled by investments in acquisitions and capital expenditures. We also examine prior recessions and find poor performers learn to invest more and perform better in subsequent contractions. Our results are strengthened through cumulative recession experiences, when downturns are deeper, and at cyclical firms, where economic cycles are most impactful and Recession CEOs are more relevant. Finally, we use time-varying industry downturns, matching, and CEO turnovers for inference. Overall, we offer novel evidence of valuable CEO learning around risk-taking following direct managerial experience as a firm policy determinant across economic conditions.

Disciplining entrenched managers through corporate governance reform: Implications for risk‐taking behavior

AbstractResearch question/issue This paper examines how enhanced monitoring by corporate boards following the passage of the Sarbanes–Oxley Act of 2002 and concurrent reforms to stock exchange rules (SOX) mitigated risk‐related agency conflicts prevalent in entrenched firms.Research findings/insights Post‐SOX, entrenched firms increased risky and value‐enhancing investments. These investments were financed by reductions in financial slack and dividend payouts and by lower cost of debt. The specific mechanism driving the positive changes in corporate policies of entrenched firms is the SOX requirement of an independent compensation committee. Managers of entrenched firms previously noncompliant with this requirement are rewarded with more equity‐based pay after SOX, which strengthened their incentives to pursue value‐creating riskier investments. Only firms with low information asymmetry benefit from this requirement.Theoretical/academic implications The paper provides evidence of a disciplining effect of the critically important governance legislation on firms with entrenched management. The findings suggest that, by imposing an additional layer of discipline on managers, SOX increased managers' willingness to take on riskier but more value‐enhancing projects that were previously stifled in entrenched firms. The paper underscores the roles of an independent compensation committee and information cost in alleviating managerial risk avoidance.Practitioner/policy implications The paper has implications for the ongoing debate among policymakers and legislators on the costs and benefits of SOX and for future governance reforms. Legal enforcement of stricter board requirements can realign investment policies with shareholders' interests even in the presence of value‐reducing firm‐specific arrangements that entrench managers. However, majority independent board and fully independent audit and compensation committees do not rein in chief executive officer (CEO)'s risk aversion. It is a fully independent compensation committee that is instrumental in incentivizing CEOs to pursue risky projects that also add value. Firms and policymakers need to be aware that the effectiveness of the independent compensation committee in designing optimal pay policies depends on the access to timely and accurate information. Other mechanisms need to be considered to enhance risk‐taking in entrenched firms operating in high cost information environments.

Deleveraging, Tax and Corporate Policies

Exploiting a government-initiated deleveraging program, we investigate how marginal corporate tax rate affects corporate policy changes in response to a credit shock. We find that, after the initiation of China’s 2015 deleveraging program, high-tax-rate firms reduce leverage to a less extent compared with low-tax-rate firms. This effect is stronger in non-state-owned firms and firms with less non-debt tax shields. High-tax-rate firms reduce dividend and switch to equity financing to a less extent. Through retaining more debt, high-tax-rate firms cut less investments in fixed assets, R&D and human capital. With this unique deleveraging setting, we reveal important implications of the tax-leverage link for corporate policies.

Dis"Like"

The social diversification hypothesis (SDH) examines the benefits of internet communication for disadvantaged individuals. In a novel application, we use it to explore the perceived costs of internet use, particularly Facebook across two different analyses. First, in-depth interviews with 45 socio-economically and racially diverse participants from a midwestern college town revealed that People of Color and those without 4-year degree were more suspicious of Facebook and more likely to have been the victim of an online scam. In contrast, Whites and those with four-year degrees were often overwhelmed by, but resigned to using, Facebook, expressing instead frustration with the perceived socio-emotional limitations of communicating online. Qualitative findings were then triangulated with a 2018 Pew survey of 2,002 U.S. adults: disadvantaged groups perceive greater social and personal costs of being online while advantaged groups are more dependent on the Internet. Findings suggest that the costs of internet use vary by access to social capital. In addition to a novel theoretical application of the SDH, we discuss the need for demographic-specific digital literacy design and corporate policy changes that can help mitigate these costs.

