Eliezer M. Fich

Are Busy Boards Effective Monitors

Firms with busy boards, those in which a majority of outside directors hold three or more directorships, are associated with weak corporate governance. These firms exhibit lower market-to-book ratios, weaker profitability, and lower sensitivity of CEO turnover to firm performance. Independent but busy boards display CEO turnoverperformance sensitivities indistinguishable from those of inside-dominated boards. Departures of busy outside directors generate positive abnormal returns (ARs). When directors become busy as a result of acquiring an additional directorship, other companies in which they hold board seats experience negative ARs. Busy outside directors are more likely to depart boards following poor performance. ON DECEMBER 28, 2000, THE WALL STREET JOURNAL reported that Elaine L. Chao would be a nominee for President-elect George W. Bush’s cabinet.1 Only a few days prior to Ms. Chao’s confirmation as labor secretary, another Journal article described a growing trend among firms to limit the number of board seats their directors sit on because serving on too many boards may be detrimental to the quality of corporate governance. Coincidentally, this article also featured Ms. Chao as one of the 10 busiest directors among large U.S. corporations.2 As expected, upon her cabinet confirmation, Ms. Chao resigned her directorships at C.R. Bard, Clorox, Columbia/HCA Healthcare, Dole Foods, Northwest Airlines, and Protective Life. Ms. Chao’s cabinet appointment permits a case study analysis of the increasingly popular notion among shareholder activists, institutional investors, regulators, and many corporations that serving on several boards causes directors to be busy, rendering them ineffective monitors of corporate management. Using standard event study methodology, we find that Ms. Chao’s impending departure from the six boards in which she served as an outside director was viewed enthusiastically by investors. Table I shows that the mean 2-day cumulative ∗Fich is with Drexel University and Shivdasani is with the University of North Carolina at Chapel Hill. The paper benefited from comments by participants at the 2005 American Finance Association meetings, the 2004 Financial Research Association conference, and by seminar participants at Drexel, INSEAD, Seton Hall, North Carolina State, University of North Carolina, and Universidade Catolica de Portugal. The authors thank Anup Agrawal, Stuart Gillan, Bill Greene, Naveen Khanna, Robert Stambaugh, David Yermack, and an anonymous referee for helpful suggestions. The authors acknowledge financial support from the Wachovia Center for Corporate Finance. 1 Cummings, Jeanne, and Greg Jaffe (2000), A floated name for cabinet lands with a thud, Wall Street Journal, Eastern Edition, December 28, A12. 2 Lublin, Joann S. (2001), Multiple seats of power—Companies are cracking down on number of directorships board members can hold, Wall Street Journal, January 23, B1.

Are Some Outside Directors Better than Others? Evidence from Director Appointments by Fortune 1000 Firms

I analyze 1,493 first-time director appointments to Fortune 1000 boards, during 1997-99, to investigate whether certain outside directors are better than others. Reactions to director appointments are higher when appointees are CEOs of other companies than when they are not. CEOs are more likely to obtain outside directorships when the companies they head perform well. Well-performing CEOs are also more likely to gain directorships in organizations with growth opportunities. Because, for these firms, a large portion of their value hinges upon realizing their growth potential, I conclude that CEOs are sought as outside directors to enhance firm value.

Effects of Web Traffic Announcements on Firm Value

Data from independent rating firms on traffic to commercial Web sites are routinely used in financial valuation models and in determining advertising rates. These metrics are not always reliable because third-party estimates of Web traffic are vulnerable to technical and methodological weaknesses. Nonetheless, many companies issue press releases proclaiming their achievement of Web traffic milestones. In this article, standard event-study methodology is used to examine how Web traffic announcements affected firm value in the period from 1996 until 2001. The findings indicate that announcements increased firm value only in 1996-1999, and that the increases were indeed due to the announcements rather than the Internet Bubble. The announcing firms, regardless of business model, trading age, financial performance, and other characteristics, experienced value increases of about 5 percent around the time of the press release. This evidence documents the extent to which the market reacted to Web traffic indicators in the late 1990s despite their shortcomings.

