Managerial Entrenchment Research Articles

Impacts of psychological behaviors of managers on money laundering: evidence from Iran stock exchange

PurposeThis study aims to investigate the impacts of the psychological behaviors of managers, including entrenchment, myopia, narcissism and overconfidence, on money laundering at Iranian companies listed on the Tehran Stock Exchange.Design/methodology/approachThe present study is descriptive-correlational in terms of methodology and applied research in terms of objectives. The statistical population consisted of all companies listed on the Tehran Stock Exchange during 2013–2019. A total of 150 companies were selected as samples via screening. Logistic regression was used to analyze the data and test the hypotheses in EViews v10.FindingsThe findings revealed that management entrenchment, managerial myopia, managerial narcissism and managerial overconfidence have significant impacts on money laundering.Originality/valueThis study pioneer investigating the impacts of psychological behaviors among managers on money laundering in Iran. As an economic crime, money laundering poses an adverse impact on economic growth in countries. The continuous monitoring of manager performance and the deployment of performance measurement systems could prevent the negative impacts of manager behavior on money laundering.

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.

Stock Price Crash Risk and the adoption of Poison Pills: Evidence from Brazil

We examine the effect of stock price crash risk on the adoption of poison pills by Brazilian public firms. By using firm-level data of 191 Brazilian firms from 2010-2018, we find that stock price crash risk is not a driver that lead the adoption of poison pills. However, further results show that managers are not drawing on stock price crash risk as a pretext to entrench themselves, considering that more crash-prone companies do not face a higher likelihood of adopting a particular Brazilian type of poison pills that signals aggressive managerial entrenchment intentions, namely eternity poison pills.

A “Win‐Win” for Soil Conservation? How Indiana Row‐Crop Farmers Perceive the Benefits (and Trade‐offs) of No‐Till Agriculture

AbstractTo address problems of soil degradation, industrial farmers across the United States have converted to no‐till agriculture, which can mitigate the effects of soil erosion and reduce operating costs without necessarily compromising agricultural output. However, producers still debate the benefits of this practice. Through participant observation and semi‐structured interviews with 14 row‐crop farmers in central Indiana, this study examines farmer perceptions of no‐till as a soil conservation practice. Ethnographic findings reveal that adopters highlight no‐till’s benefits for improving soil quality while also minimizing operating costs, including labor and fuel. However, both adopters and critics alike acknowledge trade‐offs; for example, no‐till disrupts entrenched management practices and norms—from the aesthetics of “clean” fields to the timing of spring planting. Furthermore, some non‐adopters argue that no‐till’s heightened reliance on herbicide contradicts the broader goals of conservation. This study thus shows that while a compelling case can be made for no‐till as an environmental and economic “win‐win,” this narrative also elides ongoing disagreements and trade‐offs linked to its adoption. No‐till’s appeal for many producers is that it advances soil conservation without fundamentally challenging industrial farming’s aspiration for ever‐increasing efficiency and profitability.

The relationship between managerial attributes and firm risk-taking

PurposeThe main objective of the paper is to examine the relationship between managerial attributes (e.g. managerial entrenchment, managerial myopia and managerial overconfidence) and firm risk-taking on the Tehran Stock Exchange (TSE).Design/methodology/approachThe study’s sample comprises 150 companies listed on the TSE from 2011 to 2017. Risk-taking is calculated as the standard deviation (SD) of stock return. Explanatory factor analysis was performed to calculate the weight of each of the five variables managerial ownership, board independence, chief executive officer (CEO) tenure, board compensation and CEO duality as a proxy for managerial entrenchment. The study by Anderson and Hsiao (1982) was also used to calculate managerial myopia, and the study by Schrand and Zechman (2012) was used to calculate managerial overconfidence.FindingsThe results indicate that the effect of managerial entrenchment and managerial myopia on risk-taking of listed firms on the TSE is positive and significant, implying that an increase in CEO entrenchment is likely to give rise to risk-taking. The authors conjecture that this finding could be due to the investment projects impairing the firm performance in the long run. Furthermore, the effect of managerial overconfidence on listed firms' risk-taking on the TSE is significantly negative. Since overconfidence is one of the traits of narcissism and corporate managers tend to be encouraged and admired, it is implied that they tend to make efficient and low-risk investments that ultimately reduce the firm risk-taking.Originality/valueSeveral theoretical studies show that managerial behavior is a determining factor in the economy. One of the reasons which justify the originality of this study is the context and institutional environment. Undoubtedly, managerial behavior (e.g. managerial entrenchment, managerial myopia and managerial overconfidence) is expected to have some significant variations in developing countries compared to prevailing in developed countries, particularly in the Iranian stock market the economic sanctions. Furthermore, due to the direct impact of individuals' psychological and behavioral characteristics on their decisions and the effect of companies' risk-taking on increasing and decreasing shareholders and companies' wealth, this research is essential. Given the function of designed behavioral criteria for assessing risk-taking behaviors, the relationship between managerial attributes and firms' risk-taking is still unclear and investigated in this study.

