David Javakhadze

An international analysis of CEO social capital and corporate risk‐taking

This study examines the effects of CEO social capital on corporate risk‐taking around the world. We document a significant positive relation between CEO social capital and aggregate corporate risk‐taking. Further, we find that CEOs with large social capital prefer riskier investment and financial policies. We also determine that the effect of CEO social capital on corporate risk‐taking is moderated by the extent of legal protections provided to shareholders, the financial development, and the culture of the country in which a firm is incorporated. Our results are robust to alternative proxies of risk‐taking, alternative model specifications, and tests for endogeneity.

The Corporate Demand for External Connectivity: Pricing Boardroom Social Capital

In this paper we examine the effect of boardroom social capital, defined as aggregate benefits of social obligations and informal contacts formed through social networks of outside directors, on board compensation. Using a large panel of nine thousand firm-year observations for the period 2007-2013, we find that boardroom social capital is positively priced. Further analysis shows that the firms pay premium for specific, important connections. In addition, network effects are more pronounced for firms with greater need for external resources. Firms that have suffered adverse events, such as bad merger, performance declines, and dividend cuts, pay higher connection premium. Finally, director-level analysis shows that socially well-connected directors perform important board roles and hold multiple directorships. Overall, our results are consistent with an efficient contracting explanation of boardroom pay.

Avoiding Unpriced Risk Using a Probability-Based Approach to Security Selection

We examine an approach to portfolio construction that that uses probability-based security analysis and find considerable evidence that the approach produces abnormal returns. High-minus-low value weighted portfolio returns are 0.50% per month and are monotonically increasing across probability quintiles. We argue that much of the information impounded in to prices is based on assumption and is unverifiable and that this, in turn, exposes prices to investor biases. Investors are therefore assuming risk of which they are unaware and for which they are not compensated. The approach we examine is able to identify this unpriced risk and thus produce abnormal returns with lower total risk.

Limits on Convergence in International Corporate Governance Practices

Purpose – The question of whether the corporate governance practices of firms in diverse countries are converging to those of U.S. firms, and the extent of convergence or divergence, is examined. Design/methodology/approach – Company level governance measures of board structure and organization, firm audit attributes, antitakeover defenses, and compensation design attributes of international firms are compared with those of U.S. firms. Findings – We find that the evidence for convergence is more mixed than previously believed, with firms in some nations converging, others essentially static, and a number diverging from U.S. practices. We further determine that country factors such as measures of national economic freedom, increased shareholder rights, and impartial judiciaries help to explain convergence. Greater participation by banks in the national economy is associated with greater divergence from U.S. governance standards. Firm characteristics which are suggestive of a future need for external equity encourage convergence while those which capture the use of leverage or the ability to service additional debt are correlated with greater divergence. Research limitations/implications – This study suggests that inquiry into whether convergence is occurring might be the wrong question to ask. Rather, our findings suggest that the research focus should be shifted toward an inquiry of what specific areas of governance are converging and in what countries or regions. Originality/value – This study helps to describe what constitutes effective corporate governance design for firms worldwide. It provides managers with insights on how governance mechanisms can be tailored to reflect local practices and laws.