Managerial Labor Market Research Articles

Status spillover and director labor market outcomes following organizational misconduct

Can status generate a halo effect that creates spillover consequences for similar others? In this paper, we ask if it is possible for status to spill over to one’s peers, improving the outcomes of actors whose identities might be diminished by a connection to organizational misconduct. We unpack the consequences of misconduct for corporate directors by studying the change in the prominence of directors’ affiliations following revelations of misconduct on one of the boards on which they serve. Using a sample of U.S. companies restating earnings between 1996 and 2003, we find that one’s status, as well as the status of others actors who have the same relationship to the misconduct firm, can moderate the negative effect of association with misconduct on the status a director’s subsequent affiliations. Our findings suggest that the collective status of a group of similar actors buffers the focal actor’s social position. Thus, we find evidence of a halo spillover effect created by the collective status of a gr...

The Labor Market for Corporate Directors

This paper empirically analyzes the labor market for corporate directors and the role compensation plays in this market. Since salaries are not individually negotiated with directors, preferences of directors and firms, rather than wages, determine market outcomes. I estimate preferences from a two-sided matching model and use them in counterfactual experiments. Increasing director pay by $150,000 a year per director allows less desirable firms to attract a better pool of directors. This result suggests that firms can effectively use compensation to build better boards. The framework developed here is used to analyze other important market segments, such as the market for CEO directors.

Board Games: Timing of Independent Directors’ Dissent in China

In this paper, we examine the circumstances under which so-called “independent” directors voice their independent views on public boards in a sample of Chinese firms. First, we ask why independent directors dissent, i.e. how they justify such dissent to public investors. We find that when independent directors dissent, they tend to offer mild, subjective justifications. Overt criticism of the management is rare. Next, we ask when an independent director is more likely to dissent and who is more likely to dissent. Controlling for firm and board characteristics, we find that dissent is significantly correlated with breakdown of social ties between the independent director and the board chair who locates at the center of the board bureaucracy in China. Dissent is more likely to occur when the board chair who appointed the independent director has left the board. Dissent also tends to occur at the end of board “games”, defined as a 60-day window prior to departure of the board chair or departure of the independent director herself. The endgame effect is particularly strong, seeing 27% of the dissent issued at board “endgames” which represents only 4% of independent directors’ average tenure. While directors with foreign experience are more likely to dissent, we do not find that academics, accountants and lawyers are significantly more active in voicing dissent. Lastly, we show that dissent is consequential to both the director and the firm. For directors, dissent significantly increases one’s likelihood of exiting the director labor market, which translates to a more-than-10% estimated loss of annual income. For firms, we document an economically and statistically significant cumulative abnormal return of -0.97% around announcement of dissent. Although the literature has suggested that dissent might be reflective of diverse viewpoints, and perhaps beneficial in and of itself through reduction of firm variability, we do not find this offsetting beneficial effect to be strong.

Labor market evaluation versus legacy conservation: What factors determine retiring CEOs' decisions about long-term investment?

Do CEOs nearing retirement attempt to boost short-term firm performance or do they care more about what type of legacy they will leave behind? The two opposing predictions about the behavior of CEOs upon retirement suggest that retiring CEOs' decisions about certain long-term investment items may be more complex than suggested in the literature. In search of an answer to this question, we examine the relationship between CEO retirement and the level of firm commitment to corporate social responsibility (CSR). The results show that CEO retirement has a negative effect on firm commitment to CSR. However, we found that the negative effect becomes weaker when CEOs retire at relatively older ages or are retained on the board of directors of their own firms. Our finding suggests that CEOs who face weaker pressure from the labor market for corporate directors may pay more attention to preserving their legacy. Copyright © 2014 John Wiley & Sons, Ltd.

Board Walk or Parked Place? Acquiring Firms and the Director Labor Market

We examine the stability and composition of acquirer boards around mergers and the director characteristics associated with selection for the post-merger board. Our results indicate that the post-merger board changes substantially and variation is significantly different from both non-merger years and non-merging firms. Adjustments reflect firms upgrading skills associated with executive and merger experience and bargaining between targets and acquirers, rather than agency motives. Conversely, director selection at non-merging firms is driven by general skills and diversity. Our analyses provide insight into the dynamic nature of board structure and characteristics valued in the director labor market.