CEO Bonuses as Studied by Robust Logistic Regression

This investigation utilized a robust logistic regression method (BYLOGREG) to investigate CEO bonuses prior to the 2007-2009 financial crisis. The robust logistic regression analysis determined that the year and CEO tenure affected the probability that a CEO received a bonus in the 2004-2006 study period. The analysis refuted that ”management entrenchment” widely influenced CEO bonus compensation because the probability of receiving a bonus was negatively related to CEO tenure. The probability of receiving of bonus declined during the 2004-2006 study period because the percentage of CEOs that received a bonus was lowest in 2006. The robust logistic regression analysis found that the current year stock return was positively and statistically significantly related to the probability that a CEO received a bonus. The analysis also showed that managerial (financial) performance in the areas of growth of sales, ROE, and growth in earnings per share increased the probability that a CEO received a bonus. In this investigation, the size of the firm and the growth rate of equity were not statistically significant. Overall, robust logistic regression correctly classified 77% of the observations on the basis of the model variables, which indicated that most CEO bonuses could be explained by firm, CEO, and financial variables.The BY robust logistic regression proved to be robust to outliers in the CEO bonus sample studied. Interestingly, the relationship between stock return and the probability of a bonus was completely missed by a maximum likelihood (ML) logistic regression with the full CEO bonus sample, which contained outliers. After trimming the CEO bonus data set to remove outliers, the ML logistic regression coefficients changed dramatically. However, the BY robust logistic regression coefficients changed very little. Use of the residuals from the BY robust logistic equation should facilitate further inquiry into CEOs that received a bonus but were predicted to have a low probability of a bonus.

Measuring Corporate Investment Horizons and Identifying Short-Termism

This paper proposes an empirical approach to capture investment horizons. I utilize this method to analyze short-termist investment. It relies on information which is not observable to investors in the period of investment and therefore considers the nature of short-termism as an agency problem. My empirical findings establish the validity of the introduced approach by relating it to an existing measure of investment horizons as well as multiple firm characteristics which are connected to short-termism. I observe that investment horizons are shorter for firms that inflate their reported income through real or accrual-based earnings management and for firms whose stock prices are more sensitive to earnings surprises. I also investigate which governance mechanisms are effective in curtailing short-termism. Managerial entrenchment, analyst coverage, institutional ownership, the effectiveness of the board of directors, and managerial long-term compensation all relate to longer investment horizons and thus less short-termism.

Managerial entrenchment and corporate social responsibility engagement: the role of economic policy uncertainty

The behavioral theory of corporate governance is employed to investigate the relationship between managerial entrenchment and corporate social responsibility (CSR) engagement. Effective corporate governance is argued to reduce managerial entrenchment, thereby increasing CSR engagement. The role of economic policy uncertainty (EPU) is investigated as a moderating variable in this relationship, such that high levels of EPU will increase the impact of entrenchment on CSR engagement. These arguments are supported using a panel of 386 US firms from 2011 to 2018 representing 3,088 firm-year observations in a variety of industries. In supplementary analysis, the CSR measure is disaggregated in order to provide further insight regarding these relationships as they pertain to the individual CSR dimensions under study. Findings inform research regarding the entrenchment-CSR link in particular environmental contexts. Practical implications include potential governance guidelines for boards of directors; stakeholder management given the policy environment; and the impact of government decisions as they affect policy uncertainty, firm actions, and CSR engagement.

How powerful CEOs adopt antitakeover provisions?

ABSTRACT We investigate how powerful chief executive officers (CEOs) adopt antitakeover provisions (ATPs). Prior studies indicate that CEOs adopt ATPs to increase their private benefits and job security. However, our evidence reveals a nonmonotonic relationship between CEO power and ATPs. Specifically, relatively less powerful CEOs adopt more ATPs, supporting the managerial entrenchment hypothesis. However, when CEOs become sufficiently powerful, they adopt fewer ATPs, supporting the quiet life hypothesis. Overall, our findings support the notion that a simple linear relationship does not explain the effect of CEO power.

Are credit rating disagreements priced in the M&A market?

This paper examines the effect of credit rating disagreements on merger and acquisition (M&A) decisions. We show that acquirers with split ratings prefer to use stock to finance their acquisitions. More importantly, we find that acquirers with split ratings experience lower announcement returns. Further analysis shows that overpayment by acquirers with split ratings is concentrated in acquirers with entrenched managers. Our results are robust to alternative identification strategies. Overall, our evidence indicates that credit rating disagreements are heavily priced in the M&A market.

