Decarbonizing Institutional Investor Portfolios

Authors:

Vaska Atta-Darkua

University of Virginia, Darden School of Business

Simon Glossner

Board of Governors of the Federal Reserve System

Philipp Krueger

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute; European Corporate Governance Institute (ECGI); University of Geneva - Geneva School of Economics and Management

Pedro Matos

University of Virginia - Darden School of Business; European Corporate Governance Institute (ECGI)

Abstract

Combining global data on institutional investors’ equity holdings and firm-level carbon emissions, we study how climate-conscious institutions reduced the carbon emissions of their equity portfolios between 2005 and 2019. We hypothesize that institutions could either decarbonize via tilting their holdings towards lower emitting firms or via engaging their portfolio firms to curb emissions. Our analysis suggests that tilting is the predominant strategy used by climate-conscious institutions but also uncover some early evidence of longer-term engagement with the top emitting firms following the 2015 Paris Agreement. We also find limited evidence of other portfolio measures of energy transition in terms of green patents and firm revenues. Overall, our analysis raises some doubts about the effectiveness of investor-led initiatives in reducing corporate carbon emissions and taking necessary action on climate change.

Sustainability or Greenwashing: Evidence from the Asset Market for Industrial Pollution

Authors:

Ran Duchin

Boston College - Carroll School of Management

Janet Gao

McDonough School of Business

Qiping Xu

University of Illinois Urbana Champaign

Abstract

This paper provides novel evidence on the role of pollution in the divestitures of industrial plants. We find that firms divest pollutive plants following scrutinized environmental risk incidents. Following these divestitures, however, total pollution levels at the sold plants do not decline, and per-employee pollution levels increase. Furthermore, the sellers do not fully lose access to these plants, since they are sold to firms with supply chain relationships or joint ventures with the sellers. The sellers, however, earn higher environmental, social, and governance (ESG) ratings, reduce their regulatory compliance costs, and improve their access to government resources. Overall, the evidence suggests that the asset market allows firms to redraw their boundaries in a manner perceived as environmentally friendly without real consequences for pollution levels or production processes.

Diversity Washing

Authors:

Andrew Baker

Berkeley Law School

David F. Larcker

Stanford University - Graduate School of Business; European Corporate Governance Institute (ECGI); Stanford University - Hoover Institution

Charles McClure

University of Chicago Booth School of Business

Durgesh Saraph

Jump Trading

Edward M. Watts

Yale School of Management

Abstract

We provide large-sample evidence on whether U.S. publicly traded corporations opportunistically use voluntary disclosures about their commitments to employee diversity. We document significant discrepancies between companies' disclosed commitments and their hiring practices and classify firms that discuss diversity more than their actual employee gender and racial diversity warrants as “diversity washers." We find diversity-washing firms obtain superior scores from environmental, social, and governance (ESG) rating organizations and attract investment from institutional investors with an ESG focus. These outcomes occur even though diversity-washing firms are more likely to incur discrimination violations and pay larger fines for these actions. Our study highlights the consequences of selective ESG disclosures on an important social dimension of employee diversity, equity, and inclusion.

Authors:

Roni Michaely: HKU Business School at University of Hong Kong
Silvina Rubio: University of Bristol Business School
Irene Yi: Rotman School of Management at University of Toronto

Abstract

We examine why institutional investors vote the way they vote, using a novel dataset on nearly one million voting rationales provided by institutional investors. First, we find that institutional investors are more likely to provide rationales when they vote against management, suggesting that they disclose rationales to express their concerns over management. Second, using machine learning techniques and focusing on rationales on director elections, we find that the most important reasons behind opposing directors are board independence, board diversity, tenure, firm governance, and busyness. Further, institutional investors are increasingly voting against directors to hold them accountable for failure to address environmental and social issues. We find that institutional investors’ concerns are well-grounded: companies with low board gender diversity receive more rationales on board diversity, similar for companies with long director tenure and busy directors. Finally, we show that companies with high dissent voting related to board diversity, tenure, and busyness improve their board composition in the following year. Our evidence shows that voting rationales contain useful information for firms about investors reason for opposing directors, providing an effective low-cost strategy to promote good governance practices in their portfolio companies.

Authors:

Marius Guenzel, The Wharton School
Clint Hamilton, UC Berkeley
Ulrike Malmendier, UC Berkeley, NBER, and CEPR

Abstract

We study whether CEO social preferences influence firm decision-making with respect to employees, using a new dataset on layoff announcements by U.S. public firms. We first document sizable frictions in firms’ layoff decisions: after exogenous CEO changes, new CEOs make more, and shareholder value-increasing, layoffs. Consistent with a mechanism of social preferences arising through social interactions, CEOs become more reluctant to make layoffs over their tenure as they form more connections inside the firm. This effect is amplified for “difficult-to-implement” layoffs during recessions, near company headquarters, and during the holiday season. Finally, we document a personal cost of firing for CEOs in the form of accelerated long-run mortality.

Do Individual Directors Matter? Evidence of Director-Specific Quality

Authors:

Dipesh Bhattarai

University of Tennessee, Knoxville - Department of Finance

Matthew Serfling

University of Tennessee; European Corporate Governance Institute (ECGI)

Tracie Woidtke

University of Tennessee, Haslam College of Business

Abstract

We create a new measure called director-specific quality (DSQ) that captures the collection of value-relevant transferable attributes unique to a director and explains 10% of the variation in firm value. Directors with higher DSQ receive greater voter support, and investors respond more (less) favorably when they are appointed (die). Boards with higher DSQ make more value-increasing M&A deals, tie CEO compensation more closely to performance, produce more and higher quality innovation, and manage cash better. Difference-in-differences analyses exploiting director deaths confirm these effects. During the COVID-19 pandemic, firms with higher board-level DSQ also experienced relatively higher stock returns. Overall, our results suggest that directors have unique value-relevant attributes, and who firms hire matters.

