David Oesch

Corporate Governance and Firm Value: International Evidence

In this paper, we investigate the relation between firm-level corporate governance and firm value based on a large and previously unused dataset from Governance Metrics International (GMI) comprising 6,663 firm-year observations from 22 developed countries over the period from 2003 to 2007. Based on a set of 64 individual governance attributes we construct two alternative additive corporate governance indices with equal weights attributed to the governance attributes and one index derived from a principal component analysis. For all three indices we find a strong and positive relation between firm-level corporate governance and firm valuation. In addition, we investigate the value relevance of governance attributes that document the companies’ social behavior. Regardless of whether these attributes are considered individually or aggregated into indices, and even when “standard�? corporate governance attributes are controlled for, they exhibit a positive and significant effect on firm value. Our findings are robust to alternative calculation procedures for the corporate governance indices and to alternative estimation techniques.

Shareholder Votes and Proxy Advisors: Evidence from Say on Pay: SHAREHOLDER VOTES AND PROXY ADVISORS

We study the role of proxy advisors (ISS and Glass Lewis & Co.) in the context of mandatory “say on pay” votes, a novel and complex item requiring significant firm-specific analysis. After describing the analysis underlying each proxy advisor’s recommendations, we examine the effect of these recommendations on shareholder votes, stock prices and firms’ behavior. As in prior studies, negative recommendations have a strong association with voting outcomes, but the effect varies with the reasons behind the recommendation. We document a small but significantly negative market reaction to the release of negative recommendations. More than one third of the firms receiving a negative recommendation publicly question the proxy advisors’ methodologies, but this protest has no effect on the recommendation and the voting outcome. The few firms that change their compensation practices obtain a revision in the recommendation and avoid voting dissent. We also present novel evidence on the (substantial) influence of management recommendations on shareholder votes in the context of the “say when on pay” vote, i.e. the vote on whether to hold say on pay votes every one, two or three years. Our findings contribute to the literature on shareholder voting and the related policy debate. JEL Classification: G34, G38, J33, M12

Product Market Competition, Corporate Governance, and Firm Value: Evidence from the EU Area

This paper investigates whether the valuation effect of corporate governance depends on the degree of competition in the companies’ product markets in a large international sample covering 14 countries from the European Union (EU). Besides providing external validity of previous US-centred studies, this paper uses more comprehensive and reliable measures of both product market competition and corporate governance. Consistent with the hypothesis that product market competition acts as a substitute for corporate governance as competitive pressure imposes discipline on managers to maximise firm value, our results show that corporate governance significantly increases firm value in non-competitive industries only. When investigating the channels through which firm value may be increased, we find that good governance for firms in non-competitive industries leads them to have more capital expenditures, spend less on acquisitions, and be less likely to diversify. Our results are robust to a large number of robustness checks including the use of alternative measures of competition and governance, as well as using alternative regression specifications.

Analyst Coverage and Real Earnings Management: Quasi-Experimental Evidence

We study how securities analysts influence managers’ use of different types of earnings management. To isolate causality, we employ a quasi-experiment that exploits exogenous reductions in analyst following resulting from brokerage house mergers. We find that managers respond to the coverage loss by decreasing real earnings management while increasing accrual manipulation. These effects are significantly stronger among firms with less coverage and for firms close to the zero-earnings threshold. Our causal evidence suggests that managers use real earnings management to enhance short-term performance in response to analyst pressure, effects that are not uncovered when focusing solely on accrual-based methods.

Management Influence on Investors: Evidence from Shareholder Votes on the Frequency of Say on Pay

The literature on shareholder voting has mostly focused on the influence of proxy advisors on shareholder votes. We exploit a unique empirical setting enabling us to provide a direct estimate of management’s influence. Analyzing shareholder votes on the frequency of future say on pay votes, we find that a management recommendation for a particular frequency is associated with a 26% increase in voting support for that frequency. Additional tests suggest that the documented association is likely to capture a causal effect. Management influence varies across firms and is smaller at firms where perceived management credibility is lower. Compared to firms adopting an annual frequency, firms following management’s recommendation to adopt a triennial frequency are significantly less likely to change their compensation practices in response to an adverse say on pay vote, consistent with the notion that a less frequent vote results in lower management accountability.

Do Risk Disclosures Matter When it Counts? Evidence from the Swiss Franc Shock

We examine the relation between disclosure quality and information asymmetry among market participants following an exogenous shock to macroeconomic risk. In 2015 the Swiss National Bank abruptly announced that it would abandon the longstanding minimum euro-Swiss franc exchange rate. We find evidence suggesting that firms with more transparent disclosures regarding their foreign exchange risk exposure ex ante exhibit significantly lower information asymmetry ex post. The information gap in bid-ask spreads appears within 30 minutes of the announcement and persists for two weeks, during which new information gradually substitutes for past disclosures. We validate the information dynamics of past risk disclosures with three field surveys: (1) Sell-side analysts emphasize the importance of existing (risk) disclosures in evaluating the translational and transactional effects of the currency shock. (2) Lending banks’ credit officers rely on past disclosures as the primary information source available for smaller (unlisted) firms in the immediate aftermath of the shock. (3) Investor-relations managers use existing financial filings as a key resource when communicating with external stakeholders. The results suggest that historical disclosures help investors attenuate information asymmetry in light of unexpected news.

Intangible Capital and Leverage

This study investigates the causal effect of intangible capital on leverage. We use court invalidations of patents by the U.S. Court of Appeals for the Federal Circuit as a proxy for reductions in intangible capital and mitigate endogeneity concerns by exploiting random assignment of judges to court cases. Using an instrumental variable research design, we show that a loss of intangible capital causes a reduction in a firm’s leverage. The effect is stronger for firms with low interest coverage, high proximity to default and small firm size, and if an invalidated patent is pledged as collateral.

Real Effects of Investment Banking Relationships: Evidence from the Financial Crisis

We investigate the damage to real-sector investment spending and corporate financing activities triggered by the failure of three major investment banks during the 2007-09 financial crisis. We find that corporations characterized by pre-crisis corporate investment banking relationships with troubled investment banks exhibit significantly lower post-crisis investment spending activity and securities issuance compared to corporations that were not affiliated with the troubled institutions. The effect varies systematically with the nature and strength of the investment banking relationship. Our results are robust with respect to various modifications and extensions of our empirical design (including a matched control sample) and generally inconsistent with alternative explanations unrelated to investment banking relationships.

Financial Constraints and Corporate Disclosure: Evidence from Capital Market Segmentation

The sharp distinction drawn between firms rated narrowly above (BBB-) and below (BB+) the investment-grade cutoff provides variation in debt financing availability unrelated to firm fundamentals. We exploit this market segmentation to identify an asymmetric effect of debt capital supply on voluntary disclosure: BB firms step up disclosure in response to high-yield bond mutual fund outflows. This effect is concentrated in periods of large fund outflows and among financially constrained firms. Conditional on greater disclosure, these firms increase equity issuance. Thus, disclosure may alleviate information-based financing frictions, allowing firms to smooth out temporary disruptions to the availability of finance.