Equity ownership and corporate transparency: International evidence

This paper investigates the effect of insider ownership on stock price synchronicity. Specifically, for countries with poor investor protection, the managerial entrenchment effect dominates. When ownership increases, synchronicity increases at an increasing rate. However, for countries with strong investor protections, managerial entrenchment effect only dominates the incentive alignment effect when controlling ownership increases initially. As controlling ownership continues to increase, the incentive alignment effect becomes stronger and the net effect is reversed, leading to a more transparent firm. Additional tests reveal that financial reporting framework and insider trading law enforcement are crucial external governance channels affecting stock price synchronicity.

Managerial Discretion: The Relationship Between Investments in R & D and Performance -Revisited: Case of Tunisian Enterprises

This article proposes a re-reading of the role of R & D investments in the performance equation when a manifestation of an opportunistic inclination on the part of managers occurs. Often, the manager and the owners express different expectations regarding investment choices in R & D. Although shareholders are looking for performance, the manager sometimes has a tendency to broaden his managerial discretion. The choice of R & D investments could thus reinforce managerial entrenchment. We will demonstrate the moderation exercised by managerial discretion on the R & D / Performance relationship.Our empirical validation will be put to examination against the Tunisian context by deploying various tests. We come to grips with the characteristics of the Tunisian context through an empirical study of 75 companies observed over a 7 -year time lapse, i.e. from 2008 to 2014. The explanatory analysis was an opportunity to highlight the existence of a moderation exercised over the main relationship dealt with.

The Relationship between the Audit Outputs and Managerial Entrenchment

The present study investigates the relationship between audit outputs (including audit quality, type of opinion, audit fee, and timeliness) and managerial entrenchment in firms listed on the Tehran Stock Exchange. The multivariate regression model is used for hypothesis testing, research hypotheses were tested using a sample of 678 listed observations on the Tehran Stock Exchange during 2012-2017, and the exploratory factor analysis of 12 variables (including CEO duality, financial expertise, and CEO industry, board compensation, managerial ownership, tenure, and CEO consistency, board independence, financial expertise, and board industry, correlation and board effort) is used for examining managerial entrenchment. As expected, the results show a significant relationship between audit outputs and managerial entrenchment, such that audit fee and audit quality are negatively associated with managerial entrenchment, and the relationship between report delay and type of opinion and managerial entrenchment is positive and significant. By adding new variables to measuring managerial entrenchment, the present study provides a better evaluation of this index. Moreover, it contributes to the field because the previous studies have benefited from limited proxies for this purpose.

English

The research expands the earnings management (EM) literature for Italian unlisted firms by investigating the drivers of both accrual-based (AEM) and real activity-based (REM) earnings management. According to prior literature, the reliability of financial statements of these firms concerns mainly lenders in assessing borrower creditworthiness, and Tax Offices in calculating corporate tax. We analyse unlisted firms as they represent 99.9% of Italian firms, consistent with most European countries. We estimate models using factors drawn from the literature which potentially influences both AEM and REM, along with some robustness tests. For AEM, ownership concentration is a positive driver, consistent with the entrenchment hypothesis, and firm leverage is a positive driver, suggesting the use of debt covenant violation avoidance strategies. Quality auditor engagement tends to constrain AEM, while size has a negative impact. However, tax drives AEM and profitability has a positive impact. For REM, ownership concentration has no impact, and leverage has a positive impact. The engagement of Big 4 constrains REM. Our expectations are confirmed when the total earnings management variable is used as the dependent.   Key words: Earnings management, accrual-based earnings management, real activity-based earnings management, determinants, unlisted firms, Italy.

The relationship between managerial entrenchment and accounting conservatism

PurposeThis study aims to assess the relationship between managerial entrenchment and accounting conservatism in Iran.Design/methodology/approachTo test hypotheses, all listed companies on the Tehran Stock Exchange during 2013–2018 (six years) that qualified were selected. Given the defined limitations of the study, a total of 120 firms with 720 year-observations was selected. After collecting data and figures, they were analyzed using EViews software. Having presented the inferential model tests, the panel data with fixed effects model is chosen.FindingsThe study results indicate a positive and significant relationship between managerial entrenchment and unconditional conservatism presented in the income statement. Moreover, the authors find a meaningful relationship between managerial entrenchment and unconditional conservatism about the balance sheet.Practical implicationsManagers will be more aware of the positive consequences of employment optimal corporate governance such as conservative accounting. Such corporate governance is likely to serve their interest in the long run by providing positive signals to the equity owners and board of directors.Originality/valueBy assessing conservatism’s literature in Iran, we observe many studies on this concept. Still, no investigation is carried out on the relationship between conservatism in accounting and managerial entrenchment. The present study is innovative because it evaluates the relationship between managerial entrenchment and two types of conservatism, namely, balance sheet and income statement conservatism, which have never been investigated by prior studies, notably in emerging markets.

