Contemporary Accounting Research
( Early Access)
We examine the extent to which deferred vesting of stock and option grants (deferred pay) helps firms retain executives. To the extent an executive forfeits all deferred pay if they leave the firm, deferred vesting will increase the cost (to the executive) of an early exit. The impact of deferred pay on executive retention, a key ingredient for firms to create shareholder value is hence an important empirical issue. Using pay duration proposed in Gopalan et al. (2014) as a measure of the extent of deferred equity, we find that CEOs and non-CEO executives with longer pay duration are less likely to leave the firm voluntarily. The talent retention role of deferred pay is mitigated by performance-vesting provisions and signing bonuses offered by industry peers. Moreover, we also find that voluntary turnover is less sensitive to pay duration for executives who are perceived to be more talented and have more firm-specific skills. Overall, our study highlights a strong link between compensation design and turnover of top executives. It suggests that firms take into account the need for retaining managerial talent in designing executive compensation.
Asset prices remain depressed for years following mutual fund fire sales. We show that price pressure from fire sales is partly due to asymmetric information. We separate trades into expected trades, which assume fund managers scale down their portfolio, and discretionary trades. We find that discretionary trades contain information about future returns, while expected trades do not. Moreover, other traders cannot distinguish between discretionary and expected trades. Our findings help explain the magnitude and persistence of fire sale discounts: fund managers choose which assets to sell and information asymmetries make it difficult for arbitrageurs to disentangle price pressure from negative fundamentals.
slow moving capital
Due to its value to private firms, a firm’s political connection (PC) enhances the alignment of external
investors with insiders, thereby mitigating the adverse impact of market frictions on corporate financing and
investment. This has important implications on corporate policies and governance. Using various
identification strategies, we show that PC firms are more likely to issue equity and invest more, while paying
out less in dividends. The market responds more positively to news of equity issuance and investment, but
less so to news of dividend payouts by PC firms. Moreover, external investors vote more favorably on
managerial proposals in PC firms’ annual meetings. And analysts are more optimistic in their forecasts of
earnings by PC firms. The evidence is consistent with PC as an investor endorsement device, which in turn
incentivizes unconnected firms to proactively seek PC.
We examine the valuation impact of bank-financed M&As and the loan contracts
used to finance M&A transactions, focusing on the difference between bank-dependent
acquirers and other acquirers. We find that bank-financed deals have higher acquirer’s
CARs relative to other cash M&A deals, but this certification effect exists only for
bank-dependent acquirers. Despite bank-dependent acquirers being more susceptible
to hold-up, banks do not impose higher loan pricing or more stringent non-price terms
on them. After completion of the acquisition, bank-dependent acquirers retain the
M&A financing banks for a much larger share of their borrowing needs, suggesting the
importance of repeat business for lack of hold-up. Our findings highlight the positive
aspects of bank dependence and the importance of implicit contracting for the lack of
hold-up in lending markets.
We examine how stock liquidity affects acquisitions. We hypothesize that liquidity enhances acquirer
stock as an acquisition currency, especially when the target is relatively less liquid. As hypothesized,
more liquid firms are more likely to make acquisitions and the difference in stock liquidity between
acquirer and target firms increases payment with stock, reduces acquisition premiums, and improves
acquirer announcement returns in equity deals. To exploit benefits of liquidity, firms take steps to
improve stock liquidity prior to stock acquisitions. Our empirical identification relies on policy
initiatives that exogenously increase stock liquidity.
Mergers and Acquisitions
We propose and test a new explanation for forced CEO turnover, and examine its implications for the impact of firm performance on CEO turnover. Investors may disagree with management on optimal decisions due to heterogeneous prior beliefs. Theory suggests that such disagreement may be persistent and costly to firms; we document that this induces them to sometimes replace CEOs who investors disagree with, controlling for firm performance. A lower level of CEO-investor disagreement serves to partially “protect” CEOs from being fired, thus reducing turnover-performance sensitivity, which we also document. We also show that firms are more likely to hire an external CEO as a successor if disagreement with the departing CEO is higher. Disagreement declines following forced CEO turnover. Using various empirical strategies, we rule out other confounding interpretations of our findings. We conclude that disagreement, independently of firm performance, affects forced CEO turnover.