David M. Reeb

Founding Family Ownership and the Agency Cost of Debt

We investigate the impact of founding family ownership structure on the agency cost of debt. We find that founding family ownership is common in large, publicly traded firms and is related, both statistically and economically, to a lower cost of debt financing. Our results are consistent with the idea that founding family firms have incentive structures that result in fewer agency conflicts between equity and debt claimants. This suggests that bond holders view founding family ownership as an organizational structure that better protects their interests. r 2003 Elsevier Science B.V. All rights reserved. JEL classification: G3

Board Characteristics, Accounting Report Integrity, and the Cost of Debt

Creditor reliance on accounting-based debt covenants suggests that debtors are potentially concerned with board of director characteristics that influence the financial accounting process. In a sample of S&P 500 firms, we find that the cost of debt financing is inversely related to board independence and board size. We also examine the impact of audit committee characteristics on corporate yields spreads as audit committees are the direct mechanism that boards use to monitor the financial accounting process. We find that fully independent audit committees are associated with a significantly lower cost of debt financing. Similarly, yield spreads are also negatively related to audit committee size and the number of audit committee meetings. Overall, these results provide market-based evidence that boards and audit committees are important elements affecting the reliability of financial reports.

Board Composition: Balancing Family Influence in S&P 500 Firms

We examine the mechanisms used to limit expropriation of firm wealth by large shareholders among S&P 500 firms with founding-family ownership. Consistent with agency theory, we find that the most valuable public firms are those in which independent directors balance family board representation. In contrast, in firms with continued founding-family ownership and relatively few independent directors, firm performance is significantly worse than in non-family firms. We also find that a moderate family board presence provides substantial benefits to the firm. Additional tests suggest that families often seek to minimize the presence of independent directors, while outside shareholders seek independent director representation. These findings highlight the importance of independent directors in mitigating conflicts between shareholder groups and imply that the interests of minority investors are best protected when, through independent directors, they have power relative to family shareholders. We argue that expanding the discussion beyond manager-shareholder conflicts to include conflicts between shareholder groups provides a richer setting in which to explore corporate governance and the balance of power in U.S. firms.

Founding‐Family Ownership, Corporate Diversification, and Firm Leverage*

Anecdotal accounts imply that founding families routinely engage in opportunistic activities that exploit minority shareholders. We gauge the severity of these moral hazard conflicts by examining whether founding families—as large, undiversified blockholders—seek to reduce firm‐specific risk by influencing the firm’s diversification and capital structure decisions. Surprisingly, we find that family firms actually experience less diversification than, and use similar levels of debt as, nonfamily firms. Consistent with these findings, we also find that direct measures of equity risk are not related to founding‐family ownership, which suggests that family holdings are not limited to low‐risk businesses or industries. Although founding‐family ownership and influence are prevalent and significant in U.S. industrial firms, the results do not support the hypothesis that continued founding‐family ownership in public firms leads to minority‐shareholder wealth expropriation. Instead, our results show that minority shareholders in large U.S. firms benefit from the presence of founding families.

Firm Internationalization and the Cost of Debt Financing: Evidence from Non-Provisional Publicly Traded Debt

Recent research suggests that firm internationalization is associated with greater exchange rate risk and a higher cost of equity capital. However, there is no research on the relation between the level of firm international activity and the cost of debt financing. This study offers the first such empirical evidence using non-provisional public debt. Based on a sample of 2,194 U.S. firm year observations, we find that firms with greater levels of international activity have better credit ratings. We also find that the cost of debt financing is inversely related to the degree of firm internationalization beyond that incorporated in credit ratings. These results suggest that rating agencies do not fully incorporate firm international activity in their analysis resulting in a downward bias in credit ratings for international firms. In aggregate, the results imply that failing to incorporate firm international activity in debt pricing leads to potential omitted variable problems.

Geographic and Industrial Corporate Diversification: The Level and Structure of Executive Compensation

We explore the relation between corporate diversification and CEO compensation. We document that geographic diversification provides a compensation premium, while industrial diversification is associated with lower levels of CEO pay. We also examine the effect of corporate diversification on the structure and performance criteria of CEO compensation contracts. We find that both diversification strategies are associated with a greater use of incentive-based compensation and with a greater reliance on market-based, rather than accounting-based measures of firm performance. Finally, we address the question of whether shareholders reward CEOs for corporate diversification. We document that while value-enhancing geographic diversification is rewarded, non-value-enhancing industrial diversification is penalized.

Who Monitors the Family

Founding families are in unique positions of power and control that enable them to expropriate wealth from minority shareholders. However, recent research suggests that in large publicly trade companies, firms with founding family presence outperform those with more dispersed ownership structures. This raises the question of who monitors the family and alleviates these shareholder-shareholder conflicts. Using the Standard and Poors 500 firms from 1992 to 1999, we document significant corporate governance differences between family and non-family firms. We find that the salient element in limiting family opportunism in US firms is the relative influence of independent and family directors. Overall, rather than focusing on divergences in family ownership and control as reported in East Asian firms, investors in US firms appear to focus on the presence of independent monitors to counterbalance family influence.

The blockbuster hypothesis: influencing the boundaries of knowledge

We argue that the creation of new knowledge is both difficult and rare. More specifically, we posit that the creation of new knowledge is dominated by a few key insights that challenge the way people think about an idea; generating high interest and use. We label this the blockbuster hypothesis. Using two large samples of published management studies over the period 1998–2007 we find support for the blockbuster hypothesis. We also find that numerous studies in the leading management journals are flops, having little impact on the profession as measured using citation data. Additional tests indicate that journal “quality” is related to the ratio of blockbusters to flops a journal publishes and that journal rankings are a poor proxy for study influence. Consistent with the notion that editorial boards are able to identify new knowledge, we find that research notes significantly under-perform articles in both the same journal and articles published in lower ranked journals. Taken together, the results imply that only a few scientific studies, out of the thousands published in a given area, change or influence the boundaries of knowledge, with many appearing to have little impact on the frontiers of knowledge. Overall, this analysis indicates that the development of new knowledge is rare even though it appears to be recognizable to knowledge gatekeepers like journal editors.

Insider Trading in Supervised Industries

We investigate the impact of government agency oversight, such as by the Federal Reserve, on insider trading at the firm level. Regulatory supervision potentially limits trading based on material, nonpublic information, as it provides another layer of corporate governance to mitigate outflows of private information. Yet regulators themselves may serve as a source of information leakage, thereby facilitating insider-trading activity. We find, first, that in comparison to nonsupervised firms, supervised firms exhibit substantially greater trading based on inside information prior to earnings announcements. Second, in the first few days after firms provide private information to regulators or when regulators possess private information inaccessible to corporate insiders, these firms exhibit greater symptoms of insider trading. Finally, within a given supervised industry, insider-trading symptoms appear more pronounced when regulators exhibit greater leniency or operate in states with more political corruption. These insider-trading activities translate into over

CEO Confidence and Unreported R&D

1 billion in annual transfers.