Whom are you promoting? Positive voluntary public disclosures and executive turnover

Research summary: This paper uses signaling theory to bring together two complementary research streams that have largely ignored each other: strategic human resource management and media relations management. We argue that when publicly traded firms voluntarily and publicly disclose positive information about their value creation and appropriation activities, they also send positive signals to managerial labor markets regarding executives' capabilities. Accordingly, we hypothesize a positive association between public disclosures and voluntary executive turnover. An analysis of pharmaceutical and communications equipment firms from 1990 to 2004 supports this prediction, underscoring the need to understand better the effects of voluntary public disclosures on a firm's ability to protect its human capital. More generally, our results highlight the importance of considering the impact of a single signal on multiple receivers.Managerial summary: Given the organizational benefits of positive media coverage, the considerable effort that firms put into managing their image in the media is not surprising. We argue and show, however, that when a firm enhances its public image it also improves its executives' positions in the managerial labor market and, by so doing, increases their likelihood of voluntarily leaving the firm. In particular, we find that corporate press releases, an important mechanism for managing information released in the public domain to signal a firm's competitive advantages, may result in unintentional loss of senior management talent. This trade‐off suggests that firms should increase coordination between their strategy, human resources, and corporate communications/investor relations departments to ensure that they collectively weigh the benefits and costs of publicly disclosing value‐relevant information. Copyright © 2015 John Wiley & Sons, Ltd.

Lost in Transition: Trust and CEO Succession

This study examines whether cultural elements, such as generalized trust, impede the proper working of the market place. Results suggest that generalized trust influences the size of the in-groups from which a firm’s CEO is chosen and the length of the succession process. The effect of generalized trust on CEO succession is causal. Furthermore, the negative impact of a family CEO on firm performance is more prevalent when generalized trust is low. In summary, lack of generalized trust impedes the proper working of the managerial labor market, which leads to inefficient economic outcomes at the firm level.

Effects of managerial labor market on executive compensation: Evidence from job-hopping

We find that companies dramatically raise their incumbent executives’ pay, especially equity-based pay, after losing executives to other firms. The pay raise is larger when incumbent executives have greater employment mobility in the labor market, when companies lose senior executives, and when job-hopping executives receive favorable job offers in their new firms. A company׳s subsequent pay raise to incumbent executives after losing an executive diminishes its deficiency in executive compensation relative to its industry peer firms, and is effective at retaining its incumbent executives. Overall, our evidence suggests that executive job-hopping activity has significant effects on firms’ compensation policies.

Managing the Numbers Smartly: Rewards and Reputation from the Managerial Labor Market and Strategic Disclosure Choices

Top executives’ reputation and rewards from the managerial labor market are at least partly determined by the financial information their firms convey to the capital markets. We thus examine whether managerial labor market incentives influence firms’ choices in such information transmission and whether these choices subsequently affect future outcomes in the managerial labor market. Our findings are consistent with a strategic information distortion hypothesis. Specifically, CEOs facing greater labor market incentives are more likely to engage in strategic financial disclosure choices to inflate their firms’ reported performance and to meet or narrowly beat earnings benchmarks, thereby enhancing their reputation and upward mobility in the labor market. At the same time, these CEOs are more careful not to commit disclosure maneuvers that trigger financial fraud and restatements, which will severely damage their reputation and undermine their future career prospects. These empirical patterns portray a nuanced picture of how CEOs respond strategically to labor market incentives and career concerns in making financial disclosure decisions. We further show that these decisions affect managerial labor market outcomes; consistent marginal benchmark beating leads to higher compensation and greater mobility in the labor market for CEOs.

Under the Microscope: The Effect of Star Analyst Downgrades on Director Exit

Research on the director labor market has primarily focused on internal factors driving director exit, such as firm performance or director characteristics, but has mostly overlooked how external factors may influence director exit. We draw on the reputation literature and self-determination theory to argue that downgrades from

What Death Can Tell: Are Executives Paid for Their Contributions to Firm Value?

