Corporate Governance Benefits of Mutual Fund Cooperation
Rex Wang Renjie, Patrick Verwijmeren, Shuo Xia
IWH Discussion Papers,
No. 21,
2022
Abstract
Mutual fund families increasingly hold bonds and stocks from the same firm. We study the implications of such dual holdings for corporate governance and firm decision-making. We present evidence that dual ownership allows financially distressed firms to increase investments and to refinance by issuing bonds with lower yields and fewer restrictive covenants. As such, dual ownership reduces shareholder-creditor conflicts, especially when families encourage cooperation among their managers. Overall, our results suggest that mutual fund families internalize the shareholder-creditor agency conflicts of their portfolio companies, highlighting the positive governance externalities of intra-family cooperation.
Read article
Non-base Compensation and the Gender Pay Gap
Boris Hirsch, Philipp Lentge
LABOUR: Review of Labour Economics and Industrial Relations,
No. 3,
2022
Abstract
This paper investigates whether non-base compensation contributes to the gender pay gap (GPG). Using administrative data from Germany, we find in wage decompositions that lower bonus payments to women explain about 10 per cent of the gap at the mean and at different quantiles of the unconditional wage distribution whereas the lower prevalence of shift premia and overtime pay among women is unimportant. Among managers, the contribution of bonuses to the mean gap more than doubles and is steadily rising as one moves up the wage distribution. Our findings suggest that gender differences in bonuses are an important contributor to the GPG, particularly in top jobs.
Read article
Management Capability and Innovation
Bill Francis, Iftekhar Hasan, Gokhan Yilmaz
Stephen P. Ferris, Kose John, Anil K. Makhija (eds): Empirical Research in Banking and Corporate Finance. Advances in Financial Economics 21, Emerald,
2022
Abstract
This chapter investigates whether core competence of managers and their expansive (vs. specialized) managerial style affects firms' innovative ability, capacity, and efficiency. Using exogenous CEO departures as a natural experiment, it establishes a causal link between managerial capability and innovation. Importantly, it reveals that firms with talented managers receive significantly more nonself citations; make significantly lower self-citations and lesser citations to the others, indicating novel and explorative innovation achievements. Also, managers with higher general (specialized) ability are cited more (less) by patents from a wider range of fields. Lastly, career concern is identified as a mechanism linking higher ability and innovation.
Read article
What Does Codetermination Do?
Simon Jäger, Shakked Noy, Benjamin Schoefer
ILR Review,
No. 4,
2022
Abstract
The authors provide a comprehensive overview of codetermination, that is, worker representation in firms’ governance and management. The available micro evidence points to zero or small positive effects of codetermination on worker and firm outcomes and leaves room for moderate positive effects on productivity, wages, and job stability. The authors also present new country-level, general-equilibrium event studies of codetermination reforms between the 1960s and 2010s, finding no effects on aggregate economic outcomes or the quality of industrial relations. They offer three explanations for the institution’s limited impact. First, existing codetermination laws convey little authority to workers. Second, countries with codetermination laws have high baseline levels of informal worker voice. Third, codetermination laws may interact with other labor market institutions, such as union representation and collective bargaining. The article closes with a discussion of the implications for recent codetermination proposals in the United States.
Read article
Productivity, Managers’ Social Connections and the Financial Crisis
Iftekhar Hasan, Stefano Manfredonia
Journal of Banking and Finance,
August
2022
Abstract
This paper investigates whether managers’ personal connections help corporate productivity to recover after a negative economic shock. Leveraging the heterogeneity in the severity of the financial crisis across different sectors, the paper reports that (i) the financial crisis had a negative effect on within-firm productivity, (ii) the effect was long-lasting and persistent, supporting a productivity-hysteresis hypothesis, and (iii) managers’ personal connections allowed corporations to recover from this productivity slowdown. Among the possible mechanisms, we show that connected managers operating in affected sectors foster productivity recovery through higher input cost efficiency and better access to the credit market, as well as more efficient use of labour and capital.
