We show theoretically and empirically that executives are paid less for their own firm’s performance and more for their rivals’ performance if an industry’s firms are more commonly owned by the same set of investors. Higher common ownership also leads to higher unconditional total pay. We exploit quasi-exogenous variation in common ownership from a mutual fund trading scandal to support a causal interpretation. These findings challenge conventional assumptions in the corporate finance literature about the objective function of the firm.

We present first evidence about individual and institutional factors that guide board members of public companies around the world in addressing the fundamental strategic problem of dealing with shareholders and stakeholders. In a sample comprising nearly nine hundred board members from some fifty countries of origin, we confirm that these corporate leaders hold a principled, quasi-ideological stance towards shareholders and stakeholders, dubbed shareholderism. This stance associates with a personal value profile that emphasizes self-enhancement values and is also compatible with entrepreneurship. We further find that such shareholderism stances correlate with cultural orientations of egalitarianism and mastery that, respectively, reflect a societal view of all people as moral equals and endorse assertive change and domination of the physical and social environment. Our data further suggest that board members’ handling of such strategic dilemmas may be determined by legal factors. Although we do not observe a broad effect of the general style of the legal system as reflected in its legal origin, more specific rules that provide for social security and protect employees may be related to shareholderism.

We show that following large permanent negative shocks, firms with more short-term institutional investors suffer smaller drops in sales, investment and employment and have better long-term performance than similar firms affected by the shocks. To do so, these firms increase their R&D and advertising expenses, differentiate their products from those of the competitors, conduct more diversifying acquisitions, and have higher executive turnover in the aftermath of the shocks, suggesting that they put stronger effort in adapting their business to the new competitive environment. Endogeneity of institutional ownership and other selection problems do not appear to drive our findings.

This paper is part of the ECGI Working Paper Finance series, click here to acces the paper page

In a special report in 2010, the Economist magazine called the resurging state-owned mega-enterprises worldwide, especially those from emerging economies, as “Leviathan Inc.”, and warned about the danger of such state capitalism model. While traditionally state-owned firms are criticized for weaker governance and less efficiency, they are also believed to be better positioned for dealing with market externalities. Our findings based on public firms from 45 countries suggest that state-owned companies engage more in environmental issues, and such engagement does not come as a cost for shareholders. This effect is more pronounced among firms in manufacturing industries, in emerging market economies (Latin America and Asia-Pacific), and in countries with lower energy independence and greater conflict with neighboring states. State-owned firms also reacted more significantly to the Copenhagen Accord signed in December 2009 in upgrading their environmental performance. Interestingly, state-owned firms also engage more in social issues but they do not have better corporate governance performance.

This paper is part of the ECGI Working Paper Finance series, click here to acces the paper page

This study investigates the association between business groups’ influence and the capital allocation efficiency of firms outside the business group. We use a sample of Korean firms (1987 to 2010) to compute an annual index of the collective strength and dominance of large business groups (LBGs) per industry. We discover that this index is negatively associated with non-LBG firms’ industry-level capital allocation efficiency during a period characterized by underdeveloped financial markets and weak investor protection. The negative association is stronger in industries that may lack collateral or internal equity capital. We also find that the negative association strengthens when we limit our analyses to the index component exogenous to non-LBG firms’ capital expenditures, suggesting that the relationship is causal. The results also survive a battery of robustness checks.

An extensive literature has debated the accountability of administrative agencies, and in particular, their relationship to Congress. A well-established strand in the literature emphasizes that Congress retains control over agencies by their design, and in particular, the structure and process by which agency decisionmaking is undertaken. This paper examines the relationship between agency structure and decisionmaking across four agencies with similar statutory missions but different organizational structures:  the Consumer Financial Protection Bureau (CFPB), with a uniquely independent structure, and the Consumer Product Safety Commission, Securities and Exchange Commission and Commodity Futures Trading Commission, with more conventional independent commission structures, and  presents data indicating that agency structure influences agency decisionmaking.  More specifically, the statistical analysis is robustly consistent with an agency’s insulation from Congress being related to its choice of regulatory instrument, as the most independent agency in this study, the CFPB, uses significantly less frequently the most publicly accountable regulatory instrument of notice-and-comment rulemaking.

