Aiyesha Dey

The Sarbanes Oxley Act of 2002: Implications for Compensation Contracts and Managerial Risk-Taking

This paper investigates the effect of the Sarbanes-Oxley Act (hereafter, SOX) on the compensation structure and the risk-taking incentives of CEOs as revealed by their research and development expenses and capital expenditures. We hypothesize that firms will respond to the additional liability imposed by SOX on corporate executives by altering the mix of incentive compensation to fixed salary awarded to them in order to provide insurance. Consistent with this claim, we find that there was a significant decline in the ratio of incentive compensation to salary after the passage of SOX. We also hypothesize and find that there was a significant decline in research and development expenses and capital expenditures made by CEOs after the passage of SOX. This result is obtained after controlling for the effects of the economic environment and changes in compensation structure on CEOs’ action choices. We interpret the above as evidence of some of the potential costs of this new regulation.

Disproportional Control Rights and the Governance Role of Debt

We examine the governance role of debt in the context of U.S.-based dual class ownership structures. We hypothesize that the use of debt alleviates the conflict between shareholder classes by balancing the power of controlling insiders. We document that dual class firms have higher leverage and a greater propensity to issue private debt; they also more frequently use cash sweeps and performance-based covenants. Dual class firms with greater agency conflicts and a greater need to access the capital market appear to rely more extensively on debt. These findings are consistent with controlling insiders bonding against the agency costs associated with dual class ownership. The governance role of debt is further corroborated by the valuation effect of debt for dual class companies. Private debt issuances trigger greater positive market reactions to the inferior dual class stock in relation to both the superior dual class stock and a matched sample of single class firms. Further, leverage attenuates the previou...

Bank CEO Materialism: Risk Controls, Culture and Tail Risk

We investigate how the prevalence of materialistic bank CEOs has evolved over time, and how risk management policies, non-CEO executives’ behavior and tail risk vary with CEO materialism. We document that the proportion of banks run by materialistic CEOs increased significantly from 1994 to 2004, that the strength of risk management functions is significantly lower for banks with materialistic CEOs, and that non-CEO executives in banks with materialistic CEOs insider trade more aggressively around government intervention during the financial crisis. Finally, we find that banks with materialistic CEOs have significantly more downside tail risk relative to banks with non-materialistic CEOs.

CEO Materialism and Corporate Social Responsibility

We study the role of individual CEOs in explaining corporate social responsibility (CSR) scores. We show that CEO fixed-effects explain 63% of the variation in CSR scores, a significant portion of which is attributable to a CEO’s “materialism�? (relatively high luxury asset ownership). Specifically, firms led by materialistic CEOs have lower CSR scores, and increases in CEOs’ materialism are associated with declining scores. Finally, CSR scores in firms with non-materialistic CEOs are positively associated with accounting profitability. In contrast, CSR scores in firms with materialistic CEOs are unrelated to profitability on average; however this association is decreasing in CEO power.

Bank CEO Materialism, Corporate Culture and Risk

We examine the extent to which bank CEOs exert influence on the corporate cultures of banking organizations by investigating how the prevalence of materialistic bank CEOs has evolved over time, and how observed risk management policies, the behavior of non-CEO executives and bank tail risk vary with bank CEO materialism. We document that between 1994 and 2004 the proportion of U.S. banks run by materialistic CEOs increased significantly in absolute terms and relative to non-financial firms, coinciding with significant bank deregulation. Using an index reflecting the strength of risk management functions (RMI), we find that RMI is significantly lower for banks with materialistic CEOs, significantly increases after a non-materialistic CEO replaces a materialistic CEO, and decreases after a materialistic CEO succeeds a non-materialistic one. We also provide evidence consistent with non-CEO executives in banks with materialistic CEOs more aggressively exploiting inside trading opportunities around government intervention during the financial crisis. Finally, we find that banks with materialistic CEOs have significantly more downside tail risk relative to banks with non-materialistic CEOs, where the difference between groups increased significantly during the recent crisis.