Andy Puckett

Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Costs

Using a proprietary dataset of institutional investors’ equity transactions, we document that institutional trading desks can sustain relative performance over adjacent periods. We find that trading-desk skill is positively correlated with the performance of the institution’s traded portfolio, suggesting that institutions that invest resources in developing execution abilities also invest in generating superior investment ideas. Although some brokers can deliver better executions consistently over time, our analysis suggests that trading-desk skill is not limited to a selection of better brokers. We conclude that the trade implementation process is economically important and can contribute to relative portfolio performance. ( JEL G12, G23, G24)

Suspect CEOs, Unethical Culture, and Corporate Misbehavior

We show that firms with Chief Executive Officers (CEOs) who personally benefit from options backdating are more likely to engage in other corporate misbehaviors, suggestive of an unethical corporate culture. These firms are more likely to commit financial fraud to overstate earnings. They acquire more private companies, which could perpetuate their frauds, and their acquisitions are met with lower market responses. These misbehaviors are concentrated in firms with externally hired suspect CEOs, consistent with outside CEOs having greater discretion to shape firm culture. The costs of these misbehaviors are reflected in larger stock price declines during a market correction and increased CEO replacement.

Voluntary Disclosures and the Exercise of CEO Stock Options

We examine voluntary disclosures around the exercise of CEO stock options. Previous research shows that managerial incentives depend on the intended disposition of the underlying shares of exercised stock options. When CEOs intend to sell the underlying shares of exercised options, they have an incentive to increase stock prices in the pre-exercise period. In contrast, when CEOs intend to hold the underlying shares, they have a tax incentive to decrease stock prices in the pre-exercise period. Consistent with these private incentives, we find a significant increase in the frequency and magnitude of good (bad) news announcements in the pre-exercise period when CEOs implement exercise-and-sell (exercise-and-hold) strategies. We further show that CEOsý propensities for opportunistic disclosures are positively related to the value of their exercised stock options. Lastly, we find that the Sarbanes-Oxley Act (SOX) generally reduces, but does not eliminate, this type of managerial opportunism. In one case (i.e., CEOs selling exercised shares back to the company), however, SOX might have inadvertently encouraged the use of opportunistic disclosures.

FORE! An Analysis of CEO Shirking

Using golf play as a measure of leisure, we document that there is significant variation in the amount of leisure that CEOs consume. We find that they consume more leisure when they have lower equity-based incentives. CEOs that golf frequently (i.e., those in the top quartile of golf play, who play at least 22 rounds per year) are associated with firms that have lower operating performance and firm values. Numerous tests accounting for the possible endogenous nature of these relations support a conclusion that CEO shirking causes lower firm performance. We find that boards are more likely to replace CEOs who shirk, but CEOs with longer tenures or weaker governance environments appear to avoid disciplinary consequences.