Anup Agrawal

Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders

This paper examines the use of seven mechanisms to control agency problems between managers and shareholders. These mechanisms are: shareholdings of insiders, institutions, and large blockholders; use of outside directors; debt policy; the managerial labor market; and the market for corporate control. We present direct empirical evidence of interdependence among these mechanisms in a large sample of firms. This finding suggests that crosssectional OLS regressions of firm performance on single mechanisms may be misleading. Indeed, we find relationships between firm performance and four of the mechanisms when each is included in a separate OLS regression. These are insider shareholdings, outside directors, debt, and corporate control activity. Importantly, the effect of insider shareholdings disappears when all of the mechanisms are included in a single OLS regression, and the effects of debt and corporate control activity also disappear when estimations are made in a simultaneous systems framework. Together, these findings are consistent with optimal use of each control mechanism except outside directors.

Corporate Governance and Accounting Scandals

This paper empirically examines whether certain corporate governance mechanisms are related to the probability of a company restating its earnings. We examine a sample of 159 U.S. public companies that restated earnings and an industry‐size matched sample of control firms. We have assembled a novel, hand‐collected data set that measures the corporate governance characteristics of these 318 firms. We find that several key governance characteristics are unrelated to the probability of a company restating earnings. These include the independence of boards and audit committees and the provision of nonaudit services by outside auditors. We find that the probability of restatement is lower in companies whose boards or audit committees have an independent director with financial expertise; it is higher in companies in which the chief executive officer belongs to the founding family. These relations are statistically significant, large in magnitude, and robust to alternative specifications. Our findings are consistent with the idea that independent directors with financial expertise are valuable in providing oversight of a firm’s financial reporting practices.

Large Shareholders and the Monitoring of Managers: The Case of Antitakeover Charter Amendments

This paper examines the role of large shareholders in monitoring managers when they propose antitakeover charter amendments. We attempt to distinguish between two competing hypotheses: the “active monitoring hypothesis” and the “passive voting hypothesis.” We find a statistically significant positive relation between institutional ownership and the stockholder wealth effects of various types of amendments, after controlling for ownership concentration among institutions, managerial ownership, and firm size. Our empirical evidence lends support to the “active monitoring hypothesis” proposed by Demsetz (1983) and Shleifer and Vishny (1986) that the existence of large shareholders leads to better monitoring of managers.

Anomalies or illusions? Evidence from stock markets in eighteen countries

Abstract This paper examines five seasonal patterns in stock markets of eighteen countries: the weekend, turn-of-the-month, end-of-December, monthly and Friday-the-thirteenth effects. We find a daily seasonal in nearly all the countries, but a weekend effect in only nine countries. Interestingly, the daily seasonal largely disappears in the 1980s. The last trading day of the month has large returns and low variance in most countries. Many countries have large December pre-holiday and inter-holiday returns. The January returns are large in most countries and a significant monthly seasonal exists in ten countries.

Do Takeover Targets Underperform? Evidence from Operating and Stock Returns

Financial economists seem to believe that takeovers are partly motivated by the desire to improve poorly performing firms. However, prior empirical evidence in support of this inefficient management hypothesis is rather weak. We provide a detailed re-examination of this hypothesis in a large scale empirical study. We find little evidence that target firms were performing poorly before acquisition, using either operating or stock returns. This result holds both for the sample as a whole and for subsamples of takeovers that are more likely to be disciplinary. We conclude that the conventional view that targets perform poorly is not supported by the data.

Does Section 16b deter insider trading by target managers

Authors description of his article: This paper empirically examines whether the short swing trading rule (Section 16(b) of the Securities Exchange Act) deters managers from trading before merger announcements. This rule bars insiders from profiting on round-trip trades completed within a six month period. Insiders can generally escape the short-swing rule by selling six months and a day after purchase. However, a merger forces the sale of all the outstanding common stock of the target firm, preventing insider purchases within six months before the merger from escaping this rule. We analyze the trading behavior of top managers of takeover targets around the announcement of a bid. In order to disentangle the effect of this rule from the deterrent effect of the more punitive Rule 10(b)(5), we examine the time period from 1941 to 1961, an era when the latter rule was not enforced. We find that managers of target firms reduce their purchases before the merger announcement below their normal level of purchases and relative to a control sample of non-target firms. This evidence is consistent with a deterrent effect of Section 16(b). We find that managers reduce their purchases before the merger completion only in the 1941-55 period. Surprisingly, managers do not reduce their sales before the announcement, even though Section 16(b) cannot punish deferral of planned sales.

