David C. Cicero

Suspect CEOs, Unethical Culture, and Corporate Misbehavior

We show that firms with Chief Executive Officers (CEOs) who personally benefit from options backdating are more likely to engage in other corporate misbehaviors, suggestive of an unethical corporate culture. These firms are more likely to commit financial fraud to overstate earnings. They acquire more private companies, which could perpetuate their frauds, and their acquisitions are met with lower market responses. These misbehaviors are concentrated in firms with externally hired suspect CEOs, consistent with outside CEOs having greater discretion to shape firm culture. The costs of these misbehaviors are reflected in larger stock price declines during a market correction and increased CEO replacement.

Attentive Insider Trading

We provide evidence that some profitable insider stock selling is motivated by public information. At firms that disclose having concentrated sales relationships, insiders appear to sell their own stock profitably based on public information about their principal customers. Supplier insiders also sell more stock when public information about their customers׳ recent returns and earnings surprises suggests they will earn larger profits. These results are stronger when outside investor attention could be lower. Outside of this setting, insiders engage in a higher proportion of routine sales and their sales are less profitable. We do not find similar patterns for insider purchases.

How Do Public Companies Adjust Their Board Structures

We show that public companies frequently changed their board structures before implementation of the Sarbanes–Oxley Act, with two-thirds of firms changing board size or independence during an average two-year period. Board changes were associated with changes in firm-specific fundamentals, but the rate of change toward predicted structures was negatively associated with the level of CEO influence. Companies changed board structures in either direction as underlying firm fundamentals changed, consistent with the pursuit of economically efficient board structures. However, board changes have become less frequent since the Sarbanes–Oxley Act was enacted. We provide some evidence that companies became less likely to decrease board independence when changes in fundamentals suggested they should, which may reflect a loss of economic efficiency.We examine whether firms pursue target board structures. Using a broad panel from 1991–2003, we find that board changes are frequent, with two-thirds of firms changing board size or independence during a two-year period. Board changes are associated with changes in firm-specific fundamentals. The rate of change is positively associated with the benefits of effective boards and negatively associated with CEO influence. Firms change board characteristics in either direction as underlying firm fundamentals change, consistent with the pursuit of economically efficient targets. JEL Classification: D23; G34; G38; K22; M14

Local Investors' Preferences and Capital Structure

We provide evidence that publicly listed firms respond to capital supply conditions shaped by local investing preferences. The local supply of credit is higher and more stable in areas where demographics suggest that local investors prefer safer portfolios. We find that firms headquartered in these areas use more debt financing. The demographics-leverage relation is more pronounced for non-investment-grade and unrated firms that cannot easily tap public markets (about two-thirds of U.S. public companies). Analyses of firms’ financing activities around exogenous shocks to credit supplies - including interstate banking deregulation and the 2008-2009 financial crisis - support the capital supply effect. As demographics change slowly, local investors’ preferences may contribute to the heterogeneity and persistence of public firms’ capital structures.

FORE! An Analysis of CEO Shirking

Using golf play as a measure of leisure, we document that there is significant variation in the amount of leisure that CEOs consume. We find that they consume more leisure when they have lower equity-based incentives. CEOs that golf frequently (i.e., those in the top quartile of golf play, who play at least 22 rounds per year) are associated with firms that have lower operating performance and firm values. Numerous tests accounting for the possible endogenous nature of these relations support a conclusion that CEO shirking causes lower firm performance. We find that boards are more likely to replace CEOs who shirk, but CEOs with longer tenures or weaker governance environments appear to avoid disciplinary consequences.

Chipping Away at Financial Reporting Quality

We test the association between CFO effort and the quality of public firms’ financial information environments. We evaluate this relation using a measure of CFO leisure consumption – specifically, the amount of golf played – as an inverse proxy for effort. We find that CFOs consume more leisure (play more golf) when they have weaker equity-based incentives, and that high CFO leisure consumption is associated with lower earnings quality. This result holds with firm or CFO fixed effects and when using local weather quality to instrument for golf play, in support of a causal interpretation of the results. Higher CFO leisure consumption is also negatively associated with the informativeness of earnings calls and the accuracy of management guidance. Additionally, external monitors appear to be affected by the level of CFO effort as higher CFO leisure consumption is associated with greater analyst forecast dispersion and increased audit fees. Overall, the results suggest that CFOs respond to equity-based economic incentives, and that lower CFO effort weakens public firms’ financial information environment.