Beauty is Wealth: CEO Appearance and Shareholder Value

Beauty is Wealth: CEO Appearance and Shareholder Value

Joseph Taylor Halford University of Wisconsin Milwaukee

Scott H. C. Hsu University of Wisconsin – Milwaukee

November 20, 2013

This paper examines whether and how the appearance of chief executives officers (CEOs) affects shareholder value. We obtain a Facial Attractiveness Index of 677 CEOs from the S&P 500 companies based on their facial geometry. CEOs with a higher Facial Attractiveness Index are associated with better stock returns around their first days on the job and higher acquirer returns upon acquisition announcements. To mitigate endogeneity concerns, we compare stock returns surrounding CEO television news events with stock returns surrounding a matched sample of news article events. CEOs’ Facial Attractiveness Index positively affects the stock returns on the television news date, but not around the news article date. The findings suggest that CEO appearance matters for shareholder value and provide an explanation why more attractive CEOs receive “beauty premiums” in their compensation.

Study finds ‘beautiful’ CEOs boost stock prices

University research says attractive chief executives are paid better and their shares perform well when the boss goes on television

Yahoo!’s Marissa Mayer was cited as an example of an attractive chief executive who has boosted share prices Photo: Rex Features Read more of this post

Market Reactions to Tangible and Intangible Information Revisited

Market Reactions to Tangible and Intangible Information Revisited

Joseph Gerakos University of Chicago – Booth School of Business

Juhani T. Linnainmaa University of Chicago – Booth School of Business; National Bureau of Economic Research (NBER)

December 3, 2013
Chicago Booth Research Paper No. 13-82

Daniel and Titman (2006) propose that the value premium is due to investors overreacting to intangible information. They therefore decompose changes in firms’ book-to-market ratios into stock returns and a proxy for tangible information based on accounting performance (“book returns”). Consistent with investors overreacting to intangible information, they find that only stock returns unrelated to “book returns” reverse. We show that their decomposition creates a “book return” polluted by past book-to-market ratios, stock returns, net issuances, and dividends. One-third of the variation in “book returns” is due to these factors. The Daniel and Titman (2006) result is fragile — a plausible alternative definition of tangible information reverses their conclusions.

Employee Spinouts, Social Networks, and Family Firms

Employee Spinouts, Social Networks, and Family Firms

James E. Rauch

NBER Working Paper No. 19727
Issued in December 2013
Recently collected data show that, within any manufacturing industry, vertically integrated firms tend to have larger, higher productivity plants, account for the bulk of sales, and also sell externally most of the inputs they produce. In a weak contracting environment characteristic of developing countries, vertically integrated firms are vulnerable to employee “spinouts”: managers of input divisions can start their own firms, making customized inputs formerly provided internally subject to hold-up and capturing the profits formerly made from external sales of generic inputs. This vulnerability is shown to lead to inefficiently low entry. Vertically integrated firms can fight back by hiring managers for their input divisions who are members of networks that informally sanction hold-ups or children who keep profits “in the family” even if they spin out. This is shown to predict the association of co-ethnic networks with high rates of entrepreneurship and the prominence of family-owned business groups in developing country manufacturing.

Political Connections and Earnings Quality: Evidence from India

Political Connections and Earnings Quality: Evidence from India

R. Narayanaswamy Indian Institute of Management (IIMB), Bangalore

November 25, 2013
IIM Bangalore Research Paper No. 433

This paper investigates the association between political connections and earnings quality in Indian companies. Recent corporate scandals (e.g., 2G mobile phone licences, coal block allocations, iron ore and granite mining licences) have underlined the political connectedness of Indian business entities. The increasing role of the private corporate sector in the economy in the wake of the economic liberalization has strengthened the traditional links between business organizations and the political system. The involvement of politicians in business and of business organizations in politics, the participation of senior civil servants in political and business-related activities and the dependence of political parties on donations from business organizations for funding elections have contributed to the importance of political connections in business. We find that connected firms have lower earnings quality than non-connected firms and are more likely to engage Big Four auditors.

Do Chinese CEOs Consume Abnormal Perks Before Leaving Their Firms?

Do Chinese CEOs Consume Abnormal Perks Before Leaving Their Firms?

Martin J. Conyon University of Pennsylvania – The Wharton School; European Corporate Governance Institute (ECGI)

Junxiong Fang Sr.Fudan University – School of Management

Lerong He State University of New York (SUNY) College at Brockport; University of Pennsylvania – The Wharton School

November 16, 2013

Economic success is driven by the optimal design of economic institutions. We investigate whether Chinese CEOs consume abnormal or ‘excess’ perks prior to leaving their firms. Agency models predict that CEO incentives and behavior might change in the years leading up to CEO turnover (the ‘horizon effect’). We predict that CEOs might consume excess perks at the expense of owners’ interests. Using data on Chinese publicly traded firms between 2003 and 2011 we find that abnormal perk consumption is significantly higher in the last two years of CEOs’ tenure compared to previous years. We also find that abnormal perk consumption is lower when the board is more independent, when the firm is privately controlled, and when the external auditor is more reputable. We find that perk consumption in CEOs’ terminal years vary with the type of CEO transition. Voluntary CEO turnover is associated with excess perks, whereas forced CEO turnovers are not. We find no evidence that abnormal perk consumption is associated with lower level of executive compensation, dispelling the idea that cash compensation and perks are substitutes. Instead, we document that abnormal perk consumption has a significant negative effect on firm performance. Overall, our results indicate that abnormal perk consumption and poor institutional design are correlated with managerial excess in China and there exists a horizon problem for Chinese executives.

Corporate Cash Holding in Asia

Corporate Cash Holding in Asia

Charles Y. Horioka, Akiko Terada-Hagiwara

NBER Working Paper No. 19688
Issued in December 2013
In this paper, we analyze the determinants of corporate saving in the form of changes in the stock of cash for 11 Asian economies using firm-level data from the Oriana Database for the 2002–2011 period. We find some evidence that cash flow has a positive impact on the change in the stock of cash, which suggests that Asian firms are borrowing constrained and that they save more when their cash flow increases so that they will be able to finance future investments. Moreover, we find in the developed economy sample that, as expected, cash flow has a positive impact on the change in the stock of cash only in the case of the smallest firms, which are more likely to be borrowing constrained, and find in the developing economy sample that, as expected, the positive impact of cash flow on the change in the stock of cash declines with firm size. In addition, we find that the cash flow sensitivity of cash declined after the global financial crisis. Finally, we find some evidence that Tobin’s q has a positive impact on the change in the stock of cash.

Deals Not Done: Sources of Failure in the Market for Ideas

Deals Not Done: Sources of Failure in the Market for Ideas

Ajay Agrawal University of Toronto – Rotman School of Management; National Bureau of Economic Research (NBER)

Iain M. Cockburn Boston University – Department of Finance & Economics; National Bureau of Economic Research (NBER)

Laurina Zhang University of Toronto

November 2013
NBER Working Paper No. w19679

Using novel survey data on technology licensing, we report the first empirical evidence linking the three main sources of failure emphasized in the market design literature (lack of market thickness, congestion, lack of market safety) to deal outcomes. We disaggregate the licensing process into three stages and find that although lack of market thickness and deal failure are correlated in the first stage, they are not in the latter stages, underscoring the bilateral monopoly conditions under which negotiations over intellectual property often occur. In contrast, market safety is only salient in the final stage. Several commonly referenced bargaining frictions (congestion) are salient, particularly in the second stage. Also, universities and firms differ in the stage during which they are most likely to experience deal failure.

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