Does the Gender of Directors Matter?

Miriam Schwartz-Ziv 

Harvard University – Harvard Kennedy School (HKS); Northeastern University – Finance and Insurance Area; Harvard University – Edmond J. Safra Center for Ethics

March 3, 2013

Abstract: 
I examine relatively gender-balanced boards of business companies in which the Israeli government holds a substantial equity interest. I construct a novel database based on the detailed minutes of 402 board and committee meetings of eleven such companies. I find that boards that included critical masses of at least three directors of each gender, and particularly of three women, were approximately twice as likely to request further information and to take an initiative, compared to boards without such critical masses. The ROE and net-profit-margin of these companies is also significantly larger if they have at least three women directors.

Linguistic Diversity and Stock Trading Volume (SSRN)

Authors:  Yen-Cheng Chang,  Shanghai Advanced Institute of Finance; China Academy of Financial Research (CAFR);  Harrison G. Hong, Princeton University – Department of Economics; National Bureau of Economic Research (NBER); Larissa Tiedens, Stanford Graduate School of Business;
Bin Zhao, Shanghai Advanced Institute of Finance; China Academy of Financial Research (CAFR)
Paper Date: March 14, 2013
Rock Center for Corporate Governance at Stanford University Working Paper No. 134

Abstract:      

We test the hypothesis that the linguistic diversity of a stock’s investor base leads to more trading. Trading might be due to beliefs differing across languages or investor exposure to multiple languages leading to more trading ideas. Using stock message boards from China, which has ten languages, we measure the linguistic diversity of a stock’s investor base using a Herfindahl index of messages posted from different languages. A firm’s diversity increases in the number of languages spoken in the province where it is headquartered. Using the latter as the instrument, trading volume in a stock rises with its linguistic diversity. We then attempt to discriminate among competing mechanisms. We also show using a sample of forty-one countries that countries with more linguistic diversity have greater stock market turnover.

Does Going Public Affect Innovation? (SSRN)
Author: Professor Shai Bernstein, Stanford Graduate School of Business
Date: October 14, 2012

Abstract:      
This paper investigates the effects of going public on innovation. Using a data set consisting of innovative …firms that …filed for an initial public offering (IPO), I compare the long-run innovation of …firms that completed their filing and went public with that of …firms that withdrew their filing and remained private. I use NASDAQ ‡fluctuations during the book-building period as a source of exogenous variation that affects IPO completion but is unlikely to affect long-run innovation. Using this instrumental variables approach reveals a complex trade-off between public and private ownership. The quality of internal innovation of public firms declines by 50 percent relative to …firms that remained private, measured by standard patent-based metrics. Public firms experience both an exodus of skilled inventors and a decline in productivity among remaining inventors. However, access to public equity markets allows firms to partially offset the decline in internally generated innovation by attracting new human capital and purchasing externally generated innovations through mergers and acquisitions.

Identifying Peer Firms: Evidence from EDGAR Search Traffic (SSRN)
Auhors:  Charles M.C. Lee, Stanford University – Graduate School of Business; Paul Ma, Stanford University – Department of Economics; Charles C. Y. Wang, Harvard Business School
Date: November 21, 2012; Harvard Business School Accounting & Management Unit Working Paper No. 13-048,  Rock Center for Corporate Governance at Stanford University Working Paper No. 128

Abstract: 
Using Internet traffic patterns from the Securities and Exchange Commission Electronic Data-Gathering, Analysis, and Retrieval (EDGAR) website, we show that firms appearing in chronologically adjacent searches by the same individual are fundamentally similar on multiple dimensions. In fact, traffic-based peer firms identified by our algorithm significantly outperform peer firms based on six-digit Global Industry Classification Standard (GICS) groupings in explaining cross-sectional variations in base firms’ stock returns, valuation multiples, forecasted and realized growth rates, research and development expenditures, and various other key financial ratios. Our results highlight the usefulness of EDGAR data, as well as the latent intelligence in search traffic patterns.

Keywords: peer firms, EDGAR search traffic, revealed preference

The Revenue Demands of Public Employee Pension Promises  (SSRN)
Robert Novy-Marx, University of Rochester – Simon Graduate School of Business; National Bureau of Economic Research (NBER);
Joshua D. Rauh, Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Abstract: 
We calculate increases in contributions required to achieve full funding of state and local pension systems in the U.S. over 30 years. Without policy changes, contributions would have to increase by 2.5 times, reaching 14.1% of the total own-revenue generated by state and local governments. This represents a tax increase of $1,385 per household per year, around half of which goes to pay down legacy liabilities while half funds the cost of new promises. We examine sensitivity to asset return assumptions, wage correlations, the treatment of workers not currently in Social Security, and endogenous geographical shifts in the tax base.

