Forthcoming Articles

Managerial Trustworthiness and Buybacks

Sterling Huang, Kaisa Snellman, and Theo Vermaelen

CEO trustworthiness is positively related to long-term excess returns after buyback announcements. CEO trustworthiness is initially measured by the extent to which people in the county where the company headquarters is located trust each other. Further, the positive impact of trustworthiness on excess returns is higher when the CEO has been a long term resident of a high trust county, and correspondingly, trustworthy CEOs are less likely to be accused of financial misreporting. Our conclusions are confirmed when we use alternative measures of trustworthiness such as employee trust and CEO integrity.

Vertical and Horizontal Agency Problems in Private Firms: Ownership Structure and Operating Performance

Sridhar Gogineni, Scott C. Linn, and Pradeep K. Yadav

We investigate how ownership structure influences operating performance and implied agency costs. Our sample includes over 42,000 U.K. private and public firms. We document several new results of considerable economic significance relating to: (a) horizontal agency costs arising from unequal ownership within private firms, (b) amplification of agency costs from joint presence within the same firm of horizontal agency problems and vertical agency problems arising from separation of ownership and control, (c) mitigation in agency costs wrought by a second large shareholder, (d) impact of complex ownership structures, and (e) agency cost differences between public firms and comparable private firms.

From Playground to Boardroom: Endowed Social Status and Managerial Performance

Fangfang Du

Using U.S. Census Survey data on CEOs’ residence in their formative years, I document a negative relation between CEOs’ endowed family wealth and managerial performance. Consistent with the view that CEOs born into poor families face higher barriers of entry but may possess greater levels of ability that enable them to become CEOs, I find that CEOs born into less-privileged families outperform those from higher-wealth families. The outperformance of CEOs from less-wealthy families is not driven by risk-taking or omitted variables. Overall, my results suggest that the level of CEOs’ social endowment provides a useful signal for their managerial ability.

Social Capital, Trusting, and Trustworthiness: Evidence from Peer-to-Peer Lending

Iftekhar Hasan, Qing He, and Haitian Lu

How does social capital affect trust? Evidence from a Chinese peer-to-peer lending platform shows regional social capital affects the trustee’s trustworthiness and the trustor’s trust propensity. Ceteris paribus, borrowers from higher social capital regions receive larger bid from individual lenders, have higher funding success, larger loan size, and lower default rates, especially for low-quality borrowers. Lenders from higher social capital regions take higher risks and have higher default rates, especially for inexperienced lenders. Cross-regional transactions are most (least) likely to be realized between parties from high (low) social capital regions.

Dividend Smoothing and Firm Valuation

Paul Brockman, Jan Hanousek, Jiri Tresl, and Emre Unlu

We examine the relationship between dividend smoothing and firm valuation across 21 countries using several empirical methods and smoothing measures. Our main results show that dividends are capitalized at significantly larger values for high-smoothing firms than for low-smoothing firms. We also find that dividend-smoothing premiums are higher in countries with weak shareholder protection, suggesting that smoothing serves as a substitute mechanism to reduce agency costs. Overall, our findings support the view that managers use dividend smoothing as a bonding mechanism to reduce agency costs (Leary and Michaely (2011)), and not as a rent extraction mechanism (Lambrecht and Myers (2012)).

RQ Innovative Efficiency and Firm Value

Michael Cooper, Ann Marie Knott, and Wenhao Yang

We introduce and test a firm-level innovation-efficiency measure new to the finance literature. The measure, RQ, defined as the firm-specific output elasticity of R&D, was first developed in the management literature. RQ has low correlation with existing innovation input, output and efficiency measures. We test RQ in a number of innovation tests common to the finance literature and find that RQ is robust in all tests of firm value even after controlling for previous innovation measures. The results suggest that RQ may serve as a relevant complementary measure of a company’s innovation.

Crowding and Tail Risk in Momentum Returns

Pedro Barroso, Roger M. Edelen, and Paul Karehnke

Several theoretical studies suggest that coordination problems can cause arbitrageur crowding to push asset prices beyond fundamental value as investors feedback trade on each others’ demands. Using this logic we develop a crowding model for momentum returns that predicts tail risk when arbitrageurs ignore feedback effects. However, crowding does not generate tail risk when arbitrageurs rationally condition on feedback. Consistent with rational demands, our empirical analysis generally finds a negative relation between crowding proxies constructed from institutional holdings and expected crash risk. Thus our analysis casts both theoretical and empirical doubt on crowding as a stand-alone source of tail risk.

Why Do Directors Join Poorly Performing Firms?

Ying Dou and Emma Jincheng Zhang

Prior research has suggested that sitting on the board of a poorly performing firm can be undesirable to directors. Yet, almost 60% of such firms are able to appoint new directors following director departures. Contrary to a quality matching explanation, we do not find that only poorly performing directors join these firms. Upon joining poorly performing firms, directors are more likely to fill leadership positions without necessarily receiving higher pay. These directors subsequently receive career benefits, especially those who are relatively junior in the pool. As such, the evidence is consistent with the leadership positions providing a certification effect.

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