Authors:

Ilona Babenko
Arizona State University

Goeun Choi
Tulane University - A.B. Freeman School of Business

Rik Sen
University of New South Wales (UNSW)

Abstract
Using shareholder voting records on management proposals, we find evidence of systematic managerial influence on outcomes of close votes. This behavior is more pronounced for firms with low institutional ownership and for proposals receiving a negative ISS recommendation. Approximately 65% of management proposals headed for a narrow defeat have their outcome altered. We identify new mechanisms by which managers influence the outcome, such as meeting adjournment and selective campaigning. The market reacts positively to the failure of management proposals. Combined with our theoretical model, these results suggest that managerial influence on the voting process is value-destroying.

Motivating Collusion

Authors

Sangeun Ha

Copenhagen Business School - Department of Finance

Fangyuan Ma

Chinese University of Hong Kong (CUHK) - Department of Finance; Peking Univeristy, HSBC Business School

Alminas Zaldokas

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Abstract

We examine how executive compensation can be designed to motivate product market collusion. We look at the 2013 decision to close several regional offices of the Department of Justice, which lowered antitrust enforcement for firms located near these closed offices. We argue that this made collusion more appealing to the shareholders, and find that these firms increased the sensitivity of executive pay to local rivals' performance, consistent with rewarding the managers for colluding with them. The affected CEOs were also granted more equity compensation, which provides long-term incentives that could foster collusive arrangements.

Voice Through Divestment 

Authors:

Marco Becht

Solvay Brussels School of Economics and Management, Université libre de Bruxelles, CEPR and ECGI

Anete Pajuste

Stockholm School of Economics, Riga, Harvard Law School and ECGI

Anna Toniolo

Harvard University

Abstract

A common argument against divestment is that it jettisons voting power and that it has a small effect on stock prices. We argue that divestment is a form of voice that changes social preferences. We show that the Go Fossil Free divestment movement has had a disproportionate impact on share prices by changing the economic narrative. By stigmatising target companies, it has increased stranded asset risk. Divestment pledges that went viral have depressed share prices of all high carbon emitters, including those with no significant divestment. Peak virality coincides with an increase in the carbon premium and precedes netzero commitments from countries, regions, cities, and business. By altering the social and regulatory environment, divestment induces risk averse investors to decarbonise their portfolios, further reinforcing the narrative.

On a Spending Spree: The Real Effects of Heuristics in Managerial Budgets

Authors

Paul H. Décaire

Arizona State University (ASU) - Finance Department

Denis Sosyura

Arizona State University

Abstract

Using micro data on managerial expenditures, we uncover heuristics in capital budgets, such as nominal rigidity, anchoring, and sharp reset deadlines. Such heuristics engender managerial opportunism and erode investment efficiency. Managers with a budget surplus increase investment sharply before budget deadlines, and such investments yield lower sales, weaker margins, and more negative NPV projects. Managers who reach a budget constraint early in the fiscal cycle halt further spending until their budget is reset, irrespective of investment options. These effects are stronger at firms with more hierarchical layers and a greater subordinates-to-executives ratio. Overall, simplifying budgeting rules engender strategic behavior and wasteful spending.

Authors:

Katharina Lewellen
Tuck School at Dartmouth

Gordon Phillips
Tuck School at Dartmouth

Giorgo Sertsios
University of Wisconsin Milwaukee

The paper provides a comprehensive analysis of the governance structures of nonprofit hospitals and hospital systems. We adapt the framework used to analyze for-profit governance by incorporating nonprofit objectives and legal constraints. Combining various data sources, we study both the internal governance tools (boards of directors, incentive contracts) and external tools (market for corporate control). Nonprofit boards are unusually large, include more independent and non-independent directors, and face weak external oversight. The disciplinary market for corporate control is less active: nonprofits with poor financial performance are half as likely to be acquired or closed than for-profits, and weak performance on non-financial goals has no effect on either event. CEO pay and turnover are sensitive to financial performance but are unresponsive (or less responsive) to nonfinancial goals, including the quality of medical treatment, patient satisfaction, and charity provision. We conclude that nonprofit governance structures lack the attributes that the literature has traditionally associated with ‘good governance.’ 

Closing the Revolving Door

Authors

Joseph Kalmenovitz

University of Rochester - Simon Business School

Siddharth Vij

University of Georgia Terry College of Business

Kairong Xiao

Columbia University

Abstract

Regulators can leave their government position for a job in a regulated firm. Using granular payroll data on 23 million federal employees, we uncover the first causal evidence of revolving door incentives. We exploit the fact that post-employment restrictions on federal employees, which reduce the value of their outside option, trigger when the employee's base salary exceeds a threshold. We document significant bunching of employees just below the threshold, consistent with a deliberate effort to preserve the value of their outside option. The effect is concentrated among agencies with broad regulatory powers, minimal supervision by elected officials, and frequent interactions with high-paying industries. In those agencies, 32% of the regulators respond to revolving door incentives and sacrifice 5% of their wage potential to stay below the threshold. Consistent with theories of regulatory capture, we find that revolving regulators issue fewer rules and rules with lower costs of compliance. Using our findings to calibrate a structural model, we show that doubling the duration of the restriction will reduce the incentive distortion in the federal government by 2.7%, at the cost of modest decline in labor supply to the public sector. Combined, our results shed new light on the economic implications of the revolving door in the government.