Using stock price reactions to sudden deaths of top executives as a measure of expected contribution to shareholder value, we examine the relationship between executive pay and managerial contribution to shareholder value. We find, first, that the managerial labor market is characterized by positive sorting: managers with high perceived contributions to shareholder value obtain higher pay. The executive pay-contribution relationship is stronger for professional executives and for executives with high compensation. We estimate, second, that an average top executive (chief executive officer) appears to retain 71% (65%) of the marginal rent from the firm-manager relationship. We examine, third, how the executive pay-contribution relationship varies with individual, firm, and industry characteristics. Overall, our results are informative for the ongoing discussion about the level of executive compensation. This paper was accepted by Wei Jiang, finance.

Assortative Matching in Managerial Labor Markets: Theory and Measurement

This paper provides evidence on the importance of complementarities in production within executive teams. I construct a simple structural model of production and pay rates, where productivity of each individual is aected by the productivity of his or her colleagues and managers’ compensation is set through the Nash bargaining mechanism. Estimation results show that the managerial labor market is characterized by the high degree of within-rm positive assortative matching, which implies that better managers are matched with better coworkers. This result explains high skewness of observed distribution of rm sizes and executive compensation. I nd that 32% of observed inequality in executive pay is explained by the complementarities within executive teams. Applying the model to analyze the degree of sorting between managers and directors, I nd evidence of signicant complementarities in production between managerial and director skill. This result points to the importance of advisory role of the board of directors.

Regulatory Sanctions on Independent Directors and Their Consequences to the Director Labor Market: Evidence from China

We investigate the regulatory sanctions imposed on independent directors for their firms’ financial frauds in China. These regulatory sanctions are prima-facie evidence of significant lapses in business ethics. During the period 2003–2010, 302-person-time independent directors were penalized by the regulator (the China Securities Regulatory Commission—the CSRC), and the two stock exchanges. We find that the independent directors with accounting experiences are more likely to be penalized by the CSRC, though they do not suffer more severe penalties than do the other sanctioned independent directors. We also find that independent directors suffer less severe penalties than do the insider directors. These results are consistent with the hypothesis that the sanctions on independent directors are tied to their assumed ethical and legal responsibilities. Following a regulatory sanction, penalized independent directors experience a significant decline in the number of other board seats held. However, they can gain board seats in better quality firms. We find that interlocked firms that share penalized independent directors with the fraud firm do not suffer from a valuation decline. Overall, our results suggest that regulatory sanctions have not triggered further sanctions on the penalized directors in the labor market but they have, instead, created a disincentive for these directors to serve on the company boards of high-risk firms.

Managerial Labor Market Frictions and Corporate Investment

We argue that corporate investment decisions depend not only on project characteristics such as expected NPV, but also on how well a firm can assess its managers’ human capital. If so, projects pitched by managers about whom the firm has more complete information should be more likely to be funded, all else equal. Using a novel matched employer-employee dataset of firms in the U.S. venture capital (VC) industry and exploiting employees’ moves across VC firms for identification, we show that external hires experience a dip in investment activity when they join a new VC firm. Over time, the gap between external hires and seasoned insiders closes, consistent with the firm gathering information about managerial ability. Exogenous shocks to a firm’s ability to learn result in a slower rate of convergence between external hires and insiders. The data are best explained by the interpretation that informational frictions in the managerial labor market have a significant impact on investment policy.

Birds of a feather: Value implications of political alignment between top management and directors

For 2,695 US corporations from 1996 to 2009, we find that alignment in political orientation between the chief executive officer (CEO) and independent directors is associated with lower firm valuations, lower operating profitability, and increased internal agency conflicts such as a reduced likelihood of dismissing poorly performing CEOs, a lower CEO pay-performance sensitivity, and a greater likelihood of accounting fraud. Importantly, we show that our results are driven neither by the effects associated with various measures of similarity and diversity within the board nor the effects of local director labor market and political conditions on board structure. We provide evidence that our measure of individual political orientation reflects the person׳s political beliefs rather than opportunistic attempts to seek political favor. Overall, our results suggest that diversity in political beliefs among corporate board members is valuable.