Read article
01.06.2022 • 12/2022
IWH welcomes top international researcher as head of new department
A powerful boost for the Halle Institute for Economic Research (IWH): Merih Sevilir, a world-renowned researcher on the interplay of financial and labour markets, is heading the Institute’s newest department as of today. Her expertise strengthens the unique selling points of the institute and can be expected to generate significant opportunities for policy insights.
Read
External Social Networks and Earnings Management
Ming Fang, Bill Francis, Iftekhar Hasan, Qiang Wu
British Accounting Review,
No. 2,
2022
Abstract
Using a sample of U.S. listed firms for the 2000–2017 period, we examine how external social networks of top executives and directors affect earnings management in their firms. We find that well-connected firms are more aggressive in managing earnings through both accruals and real activities and that the results are robust after controlling for internal executive social ties. Using a difference-in-differences approach, we find that earnings management decreases after a socially connected executive or director dies. Additional analysis shows that connections forged by past professional working experiences have a greater impact on earnings management than connections forged by education and other social activities. Moreover, CFO social networks have a greater influence on earnings management than CEO social networks. Finally, we explore the underlying mechanisms, finding that 1) firms that are socially connected to each other show more similarities in their earnings management than firms that do not share a connection, and 2) more connected firms are less likely to incur accounting restatements. Collectively, our findings indicate that the external social networks of top executives and directors are important determinants of both their accrual- and real activity-based earnings management.
Read article
The Effect of Foreign Institutional Ownership on Corporate Tax Avoidance: International Evidence
Iftekhar Hasan, Incheol Kim, Haimeng Teng, Qiang Wu
Journal of International Accounting, Auditing and Taxation,
March
2022
Abstract
We find that foreign institutional investors (FIIs) reduce their investee firms’ tax avoidance. We provide evidence that the effect is driven by the institutional distance between FIIs’ home countries/regions and host countries/regions. Specifically, we find that the effect is driven by the influence of FIIs from countries/regions with high-quality institutions (i.e., common law, high government effectiveness, and high regulatory quality) on investee firms located in countries/regions with low-quality institutions. Furthermore, we show that the effect is concentrated on FIIs with little experience in the investee countries/regions or FIIs with stronger monitoring incentives. Finally, we find that FIIs are more likely to vote against management if the firm has a higher level of tax avoidance.
Read article
CEO Network Centrality and the Likelihood of Financial Reporting Fraud
Salim Chahine, Yiwei Fang, Iftekhar Hasan, Mohamad Mazboudi
Abacus,
No. 4,
2021
Abstract
This paper investigates the association between CEO’s relative position in the social network and the likelihood of being involved in corporate fraud. Tracing a large sample of US publicly listed firms, we find that CEO network centrality is inversely related to the likelihood of fraudulent financial reporting. We also document a significant spillover effect of financial reporting behaviour from the dominant (most central) CEO to other CEOs in the same social network, suggesting that the ethical corporate behaviour of CEOs is, on average, influenced by that of their dominant CEO in the network. We further find that the role of CEO network centrality in reducing fraud risk is more prominent in firms with lower auditor quality. Overall, our results suggest that network centrality is an important CEO trait that promotes ethical financial reporting behaviour within social networks.
Read article
Executive Equity Risk-Taking Incentives and Firms’ Choice of Debt Structure
Iftekhar Hasan, Walid Saffar, Yangyang Chen, Leon Zolotoy
Journal of Banking and Finance,
December
2021
Abstract
We examine how executive equity risk-taking incentives affect firms’ choice of debt structure. Using a longitudinal sample of U.S. firms, we document that when executive compensation is more sensitive to stock volatility (i.e., has higher vega), firms reduce their reliance on bank debt financing. We utilize the passage of the Financial Accounting Standard (FAS) 123R option-expensing regulation as an exogenous shock to management option compensation to account for potential endogeneity. In cross-sectional analyses, we find that the documented effect of vega is amplified among firms with higher growth opportunities and more opaque financial information; we also find vega's effect is mitigated in firms with limited abilities to tap into public debt market. Supplemental analyses suggest that firms with higher vega face more stringent bank loan covenants. We conclude that, by encouraging risk-taking, higher vega reduces firms’ reliance on bank debt financing in order to avoid more stringent bank monitoring.
Read article