Executive Compensation and Corporate Performance in Electric and Gas Utilities

We study how the composition of the board of directors and incentives from direct shareholdings affect firm performance in a sample of large, publicly traded firms. We use an instrumental variables approach that controls directly for endogeneity of both shareholdings and board composition. We find no evidence that cross-sectional patterns in board composition are correlated with cross-sectional patterns in performance. This result is consistent with a number of different explanations, all of which suggest that potential regulation of board composition would not be beneficial. Similar to the previous literature, we find a nonmonotonic relation between ownership and performance. Our results suggest that this relation is not a product of the endogeneity of shareholdings. Finally, we find that firm performance suffers if the CEO stays on too long (beyond 15 years).

Corporate Governance Consequences of Accounting Scandals: Evidence from Top Management, CFO and Auditor Turnover

This paper examines the consequences of accounting scandals to top management, top financial officers and outside auditors. We examine a sample of 518 U.S. public companies that announced earnings-decreasing restatements during the 1997–2002 period and an industry-size matched sample of control firms. Using logistic regressions that control for other determinants of management turnover, we find strong evidence of greater turnover of chief executive officers (CEOs), top management and chief financial officers (CFOs) of restating firms compared to the control sample. On average, over the three-year period surrounding the year of restatement announcement, CEOs and CFOs face, respectively, a 14% and 10% greater probability of being replaced in restating firms than in control firms, after controlling for other factors. These represent increases of about 42% and 23%, respectively, compared to the usual turnover probabilities for CEOs and CFOs. The magnitudes of these effects are even larger for restatements that are more serious, have worse effects on stock prices, result in negative restated earnings, are initiated by outside parties, are accompanied by Accounting and Auditing Enforcement Releases (AAERs), or trigger securities class action lawsuits. We find little systematic evidence that auditor turnover is higher in restating firms. Our paper provides evidence of effective functioning of internal governance mechanisms following accounting scandals.

Accounting Scandals in IPO Firms: Do Underwriters and VCs Help?

This paper examines whether underwriter reputation, venture capitalist (VC) backing, and VC reputation are related to the probability that a newly public firm has serious accounting problems. We examine a sample of firms that went public during 1995-2005 and announced restatements within three years of their initial public offerings (IPOs), and a control sample of non-restating IPO firms matched by industry and IPO size. We use a variety of sources to assemble a novel dataset that includes hand-collected data on underwriters, VCs, corporate governance, executive compensation, and other IPO-firm characteristics. We use paired logistic regressions to examine how the probability of restatement by an IPO firm is related to the reputation of its lead underwriter, VC backing, and the reputation of its lead VC. We test several competing hypotheses and control for other factors that prior studies have found to be significant determinants of the probability of restatement. We find that the probability of restatement by a newly public firm is 1) consistently and positively related to the reputation of its lead underwriter, 2) negatively related to VC backing and the reputation of its lead VC in several sub-samples where misstatements are likely to be more harmful to VC reputations, and 3) negatively related to the maturity of its lead VC. The endogenous selection of a more reputable underwriter or VC backing does not appear to drive our results. Our findings suggest that VCs, especially those that are mature and reputable, have positive influence as monitors on the financial reporting quality of IPO firms, while underwriters’ concerns about generating revenue appear to override their reputational concerns.

Boardroom Brawls: An Empirical Analysis of Disputes Involving Directors

We investigate the internal workings of US corporate governance with a hand-collected dataset of director resignations that are related to power struggles within the board. About two-thirds of the conflicts arise because of how board members interact in carrying out their duties, while most of the remaining cases involve disagreements between directors and top management over corporate strategy or financial policy. Conflicts are more likely to occur at companies where the CEO is the founder or is relatively new to the position. Tensions also increase when there are independent directors with large blockholdings. Stock prices decline sharply on average after a director turnover amid dispute, which may indicate that investors expect the firm to continue to have poor operating performance. The aftermath of such a resignation often includes shareholder class-action lawsuits, proxy contests, asset divestitures, and stock market delistings. Our results highlight the importance of a well-functioning board for reducing agency problems and maximizing shareholder value.