Managing the Numbers Smartly: Rewards and Reputation from the Managerial Labor Market and Strategic Disclosure Choices

A top executive’s reputation and potential rewards from the managerial labor market are at least partly determined by the financial information conveyed by her firm to the capital markets. We thus examine whether incentives from the managerial labor market affect firms’ choices in such information transmission. We measure a CEO’s labor market incentives by the gap between her pay and the maximal or near-maximal pay of CEOs at industry peer firms, which essentially captures the size of the prize of an industry tournament for CEOs. We find that firms whose CEOs face a larger pay gap are more like to distort reported financial information by managing earnings upward through income-increasing accruals and are more likely to meet or narrowly beat consensus analyst forecast. However, these firms are less likely to commit accounting irregularities that trigger earnings restatements later. These empirical patterns are concentrated in firms where CEOs stand a better chance of winning the industry tournament and have more mobility within the industry. Our findings are consistent with the hypothesis that CEOs facing greater incentives from the managerial labor market tend to engage in within-GAAP earnings management to boost their firms’ reported performance to burnish their reputation in the labor market and enhance their chance to move up the industry hierarchy. At the same time, these CEOs are more careful not to commit GAAP-violating earnings management, which, if discovered, will severely damage their reputation and undermine their future employment prospect as top executives. Overall, our evidence portrays a nuanced picture of how CEOs make strategic choices in firms’ financial disclosure in response to their labor market incentives and career concerns.

Scarce Human Capital in Managerial Labor Markets

Strategic human capital scholars are increasingly recognizing the importance of human capital scarcity for explaining individual and firm outcomes. This article focuses on scarce human capital in the top manager labor market—and in particular, patterns in which top managers and firms form employment relationships. This examination redirects strategic human capital scholarship in three important ways. First, the findings point to the importance of specifying an omission from prior human capital scholarship: the relationship between human capital and the firm’s resource base (e.g., potential complementarities). Second, the article illustrates the need to simultaneously consider both human capital scarcity and complementarities, and reinforces that scarce human capital can indeed be general human capital. Finally, the theory explains how complementarities fundamentally alter value creation and appropriation dynamics. Specifically, complementarities facilitate the matching of the best managers and firms with the most productive resources, increase the size of the pie (financial proceeds) from the employment relationship, and can enhance the manager’s bargaining power in the division of these proceeds.

Managers, Training, and Internal Labor Markets

We propose a theory that emphasizes the role of managers for the production and allocation of human capital in firms. Managers invest time to train junior employees, and acquire information about the juniors' abilities that is valuable for job assignments. This dual role of managers matters especially in a multidivisional firm, whose internal labor market may be structured in two distinct ways. In a silo, junior workers are eligible only for a transfer or promotion in the division they currently work in; in a lattice, they can also be assigned to another division. The prospect of losing a good worker to another division undermines a manager's training incentives, and may encourage her to misrepresent the information she provides about her workers. We show that because of these agency problems, implementing a lattice to achieve better job assignments also leads to higher wage costs for the firm. As a result, either silos or a lattice can be optimal. Our comparative-statics analysis suggests that the recent trend for firms to facilitate cross-divisional mobility may be caused by product market competition, a tight managerial labor market, and skill-biased technological change.

Independent Director Incentives: Where do Talented Directors Spend Their Time and Energy?

We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally based on the directorship’s relative prestige. When directors experience an exogenous increase in a directorship’s relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced CEO departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors.

Independent director incentives: Where do talented directors spend their limited time and energy?

We study reputation incentives in the director labor market and find that directors with multiple directorships distribute their effort unequally based on the directorship's relative prestige. When directors experience an exogenous increase in a directorship's relative ranking, their board attendance rate increases and subsequent firm performance improves. Also, directors are less willing to relinquish their relatively more prestigious directorships, even when firm performance declines. Finally, forced Chief Executive Officer departure sensitivity to poor performance rises when a larger fraction of independent directors view the board as relatively more prestigious. We conclude that director reputation is a powerful incentive for independent directors.