Antonio Falato

Distracted Directors: Does Board Busyness Hurt Shareholder Value?

We use the deaths of directors and chief executive officers as a natural experiment to generate exogenous variation in the time and resources available to independent directors at interlocked firms. The loss of such key co-employees is an attention shock because it increases the board committee workload only for some interlocked directors—the ‘treatment group’. There is a negative stock market reaction to attention shocks only for treated director-interlocked firms. Interlocking directors׳ busyness, the importance of their board roles, and their degree of independence magnify the treatment effect. Overall, directors׳ busyness is detrimental to board monitoring quality and shareholder value.

Do Creditor Rights Increase Employment Risk? Evidence from Loan Covenants

This paper studies whether financial contracts exacerbate or mitigate agency conflicts among stakeholders. We consider a specific contractual provision, debt covenants, and examine how, by allocating control rights between shareholders and debtholders, debt covenants affect the employment relationship. We analyze the role of covenants in both public (bonds) and private (loans) debt contracts. For public debt covenants, we estimate dynamic employment equations and find a significant negative effect of leverage on employment only for firms with relatively high covenant protection. For private debt covenants, we use a regression discontinuity design and document sizable job cuts following a covenant violation. Overall, these findings suggest that creditor rights increase employment risk. As such, they complement the recent literature on financial covenants by showing that covenants affect a broader set of operating decisions than previously recognized. Moreover, the results contribute to our understanding of the consequences of the allocation of control rights within the firm by identifying a specific risk-shifting channel from debtholders to employees.

CEO Successions and Firm Performance in the US Financial Industry

This paper examines the labor market for CEOs in the financial sector from 1988 to 2007, using a new hand-collected sample of 1,655 CEO successions. We document that there is a significant role of outside successions, as about one out of two successions involves an outside hire. In addition, using difference-in-differences estimates, we study the link between the labor market for finance CEOs and firm performance. We document that (1) there is a large performance gap between inside and outside successions, as outside successions are followed by significantly larger improvements in firm performance; (2) the performance gap between outside and inside successions is larger for firms with an insider dominated board of directors; (3) the performance gap widened after an important deregulation event (the 1999 Gramm-Leach-Bliley Act). These results are robust to using a battery of firm performance measures (short-run and long-run stock market returns, and several long-run operating performance measures) and a matched sample approach to address selection issues. Overall, our findings suggest that managerial human capital is very valuable in the financial industry, and weak internal governance hurts firm performance by limiting the scope of labor market competition.