Blockholder and CEO Wealth-Performance Sensitivity (Job Market Paper, updated on Nov 14, 2022)
Abstract: CEO incentive contracts both i) substitute blockholder monitoring by reducing the agency problem and ii) complement blockholder monitoring by increasing the disciplinary effect on CEOs when dissatisfied blockholders exit. I model the relation between managerial incentives and blockholder monitoring and show the substitution effect dominates. It is predicted that blockholders who are monitors are less likely to be in a firm as its CEO incentives increase. Empirically, I find higher CEO incentives indeed lead to lower blockholding and that the negative relation is stronger in firms where blockholder monitoring is more likely. To support the causal claim, I examine the FASB and SEC regulation changes in 2006, which required firms to expense and disclose equity-based CEO pay. Firms' concerns about such expenses and disclosures might reduce CEO incentives but should not directly increase blockholding. I find firms that reduced CEO incentives after the regulation changes had significant increases in blockholding.
Presentation: 2022 FMCG PhD Symposium; 2022 FMA European Conference; The University of Melbourne (x2); 2022 E(uropean)FA Doctoral Tutorial; Asia-Pacific Corporate Finance Online Workshop; 2022 FMA Special PhD Paper Presentation; 2022 PhD Conference in Economics and Business; 2022 FIRN PhD Symposium; Paris December 2022 Finance Meeting; 2022 Australasian Finance and Banking Conference.
Media Coverage: The FinReg Blog, by the Duke Financial Economics Center at Duke University.
Creditor Control Rights and Blockholder
Abstract: This paper examines how a firm’s covenant violations affect blockholders’ stakes in the firm. A firm’s control is shifted towards its creditors upon covenant violations and the heightened creditor control helps turn around the firm (Nini, Smith, & Sufi, 2012). The heightened creditor control, however, might prevent blockholders from engaging in meaningful governance activities and maximizing shareholder value. If the ability to engage in governance is important to blockholders, their stakes in a firm will be lower upon its covenant violations. Alternatively, blockholders’ stakes will be higher upon covenant violations if they are attracted by the returns generated as the firm is turned around by creditors. Using a sharp regression discontinuity design, I find that blockholders’ stakes are higher upon covenant violations. This suggests that blockholders prioritize the opportunity to “buy low and sell high” over the ability to engage in governance. Blockholders who are more likely to be active monitors increase their stakes to a lesser extent upon covenant violations, consistent with the notion that they do not trust creditors have their best interests at heart. Consistent with the shareholder-creditor conflict, blockholders and creditors appear to have opposite viewpoints on a firm’s post-violation investment and financing policies. Blockholders’ presence in a post-violation firm is associated with a slower recovery in the short run but a better long-run firm performance.
Presentation: 2021 FIRN PhD Student Brown Bag; 2022 FMCG Conference; 2022 FMA Asia Pacific Conference.
Ownership Concentration and Crisis Recovery, with Yifan Zhou
Abstract: This paper examines the effects of having a concentrated ownership structure during the 2008-09 financial crisis (GFC) on post-crisis recovery. We find that firms with higher ownership concentrations outperform those with lower concentrations in abnormal returns, ROA, sales growth, Tobin’s Q, and asset turnover in the decade following the GFC. The effect is driven almost exclusively by external blockholder concentration. Focusing on blockholders, we further discover that during the GFC, blockholder concentration was associated with i) more votes against manager-initiated proposals, ii) a higher probability of appointing a new CEO and/or director, and iii) issuance of less net debt. These firm decisions are in turn associated with superior post-crisis performance.