CEOs’ Prosocial Behavior, Their Careers and Corporate Policies

This paper examines the associations of Chief Executive Officers’ (CEOs’) prosocial behavior with their career paths and corporate policies. Using individuals’ involvement with charitable organizations as a proxy for prosocial behavior, we find that prosocial individuals are promoted to CEOs faster than non-prosocial individuals. In addition, compared to firms with non-prosocial CEOs, firms with prosocial CEOs tend to have lower executive subordinate turnover, implement more employee-friendly policies, experience higher customer satisfaction, and engage in more socially responsible activities. We also find that firms with prosocial CEOs have higher firm value. These results are corroborated when we compare changes in corporate policies and firm value around different types of CEO turnovers: a prosocial CEO replacing a non-prosocial CEO versus other types of CEO turnovers. Our results thus suggest that prosocial CEOs are more likely to make corporate decisions that benefit a wide range of firm stakeholders.

The importance of ICTs in service delivery at MTC, Namibia

The purpose of the study was to examine the effect of information and communication technology on servicedelivery in the telecommunications industry. A descriptive survey research method was adopted as it helpeddetermine how the use of ICTs can improve service delivery at MTC, Namibia. Findings showed that variablesof information and communication technology have a positive effect on service delivery. Therefore, the studyconcluded that training collectively with changes in corporate policies and support can result in better servicedelivery. It was recommended that employees have to acquire skills on how to use computers and communicationsoftware in order to offer efficient services. It is vital for the telecommunications sector to foster digital opportunitiesby enhancing the use of ICTs to improve service delivery. Barriers to be overcome are no longer only technologicalbut also educational, cultural and linguistic in nature. With that in mind, neglecting to invest sufficiently in humancapital may result in clientele dissatisfaction.

The Importance of ICTs on Service Delivery at MTC, Namibia

The purpose of the study was to examine the effect of information and communication technology on service delivery in the Telecommunications industry. A descriptive survey research method was used as it helped the researcher to determine how the use of ICTs can improve service delivery at MTC, Namibia. Findings showed that variables of information and communication technology have positive effect on service delivery. Therefore, the study concluded that training collectively with changes in corporate policies and support, can result in better service delivery. It was recommended that employees have to acquire skills on how to use computers and communication software in order to offer efficient services. It is vital for the Telecommunications sector to foster digital opportunities by enhancing the use of ICTs to improve service delivery. Barriers to be overcome are no longer only technological but also educational, cultural and linguistic in nature. With that in mind, neglecting to invest sufficiently in human capacity may result in clientele dissatisfaction.

Do political connection disruptions increase labor costs in a government-dominated market? Evidence from publicly listed companies in China

This paper investigates whether the disruption of political connections increases labor costs among Chinese listed firms. Using the Communist Party of China's Rule No. 18 as an exogenous shock that forces firms to lose their politically connected independent directors, we find that the disruption of political connections is associated with an increase in labor costs (both in terms of aggregate labor costs per firm and average labor costs per employee) and an increase in employee turnover. Such increases do not lead to labor productivity improvements, and cannot be attributed to changes in corporate policies or the composition of labor forces after Rule No. 18. We also find that firms with higher unemployment risk and skilled labor risk increase their labor costs to a larger extent. Our results are robust to alternative labor cost measures, controlling for potential confounding events, and alternative political connection channels. Our study shows an unintended labor market consequence—increases in labor costs—of political connection disruptions for firms that are adversely affected by such disruptions.

Social Activism Through E-Petitions: Predicting Activists' Targeting Petitions and Firm Responses

With the advent of media 2.0, e-petitions have become a rampant tactic for activists to press their requests for corporate policy changes. Still, we know little about the mechanisms underpinning th...

Rural-urban disparities in tobacco retail access in the southeastern United States: CVS vs. the dollar stores.

ObjectivesCVS, the largest US pharmacy chain, discontinued selling tobacco products in 2014; meanwhile, Family Dollar and Dollar General, the two largest dollar store chains, began selling tobacco in 2012 and 2013, respectively. The purpose of this study is to evaluate the differential change in tobacco retailer density (TRD) by rurality throughout 12 Southeastern US states.MethodsTobacco retailer density was calculated for CVS and dollar store locations and combined to represent retailer density change before and after policy changes. Bivariate analyses were conducted to compare the corporate-initiated changes in county-level retailer density across rurality categories.ResultsFindings suggest a statistically significant difference (p < 0.0001) between TRD effect and rurality. Urban counties together experienced a retailer density increase of 0.4 stores per 10 k adult population, while rural counties reported a TRD increase of 2.6—eight (8) times the increase in urban areas.ConclusionsRecent corporate policy changes on tobacco sales have increased access to tobacco retailers in rural counties considerably more than in urban counties, contributing to further disparities. CVS pharmacies discontinuing tobacco sales caused a decrease in retail density in urban areas, and the decision of the dollar stores locations initiating tobacco sales resulted in a greater burden to rural and small-metro counties.