This paper offers the first study of the shareholder welfare effects of poison pills and control share acquisition statutes in a research design that can support causal inference. We examine a series of four events between 2004 and 2010 that suddenly and exogenously changed the legality of poison pills and control share acquisition statutes for a peculiar class of company known as a closed-end fund. In the first two events, a court held for the first time that these defenses were legal under the Investment Company Act of 1940. In the latter two events, the SEC officials expressly rejected the court’s decision, rendering these defenses effectively illegal. We show that as poison pills and control share acquisition statutes became more legal, closed-end fund stock prices increased; and as these defenses became less legal, closed-end fund stock prices decreased. We find, in other words, that closed- end fund shareholders liked the poison pill.

Exploiting a bankruptcy reform in Korea, I examine how managers’ personal bankruptcy costs affect firms’ financing and investment decisions. Under the pre-reform auction system, incumbent management was forced to resign and the firm was auctioned to new investors. Under the post-reform management stay system, incumbent management stays in control of the firm during bankruptcy proceedings. I find that firms curb risk- taking under the auction system, when bankruptcy states are costlier for managers. Specifically, firms take on lower leverage, forego risky investment projects, and engage less in innovation under the auction regime. The effects are stronger for firms where private benefits of control are large and when managers’ wealth is more concentrated in the firm.

This paper is part of the ECGI Working Paper Finance series, click here to acces the paper page

This paper explores the role of corporate law in the minting of capital. Capital, as the term is used here, is more than the means of production in Marx’s account or a factor of production in the nomenclature of economists, and has even less to do with the paid in ‘capital’ immortalized in corporate law statutes. I use the term capital to denote assets that have “income yielding capacity” (Veblen), with the add-on that the expected future income can be realized today through exchange. Three legal attributes ensure that some assets have greater income yielding capacity than others: priority, universality, and durability. Once assets that enjoy these attributes are made transferable, they can turn future cash flows into current income. I develop the argument more fully in my forthcoming book, “The Code of Capital”. In this paper, I explore the contribution of corporate law to the minting of capital and reconsider the concept of “shareholder value maximization” in light of these findings

Using hand-collected data on 691 corporate inversions from 11 home countries into 45 host destinations in 1996-2013, we document that corporations invert to destinations with lower tax rates and similar governance standards. Indeed, passage of bilateral double taxation treaties (DTTs), which provide tax incentives for inversions, and bilateral tax information exchange agreements (TIEAs), which improve transparency of tax havens, leads to an increase in corporate inversions. Further, shareholders support tax-driven inversions but shun inversions into weakly governed countries: A 1% point lower tax rate in the host destination (vis-à-vis the home country) is associated with a 0.6% drop in effective tax rates and a 0.4% increase in firm value, respectively. Institutional ownership only increases when firms invert into well-governed tax havens. Our findings suggest that corporate inversions, despite their negative publicity, are typically in shareholders’ interest.

Extending the theories of employee incentives and inalienability of human capital, we investigate the link between a firm‘s engagement in employee relations and the returns to shareholders around mergers and acquisitions (M&As). Using firm-level data on employee-engagement in an international sample of 4,565 M&A deals from 48 countries, we find that an acquirer‘s employee-engagement – especially in terms of monetary incentives – is positively related to shareholder returns in domestic deals, but this relationship turns negative in cross-border deals. Workforce diversity, training and development, and health and safety do not affect shareholder returns around M&As. Consistent with the notion of the inalienability of human capital and employment policies, we find that the attenuating effect in cross-border deals is stronger when uncertainty about post-merger labor integration and transferability of employment policies across firms and countries is higher. These results hold after controlling for country-level differences in labor regulations and that most effects of employee-engagement on shareholder returns are driven by the acquirer rather than the target. Moreover, they persist in terms of long-run post-merger profitability.

This paper is part of the ECGI Working Paper Finance series, click here to acces the paper page

We examine the relation between team turnover and firm performance studying the private equity industry. Using a unique data set that tracks over time teams in 138 PE managers and their performance, we uncover a positive relation between turnover and fund performance. We propose and confirm in the data two channels that explain our findings: i) in the short-run, perfor- mance improves when bad performers are fired, ii) in the long-run, turnover helps teams to adapt and replenish their skills in response to shifting exter- nal demand. Our findings suggest that frictions coming from informational asymmetries may deter optimal turnover. These findings are surprising given the common belief among PE investors that team stability is key to long-term success.