The ownership effect on corporate investment distortion in the transitional economies: Mitigating or exacerbating?

This article analyzes how asymmetric information in corporate management and equity financing distorts corporate investment and how different corporate ownership (government, managerial, and foreign) affects investment distortion in a transitional economy. When managerial entrenchment is sufficiently high, government ownership further distorts investment by biasing downward managers’ net marginal cost of investment; in contrast, managerial and foreign ownership counter the bias and thereby reduce investment distortion. Furthermore, unlike government ownership, managerial and foreign ownership mitigate rather than exacerbate the extent to which high entrenchment distorts investment. An econometric analysis of a large sample of Chinese public firms provides strong evidence in support of these theoretical predictions.

The relationship between business strategy and management entrenchment

PurposeThe present study's main objective is to assess the relationship between business strategy and management entrenchment in listed firms on the Tehran Stock Exchange (TSE).Design/methodology/approachIn this paper, 128 firms have been assessed during 2012–2017. The management entrenchment variable is measured using five factors: management ownership, board independence, chief executive officer (CEO) tenure, managers' compensation and CEO duality.FindingsThe obtained results show a negative and significant relationship between the aggressive strategy of the current year (and that of the previous year) and management entrenchment such that adopting an aggressive business strategy in the current and previous years can debilitate the management entrenchment. Moreover, there is a negative and significant relationship between the current year's defensive strategy and management entrenchment, and employing a defensive business strategy in the current year can also weaken the management entrenchment. At the same time, there is no significant relationship between the previous year's defensive business strategy and management entrenchment.Originality/valueManagerial entrenchment is a determining factor in the economy, and regarding the dominant norms in the emerging markets and developing countries, this factor is different from that of the developed countries. It is more important in some markets, like Iran that is dealing with economic sanctions. On the other hand, Tehran Stock Exchange observes numerous modifications, especially providing financial statements in accordance with international standards that are expected to affect the determination of business strategy in firms.

Does CEO pay slice reflect poor corporate governance?

AbstractWe examine whether high CEO pay inequality, measured by the share of total managerial pay captured by the CEO (CEO pay slice or CPS), is an outcome of poor corporate governance, and its implications for shareholder wealth. We exploit the 2002 NYSE and NASDAQ governance reforms that mandated firms to have majority independent boards as a quasi‐exogenous source of variation in the internal governance environment of firms. Results show that CPS decreases following the passage of these exchange listing regulations, for firms with entrenched CEOs affected by the exchange listing regulations. Firm value also increases for firms that likely suffer from agency conflicts in the pre‐regulation period. The novelty of our paper stems from combining the difference‐in‐difference estimation with CPS as a measure of CEO compensation, reducing the endogeneity concerns. Our paper links board independence, CPS, CEO entrenchment, and firm value by documenting that the impact of governance reforms on CPS is conditional on CEO entrenchment. Overall, our results suggest that poor corporate governance environments are associated with high CPS and consequently lower firm valuations, supporting the view that high CEO pay inequality reflects managerial entrenchment.

Excessive managerial entrenchment, corporate governance, and firm performance

This paper investigates the differential impact of positive and negative excessive managerial entrenchment on the CEO turnover-performance sensitivity, CEO compensation, and firm performance. We measure the degree of managerial entrenchment using the E-index introduced by Bebchuk et al. (2009). Our findings suggest that an increase in excess CEO entrenchment reduces the likelihood of CEO turnover due to poor performance. We also show a positive association between excessive entrenchment and CEO compensation as managers gain more power and authority when they are entrenched. On the other hand, excess CEO entrenchment has an inverse correlation with firm performance and firm value. Overall, we propose that excessive managerial entrenchment has a converse impact on board monitoring and shareholders’ welfare.

Financial hedging and corporate investment

Building on the well-documented relationship between corporate financial hedging and firms' borrowing costs, this study examines the impact of utilizing financial derivative instruments on corporate investment. We document that engaging in financial hedging enables firms to pursue more inorganic growth opportunities in the form of M&As. Acquiring firms with financial hedging programs have a lower borrowing cost and are more likely to pay for their deals with cash and use external borrowing. While financial hedging serves as a vehicle for firms to bring their inorganic investment plans to fruition by facilitating their financing, it also leads to inferior investment choices when conflicts of interest among managers and shareholders are more likely to arise. Our study shows for the first time that the financial flexibility emanating from corporate financial hedging can give rise to agency costs by instigating entrenched managers to overinvest.