Critical Condition: People Only Object to Corporate Experiments If They Object to a Condition

Why have companies faced a backlash for running experiments? Academics and pundits have argued people find corporate experimentation intrinsically objectionable. Here we investigate “experiment aversion,” finding evidence that, if anything, experiments are more acceptable than the worst policies they contain. In six studies participants evaluated the acceptability of either corporate policy changes or of experiments testing them. When all policy changes were deemed acceptable, so was the experiment, even when it involved deception, unequal outcomes, and lack of consent. When a policy change was deemed unacceptable, so was the experiment, but less so. The acceptability of an experiment hinges on its critical condition — its least acceptable policy. Experiments are not unpopular, unpopular policies are unpopular.

Disciplining Entrenched Managers Through Corporate Governance Reform: Implications for Risk-Taking Behavior

Research Question/Issue: This paper examines how enhanced monitoring by corporate boards following the passage of the Sarbanes-Oxley Act of 2002 and concurrent reforms to stock exchange rules (SOX) mitigated risk-related agency conflicts prevalent in entrenched firms. Research Findings/Insights: Post SOX, entrenched firms increased risky and value-enhancing investments. These investments were financed by reductions in financial slack and dividend payouts, and by lower cost of debt. The specific mechanism driving the positive changes in corporate policies of entrenched firms is the SOX requirement of an independent compensation committee. Managers of entrenched firms previously non-compliant with this requirement are rewarded with more equity-based pay after SOX, which strengthened their incentives to pursue value-creating riskier investments. Only firms with low information asymmetry benefit from this requirement. Theoretical/Academic Implications: The paper provides evidence of a disciplining effect of the critically important governance legislation on firms with entrenched management. The findings suggest that, by imposing an additional layer of discipline on managers, SOX increased managers' willingness to take on riskier, but more value-enhancing projects that were previously stifled in entrenched firms. The paper underscores the roles of an independent compensation committee and information cost in alleviating managerial risk avoidance. Practitioner/Policy Implications: The paper has implications for the ongoing debate among policy-makers and legislators on the costs and benefits of SOX and for future governance reforms. Legal enforcement of stricter board requirements can realign investment policies with shareholders' interests even in the presence of value-reducing firm-specific arrangements that entrench managers. However, majority independent board and fully independent audit and compensation committees do not rein in CEO's risk aversion. It is a fully independent compensation committee that is instrumental in incentivizing CEOs to pursue risky projects that also add value. Firms and policy-makers need to be aware that the effectiveness of the independent compensation committee in designing optimal pay policies depends on the access to timely and accurate information. Other mechanisms need to be considered to enhance risk-taking in entrenched firms operating in high cost information environment.

Social Activism through E-petitions: Explaining targeting decisions and corporate responses

With the advent of media 2.0, e-petitions have become a rampant tactic for activists to press their requests for corporate policy changes. Still, we know little about the mechanisms underpinning this new tactic in terms of how it impacts the targeting decisions of filers of e-petitions and the effectiveness of this medium to garner firm responsiveness. In this paper, we extend current research at the intersection of activism and social movements and develop a conceptual framework for understanding the factors that increase a firm’s propensity to become a target of e-petitions and a firm’s likelihood of responding symbolically or substantitively to the petitioned request. We conclude with directions for future research to test and expand our conceptual development of the the impact of e- petitions.

The Disciplinary Effects of Proxy Contests

Using a manually collected data set of all proxy contests from 1994 through 2012, I show that proxy contests play an important role in hostile corporate governance. Target shareholders benefit from proxy contests: the average abnormal returns reach 6.5% around proxy contest announcements. Proxy contests that address firms’ business strategies and undervaluation are most beneficial for shareholders. By contrast, proxy contests that aim at changing capital structure and governance do not lead to higher firm values. Relative to matching firms, future targets are smaller, they have higher stock liquidity, higher institutional and activist ownership, lower leverage and market valuation, and higher investments. Whereas most of these characteristics predict proxy contests in time series, prior to proxy contests, targets also experience poor stock performance, decreases in investments, increases in cash reserves and payouts to shareholders, and increases in management’s entrenchment. These changes in corporate policies are consistent with targets’ attempts to affect the probability of a proxy contest. This paper was accepted by Amit Seru, finance.

