Chun-Keung Hoi

Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds

We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social-capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarter relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer bonds over loans. We conclude that debt holders perceive social capital as providing environmental pressure constraining opportunistic firm behaviors in debt contracting.

Agency Conflicts, Controlling Owner Proximity, and Firm Value: An Analysis of Dual-Class Firms in the United States

The study seeks to understand whether the proximity of the largest shareholder (controller) to the locus of management – whether the controller is a top executive, a board member, or an outsider – determines the value of US dual-class firms. Using a sample of 209 US dual class firms from the year 2000 and a corresponding control sample of single-class firms, we run cross-sectional regressions to determine the effect of the controller on firm value. We present robust evidence that dual-class firm value is negatively related to controller proximity. Dual-class structure overall is unrelated to firm value, because despite its negative effects with high proximity controllers there appear to be benefits when controller proximity is low (when the largest shareholder is an outsider). Ownership structure is a widely studied subject but most studies focus on insider ownership. More nuanced aspects of ownership such as controller proximity are needed in empirical studies and theoretical models. These nuances could help us better understand the interplay between the incentive of various parties (e.g., managers, large shareholders) and the opportunity available for extraction of private benefits. A practitioner implication is that shareholder of high-proximity dual-class firms must seek additional control mechanisms to curb agency costs. A policy implication is that investor protection (laws and institutional structure protecting shareholders) works only to a limited extent – it curbs overt acts of expropriation, but cannot eliminate acts engineered by insiders.

The design of incentive compensation for directors

Today, most firms provide equity‐based incentive compensation to their non‐executive directors. We summarize viewpoints supportive and critical of this development. We argue that the effectiveness of incentive compensation is related to the structure of the incentive pay contact. We discuss the use of options and shares as well as the issue of whether incentive pay should be geared towards current rewards or future incentives. We also discuss the critical issue of maintaining the ownership exposure of directors by providing sufficient levels of equity as well as placing restrictions on cashing out. Using our arguments above, we suggest guidelines for constructing an optimal contract. We compare 289 incentive plans offered by public companies in the USA during 1988‐1998 and find that plans deviate significantly from the optimum.

Sarbanes‐Oxley: are audit committees up to the task?

Purpose – This paper aims to study the audit committee (AC) provisions of the Sarbanes‐Oxley Act with the objective of identifying implementation issues and to recommend firm and board actions to remedy the problems that are identified.Design/methodology/approach – Standard economic theory was used to analyze the incentives and abilities of AC members, relying on results in the financial economics literature regarding outside director behavior.Findings – The framework predicts that the new provisions in conjunction with the new regulatory/liability environment will increase risk‐aversion in directors belonging to ACs. This, in turn, creates an incentive alignment problem between AC members and shareholders leading to sub‐optimal decisions with regard to the audit. In particular, it is noted that demand will increase for high‐quality audits irrespective of cost considerations. The analysis also indicates that director labor markets will not mitigate this sub‐optimality.Research limitations/implications – B...

Labor market consequences of accounting fraud

Purpose – This paper aims to examine the research questions: Do executive and non‐executive directors face similar labor market penalties upon revelation of accounting fraud? Are all executive directors treated by markets as a homogenous group? Or, do executive directors who are top managers face stiffer penalties than other executive directors?Design/methodology/approach – Board membership of incumbent directors in US firms accused of accounting fraud are tracked for three years after the revelation. Two labor market consequences/penalties are considered. Probability of losing internal, own firm board seat is the likelihood that incumbent directors leave the accused firms board upon accounting fraud revelation. The likelihood of losing at least one external board seat (outside directorship) is also examined. Both univariate tests and multivariate LOGIT regressions are used to conduct the analysis.Findings – Compared to non‐executive directors, executive directors are more than twice as likely to lose ow...

Effects of Firm Complexity on the Adaption of Board Structure: Evidence from U.S. Electric Utilities Following Deregulation

This paper reexamines the adaptation of board structure in U.S. electric utilities following deregulation. Post-deregulation changes in board size and the number of outside directors are positively and statistically-significantly associated with changes in the complexity of a firm’s operations. Electric utilities that do not become more complex after deregulation reduce their board size significantly, employing fewer outside and inside directors. In contrast, board size is unchanged for firms that become more complex; these utilities employ more outsiders but fewer inside directors after deregulation. We conclude that electric utility boards adapt to deregulation by accommodating for changes in firm complexity in addition to other effects induced by deregulation.