Keywords: pensions, state and local government, public finance

Which U.S. Market Interactions Affect CEO Pay? Evidence from U.K. Companies (SSRN)
Authors: Joseph Gerakos, University of Chicago – Booth School of Business;  Joseph D. Piotroski ,
Stanford University – Graduate School of Business; Suraj Srinivasan , Harvard Business School
Date: August 2012
Management Science, Forthcoming

Abstract: This paper examines how different types of interactions with U.S. markets by non-U.S. firms are associated with higher level of CEO pay, greater emphasis on incentive-based compensation, and smaller pay gap with U.S. firms. Using a sample of CEOs of U.K. firms and using both broad cross-sectional and narrow event-window tests, we find that capital market relationship in the form of an U.S. exchange listing is related to higher U.K CEO pay; however, the effect is similar when U.K. firms have a listing in any foreign country implying a foreign listing effect not unique to the U.S. Product market relationships measured by the extent of sales in the U.S. by U.K. companies are associated with higher pay, greater use of U.S.-style pay arrangements, and a reduction in the U.S.-U.K. pay gap. The product market effect is incremental to the effect of a U.S. exchange listing, the extent of the firm’s non-U.S. foreign market interactions, and the characteristics of the executive. The U.S-U.K. CEO pay gap reduces in U.K. firms that make U.S. acquisitions. Further, the firm’s use of a U.S. compensation consultant increases the sensitivity of U.K. pay practices to U.S. product market relationships.

Keywords: CEO compensation, international pay, globalization, corporate governance, incentives, cross-listing, United Kingdom

The Relation between Equity Incentives and Misreporting: The Role of Risk-Taking Incentives
Authors: Chris Armstrong, University of Pennsylvania – Accounting Department;  David F. Larcker, Stanford University – Graduate School of Business;  Gaizka Ormazabal, IESE Business School of the University of Navarra; Daniel J. Taylor, University of Pennsylvania – The Wharton School.
Dated: August 25, 2012
Journal of Financial Economics (JFE), Forthcoming

Abstract: 
Prior research argues that a manager whose wealth is more sensitive to changes in the firm’s stock price has a greater incentive to misreport. However, if the manager is risk-averse and misreporting increases both equity values and equity risk, the sensitivity of the manager’s wealth to changes in stock price (portfolio delta) will have two countervailing incentive effects: a positive “reward effect” and a negative “risk effect.” In contrast, the sensitivity of the manager’s wealth to changes in risk (portfolio vega) will have an unambiguously positive incentive effect. We show that jointly considering the incentive effects of both portfolio delta and portfolio vega substantially alters inferences reported in prior literature. Using both regression and matching designs, and measuring misreporting using discretionary accruals, restatements, and SEC Accounting and Auditing Enforcement Releases, we find strong evidence of a positive relation between vega and misreporting and that the incentives provided by vega subsume those of delta. Collectively, our results suggest that equity portfolios provide managers with incentives to misreport when they make managers less averse to equity risk.

Keywords: Equity Incentives, Executive Compensation, Misreporting, Earnings Management, Restatements, SEC Enforcement Actions

On Derivatives Markets and Social Welfare: A Theory of Empty Voting and Hidden Ownership  (SSRN)
Authors: Jordan M. Barry, University of San Diego School of Law; John William Hatfield, Stanford Graduate School of Business; Scott Duke Kominers, University of Chicago – Becker Friedman Institute for Research in Economics
Paper Date:  August 22, 2012

Abstract:  The prevailing view among many economists is that derivatives markets simply enable financial markets to incorporate information better and faster. Under this view, increasing the size of derivatives markets only increases the efficiency of financial markets.  We present formal economic analysis that contradicts this view. Derivatives allow investors to hold economic interests in a corporation without owning voting rights, or vice versa. This leads to both empty voters — investors whose voting rights in a corporation exceed their economic interests — and hidden owners — investors whose economic interests exceed their voting rights. We show how, when financial markets are opaque, empty voting and hidden ownership can render financial markets unpredictable, unstable, and inefficient. By contrast, we show that when financial markets are transparent, empty voting and hidden ownership have dramatically different effects. They cause financial markets to follow predictable patterns, encourage stable outcomes, and can improve efficiency. Our analysis lends insight into the operation of securities markets in general and derivatives markets in particular. It provides a new justification for a robust mandatory disclosure regime and facilitates analysis of proposed substantive securities regulations.

Cash Holdings and Credit Risk  (via Social Science Electronic Publishing, Inc.)
Authors: Viral V. Acharya, New York University – Leonard N. Stern School of Business; Sergei A. Davydenko, University of Toronto – Finance Area; Ilya A. Strebulaev, Stanford University – Graduate School of Business; National Bureau of Economic Research
Date: August 1, 2012
Rock Center for Corporate Governance at Stanford University Working Paper No. 123

SSRN Abstract:  Intuition suggests that firms with higher cash holdings should be ‘safer’ and have lower credit spreads. Yet empirically, the correlation between cash and spreads is robustly positive. This puzzling finding can be explained by the precautionary motive for saving cash, which in our model causes riskier firms to accumulate higher cash reserves. In contrast, spreads are negatively related to the part of cash holdings that is not determined by credit risk factors. Similarly, although firms with higher cash reserves are less likely to default in the short term, endogenously determined liquidity may be related positively to the longer-term probability of default. Our empirical analysis confirms these predictions, suggesting that precautionary savings are central to understanding the effects of cash on credit risk.