Shareholder Wealth Consequences of Insider Pledging of Company Stock as Collateral for Personal Loans

We investigate the consequences of insiders pledging company stock as collateral for personal loans. Exploiting a new regulatory restriction on voting pledged shares, we document a negative causal impact of pledging on shareholder wealth. We document two channels through which this occurs. First, margin calls triggered by exogenous price falls appear to exacerbate the crash risk of pledging firms. Second, since insiders can suffer significant losses of private benefits of control in meeting large margin calls, we hypothesize and find that pledging is followed by several changes in corporate policies that are consistent with greater risk aversion.

The Contract Year Phenomenon in the Corner Office: An Analysis of Firm Behavior During CEO Contract Renewals

This paper investigates how executive employment contracts influence corporate financial policies during the final year of the contract term, using a new, hand-collected data set of CEO employment agreements. On the one hand, the impending expiration of fixed-term employment contracts creates incentives for CEOs to engage in strategic window-dressing activities. We find that, compared to normal periods, CEOs manage earnings more aggressively when they are in the process of contract renegotiations. Correspondingly, during CEO contract renewal times, firms are more likely to report earnings that meet or narrowly beat analyst consensus forecasts. Moreover, CEOs also reduce the amount of negative firm news released during their contract negotiation years. On the other hand, we find that merger and acquisition deals announced during the contract renegotiation year yield higher announcement returns than deals announced during other periods, suggesting that the upcoming contract expiration and renewal can also have disciplinary effects on potential value-destroying behaviors of CEOs. In addition, we show that firms whose CEOs are not subject to contract renewal pressure do not experience such corporate policy changes and that CEOs who engage in manipulation during contract renewal obtain better employment terms in their new contracts, in terms of contract length, severance payment, and salary and bonus. Overall, our results indicate that job uncertainty created by expiring employment contracts induces changes in managerial behaviors that have significant impacts on firm financial activities and outcomes.

First Year in Office: How Do New CEOS Create Value?

Career concerns and possible “escalation of commitment” bias imply that replacing key decision makers is often necessary for effective re-optimization on poor prior investment decisions. Thus, examining firm actions immediately post CEO turnover can shed important light on the error correction process in a corporation. We find that the probability that a poorly performing business segment will be terminated almost doubles when the CEO who established it steps down. More generally, corrective actions such as operational downsizing tend to follow CEO turnover, while expansion and other corporate policy changes do not. Management shakeup greatly facilitates the correction process, especially after CEO turnover. The higher intensity of corrective actions and their positive value impact post CEO turnover hold pervasively, whether the pre-turnover firm and industry conditions are good or bad, and even for turnovers due to the death and retirement of the department CEOs. The intensity and value impact of post-turnover corrective actions can also explain the well documented performance difference between new insider and outsider CEOs. Our study suggests that a main source of value creation associated with CEO turnover is the facilitation of error correction and re-optimization. We also identify institutional frictions that can hinder error correction at CEO turnover.

The Disciplinary Effects of Proxy Contests

Using a manually collected data set of all proxy contests from 1994 through 2012, I show that proxy contests play an important role in hostile corporate governance. Target shareholders benefit from proxy contests: the average abnormal returns reach 6.5% around proxy contest announcements. Proxy contests that address firms' business strategies and undervaluation are most beneficial for shareholders. In contrast, proxy contests that aim at changing capital structure and governance do not lead to higher firm values. Relative to matching firms, future targets are smaller, they have higher stock liquidity, higher institutional and activist ownership, lower leverage and market valuation, and higher investments. While most of these characteristics predict proxy contests in time-series, prior to proxy contests targets also experience poor stock performance, decreases in investments, increases in cash reserves and payouts to shareholders, and increases in management's entrenchment. These changes in corporate policies are consistent with targets' attempts to affect the probability of a proxy contest.

Using an International Medical Advisory Board to Guide Clinical Governance in a Corporate Refractive Surgery Model

To describe the role played by the International Medical Advisory Board (IMAB) in clinical and corporate governance at Optical Express, a corporate provider of refractive surgery. A review of goals, objectives, and actions of the IMAB. The IMAB has contributed to study design, data analysis, and selection of instruments and procedures. Through interactions with Optical Express corporate and clinical staff, the IMAB has supported management's effort to craft a corporate culture focused on continuous improvement in the safety and visual outcomes of refractive surgery. The IMAB has fashioned significant changes in corporate policies and procedures and has had an impact on corporate culture at Optical Express.