C. Edward Fee

Proprietary Costs and the Disclosure of Information About Customers

In deciding how much information about their firms’ customers to disclose, managers face a trade-off between the benefits of reducing information asymmetry with capital market participants and the costs of aiding competitors by revealing proprietary information. This paper investigates the determinants of managers’ choices to disclose information about their firms’ customers using a comprehensive dataset of customer-information disclosures over the period 1976-2006. We find robust evidence in support of the hypothesis that proprietary costs are an important factor in firms’ disclosure choices regarding information about large customers.

The Costs of Outside Equity Control: Evidence from Motion Picture Financing Decisions

Recent theoretical work suggests that outside investor control may have costs as well as benefits, particularly in small, entrepreneurial firms. The possibility of investor opportunism can reduce an entrepreneurs incentives to invest personal effort into the firm. I investigate this issue in the context of motion picture financing decisions. Filmmakers face the choice of using studio financing (and giving up control) or of obtaining independent financing (and retaining control). I find that independent financing is more common when a filmmakers private artistic stake in a film is high and also for films requiring a relatively high level of creative effort.

Management Turnover and Product Market Competition: Empirical Evidence from the U.S. Newspaper Industry

We examine the relationship between management turnover and market structure for newspapers in 50 large cities from 1950 to 1993. We find that competitive markets display greater turnover rates than monopolistic markets and that turnover rates are increasing in the degree to which a newspaper trails its competition in market share. We find no evidence that the turnover-performance relationship varies with market structure. We discuss the implications of these findings for theories concerning competition and managerial employment contracting. The results appear most consistent with the hypothesis that the greater likelihood of liquidation in competitive markets leads to elevated turnover rates. Copyright 2000 by University of Chicago Press.

Corporate diversification and asymmetric information: evidence from stock market trading characteristics

Abstract We examine the relation between firm diversification and asymmetric information empirically using metrics drawn from the market microstructure literature. We find that the average diversified firm in our sample has somewhat less severe asymmetric information problems than a similarly constructed portfolio of stand-alone firms chosen to approximate the segments of the conglomerate. We also find that the information asymmetry of diversified firms is very similar to that of individual focused firms that approximate the conglomerates along several dimensions not including industry composition. We conclude that greater diversification is not on average associated with increased asymmetric information.

Financial Leverage and Bargaining Power With Suppliers: Evidence from Leveraged Buyouts

This paper investigates whether leveraged buyouts (LBOs) increase the bargaining power of firms with their suppliers. We find that suppliers to LBO firms experience significantly negative abnormal returns at the announcements of downstream LBOs. We also find that suppliers who have likely made substantial relationship-specific investments are more negatively affected, both in terms of abnormal stock returns and reduced profit margins, than suppliers of commodity products or transitory suppliers. Interestingly, leveraged recapitalization announcements are not associated with negative returns to suppliers, suggesting that increased leverage without an accompanying change in organizational form does not, on average, lead to price concessions from suppliers.

Promotions in the Internal and External Labor Market: Evidence from Professional Football Coaching Careers*

We study job movements of professional football coaches. The likelihood of an external promotion is strongly related to measures of individual performance and only weakly related to team performance. In contrast, the likelihood of an internal promotion is not related to individual performance. This difference arises from the process governing internal job openings, since openings are negatively related to performance. Conditional on the presence of an opening, promotion likelihood is increasing in individual performance. Relationships matter, as coaches are often hired and fired as a group. These findings have implications for several issues related to incentives and organizational design.

Raids, Rewards, and Reputations in the Market for CEO Talent

We examine the basic hypothesis that the market for managerial talent rewards managers from firms with superior stock price performance. We identify a set of outside CEO hires in a set of large publicly traded firms and investigate the stock price performance of the prior employers of these executives. Using 5-year buy-and-hold returns as our basic performance measure, we find that the prior employers of our sample executives did, on average, exhibit superior performance compared to a variety of benchmarks. A conditional logit analysis confirms that superior firm performance increases the likelihood that an executive will get an outside CEO job. Our results are most pronounced for executives who jump immediately from their prior employer to the new employer (raids) and for executives who were more highly ranked at their prior employer. We also examine compensation contracts and find that executives are typically awarded large initial hiring grants composed of stock options, restricted stock, and cash signing bonuses. These grants are highly correlated with the value of the unvested option and restricted stock position the executive leaves behind at his old employer. The evidence also suggests that these grants are positively related to prior firm performance, even after controlling for the forfeited position at the prior employer. We interpret our findings as providing substantial support for the basic hypothesis that superior stock price performance enhances an executives external labor market opportunities. In our view this is an interesting and important finding, as it supports the basic assumption underlying a large class of models concerning executive decision making and contracting in the presence of career concerns.

What Happens in Acquisitions? Evidence from Brand Ownership Changes and Advertising Investment

We study advertising at the brand level in a sample of corporate acquisitions. New owners display an elevated propensity to sharply cut advertising in acquired brands. This behavior is most pronounced in private equity transactions. When a buyers existing brands overlap with the acquired brands, aggregate advertising spending on the merged portfolio of brands tends to shift downward. Sharp advertising cuts are more likely to be observed when the old owner of the assets was investing at an elevated level and when the new owner has displayed past restraint in their investment spending activities. Combined buyer and seller abnormal returns are more positive in deals characterized by post-acquisition cuts in advertising, suggesting that these cuts often represent efficiency-enhancing cost savings.

Robust Models of CEO Turnover: New Evidence on Relative Performance Evaluation

We examine the robustness of empirical models of CEO turnover and revisit prominent findings in the literature regarding the CEO turnover-performance relation. We find that the procedure used to categorize turnover events and the method used to construct performance metrics can have large effects on model inferences. We show that common modeling choices have potentially serious shortcomings including (a) ignoring important information, (b) relying on information that may be systematically biased towards the hypothesis of interest, and (c) weighing extreme observations more heavily than the underlying theory would suggest. We identify a small set of robustness checks and model permutations that are likely to span the reasonable set in many turnover modeling contexts. Using these checks, we show that the widely documented significant sensitivity of CEO turnover to a firm’s abnormal stock performance is an extremely robust result. In contrast, the surprising recent evidence that CEO turnover depends on industry returns is fragile and non-robust, and in general there is no convincing evidence of an independent role of industry stock returns in predicting CEO turnover. We conclude that efforts to explain the general presence of an industry factor in turnover are misguided and that a simple efficient learning view of turnover with full relative performance evaluation is a reasonable description of the CEO turnover process.

Playing Favorites? Industry Expert Directors in Diversified Firms

We examine the influence of outside directors’ industry experience on segment investment, segment operating performance, and firm valuation for conglomerates. Given board composition is endogenous, we instrument for the presence of industry expert directors using the supply of experienced executives near conglomerate firms’ headquarters. We find that industry expert representation on the board causes increased segment investment. Consistent with experienced directors playing favorites rather than acting as dispassionate advisors, segment profitability (firm value) is lower for segments (firms) with industry expert outside directors. We do not find analogous negative profitability or valuation effects of director experience for single-segment firms.