Brian J. Bolton

Director Ownership, Governance and Performance

We study the impact of the Sarbanes-Oxley Act on the relationship between corporate governance and company performance. We consider 5 measures of corporate governance during the period 1998–2007. We find a significant negative relationship between board independence and operating performance during the pre-2002 period, but a positive and significant relationship during the post-2002 period. Our most important contribution is a proposal of a governance measure, namely, dollar ownership of the board members, that is simple, intuitive, less prone to measurement error, and not subject to the problem of weighting a multitude of governance provisions in constructing a governance index.

CEO Education, CEO Turnover, and Firm Performance

This paper analyzes the relationship between CEO education, CEO turnover and firm performance. Our primary interest is on the role that CEO education plays in a firms decision to replace its current CEO, the role that it plays in selecting a new CEO, and on whether CEO education significantly affects performance. We use six main measures of CEO education: whether or not the CEO attended a Top-20 undergraduate school, whether or not the CEO has an MBA, law or masters‟ degree, and whether or not the MBA or law degree is from a Top-20 program. Our study includes more than 14,500 CEO-years and more than 2,600 cases of CEO turnover from 1993-2007. Our results show that CEO education does not play a large role in the decision by a firm to replace its current CEO; poorly performing CEOs are replaced, regardless of their education. Education, however, does play a significant role in the selection of the replacement CEO; there is a significantly positive correlation between the education levels of new CEOs and those of the CEOs they replace. Further, hiring new CEOs with MBA degrees leads to short-term improvements in operating performance. We, however, do not find a significant systematic relationship between CEO education and long-term firm performance. CEO education does not seem to be an appropriate proxy for CEO ability. Our results lead to the puzzling implication that, while CEO education appears to play an important role in the hiring of CEOs, it does not affect the long-term performance of firms.

Manager Characteristics and Capital Structure: Theory and Evidence

We investigate the effects of manager characteristics on capital structure in a structural model. We implement the manager’s optimal contracts through financial securities that lead to a dynamic capital structure, which reflects the effects of taxes, bankruptcy costs, and manager-shareholder agency conflicts. Long-term debt declines with the manager’s ability, inside equity stake, and the firm’s long-term risk, but increases with its short-term risk. Short-term debt declines with the manager’s ability, increases with her equity ownership, and declines with short-term risk. We show support for these implications in our empirical analysis.

Sarbanes-Oxley, Governance and Performance

We study the relationship between corporate governance and company performance. We consider five measures of corporate governance during the period 1998-2007. Given the passage of Sarbanes-Oxley Act (SOX) during 2002, we separate the sample into pre-2002 and post-2002 periods to study how governance-performance relationships might have been impacted by this regulation.We find a negative and significant relationship between board independence and operating performance during the pre-2002 period, but a positive and significant relationship during the post-2002 period. The stock ownership of directors is consistently positively and significantly related to performance through each of the subperiods. Other measures, such as the governance indices introduced by Gompers, Ishii and Metrick (2003) and Bebchuk, Cohen and Ferrell (2009) provide inconsistent results. We conclude that corporate governance studies should consider director stock ownership as the most reliable measure of governance. We further investigate the relationship between SOX, governance and performance by examining how CEOs are disciplined following poor performance. We find that board independence and director stock ownership appear to be effective governance mechanisms for replacing the CEO following poor performance.

Getting Incentives Right: Is Deferred Bank Executive Compensation Sufficient?

In the wake of the global financial crisis, attention has often focused on whether incentives generated by bank executives’ compensation programs led to excessive risk-taking. Post-crisis, compensation reform proposals have taken broadly three approaches: long-term deferred equity incentive compensation, mandatory bonus clawbacks upon accounting restatements and financial losses, and debt-based compensation. In earlier articles we recommended the following compensation structure for bank executives: incentive compensation should consist only of restricted stock and restricted stock options – restricted in the sense that the executive cannot sell the shares or exercise the options for two to four years after his or her last day in office. We contend that this incentive compensation package, which we term the Restricted Equity proposal, will focus bank managers’ attention on the long-run and discourage them from investing in high-risk, value-destroying projects. Equity based incentive programs such as our proposal may lose effectiveness in motivating managers to enhance shareholder value as a bank’s equity value approaches zero. As a consequence, some commentators have called for pay packages linked to bank debt. We contend, however, that the more appropriate approach is to retain equity-based incentive pay and to reform bank capital structure to reduce the probability of a tail event, and hence insolvency. We advance two approaches, not necessarily exclusive, that coupled with the Restricted Equity proposal, we maintain, would incentivize bank executives to not take on projects of excessive risk: meaningful higher and simpler capital requirements and mandatory issuance of contingent convertible capital – debt that converts to equity under specified adverse states of the world. Because the optimal capital level is unknown, we further advocate facilitating regulatory diversity within the international financial regulatory regime, to generate information concerning what level and form of capital works best, which would improve the quality of decision-making and the resiliency of the global financial system.

Corporate Social Responsibility and Bank Performance

This is an empirical study of the relationship between Corporate Social Responsibility (CSR), financial performance and risk at U.S. banks from 1998-2010. The results are striking. First, there is a positive relationship between CSR and both operating performance and firm value. This result is most pronounced in the largest banks. Second, there is a negative relationship between bank risk-taking and aspects of a bank’s CSR environment that are central to the bank’s operating activities. Third, those same aspects were negatively related to whether or not the bank received assistance through TARP during 2008-2009, while aspects consistent with green-washing were positively related to a bank receiving TARP assistance. Overall, these results suggest that improving the quality of CSR at banks might go a long way towards improving individual bank performance and reducing the risk associated with U.S. financial institutions.

The Role of the Firm’s Stakeholders

Who owns any firm? That is, who owns the resources of any firm? The answer may not be as obvious as you might think. The standard answer is that stockholders own the firm. After all, that is what business schools teach in Business 101. Stockholders are the residual owners entitled to all cash flows or interests after all prior expenses and obligations have been fulfilled. But that same Business 101 class also teaches that the firm is a nexus of contracts, an integrated system of relationships between many disparate parties: stockholders, customers, employees, suppliers, and others. The firm would not— could not—exist without any of these parties. While the stockholders may be the ultimate legal owners of the firm’s cash flows, many other parties are the owners of other specific cash flows that take priority over anything the stockholders may receive. In this sense, these other parties own the firm, too.

The Purpose of the Firm

What is value? How do we measure value? And who gets to measure what is valuable? Which investments create value and why? This book explores these issues and translates traditional economic and finance perspectives on value and value creation into an approach that everyone can understand and apply to his or her own specific situations.

The Sustainability of Economics

Think about what you did yesterday. Think about what you’re going to do tomorrow. In economic terms, your actions are choices. Even if you went to work, that was a choice. You choose to go to work because you want the money, or you don’t want to get fired, or you actually enjoy going to work. And if you go shopping—whether at the grocery store or an art gallery—that is a choice, too. Even within those choices, there are choices: you could spend

Valuation of Sustainable Financial Investments

0.99 per pound of bananas at the discount grocery chain, or you could spend