On the Importance of Golden Parachutes

In acquisitions, target CEOs face a moral hazard: any personal gain from the deal could be offset by the loss of the future compensation stream associated with their jobs. Larger, more important, parachutes provide greater relief for these losses. To explicitly measure the moral hazard target CEOs face, we standardize the parachute payment by the expected value of their acquisition-induced lost compensation. We examine 851 acquisitions from 1999-2007, finding that more important parachutes benefit target shareholders through higher completion probabilities. Conversely, as parachute importance increases, target shareholders receive lower takeover premia while acquirer shareholders capture additional rents from target shareholders. JEL classification: D82; G34; J33

Measuring the Value of Refining a Web Presence

The redesign of a Web presence can be classified as both an IT investment and an e-commerce initiative. Although the empirical literature provides evidence that financial markets are sensitive to e-commerce announcements, it is still unknown what types of announcements affect the value of firms. We use the event study methodology on a sample of Web site redesigns from 1995 to 1999 to investigate the types of commercial organizations that announce changes to their Web presence, and to study whether such redesign initiatives affect the value of publicly traded firms. Our findings indicate that, on average, refining a Web presence does not produce significant firm valuation adjustments. However, cross-sectional analyses reveal that Web site redesign increases the value of service companies.

Large Wealth Creation in Mergers and Acquisitions

We examine completed MA (ii) transaction-specific events (not firm- nor CEO-specific events); (iii) enhanced by synergies from a strategic fit in the supply chain; and (iv) executed by bidders with high valuation multiples. Our analyses also document a link between financial accounting reporting irregularities and subsequent merger performance. These findings provide important insight into the factors associated with considerable wealth creation for acquirer shareholders in M&A deals.

Are Outside Directors with Greater Board Tenure Valuable? Evidence from the Last Credit Crisis

Analyses of bank performance around the 2007-2008 financial crisis suggest that outside directors with financial experience acquired through longer board service at their own banks are more effective than those with financial experience attained elsewhere. Institutions with more long-tenured independent directors (i) earn higher CARs around the collapse of both Bear Stearns and Lehman Brothers, (ii) limit their risk exposure before the crisis, (iii) exhibit better stock return and accounting performance during the crisis, (iv) are less likely to be bailed out by the U.S. government’s Troubled Assets Relief Program (TARP), and (iv) receive proportionally less financial assistance from TARP.

Advertising, Attention, and Acquisition Returns

We examine the hypothesis that advertising allows a takeover target’s management to increase the firm’s profile and their own negotiating power, leading to higher subsequent takeover premiums. Our evidence from 7,095 merger bids supports this hypothesis. Moreover, we find an economically significant decrease in the acquirer’s market capitalization during the announcement period. To consider the possibility of codetermination of target advertising and takeover premiums, we employ instrumental variable tests as well as propensity matching methods and our results hold. Further, we find targets that advertise are more likely to be pursued by multiple bidders and receive revised increased bids.We examine the hypothesis that advertising allows a takeover target’s management to increase the firm’s profile and their own negotiating power, leading to higher subsequent takeover premiums. Our evidence from 7,095 merger bids supports this hypothesis. Moreover, we find an economically significant decrease in the acquirer’s market capitalization during the announcement period. To consider the possibility of codetermination of target advertising and takeover premiums, we employ instrumental variable tests as well as propensity matching methods and our results hold. Further, we find targets that advertise are more likely to be pursued by multiple bidders and receive revised increased bids.

Are Market Reactions to M&As Biased by Overextrapolation of Salient News?

We study earnings surprises by firms in a takeover target’s 1-digit SIC released hours before M&A announcements. These surprises correlate with the acquirers’ M&A announcement return. Consistent with the effect of behavioral biases, one week after the M&A announcement, acquirers’ response to the earnings surprises disappears. While the acquirers’ stock misvaluation is transitory, other effects to the M&A process are permanent. Larger earnings surprises are related to increases in bid competition, in takeover premiums, and in withdrawn M&As. These results, which withstand numerous robustness tests, indicate that behavioral biases, characterized by trend-seeking and extrapolation, generate material distortions in some M&A transactions.

Class Action Spillover Effects on Joint Venture Partners

Firms exhibit a US