Huasheng Gao

Determinants of Corporate Cash Policy: Insights from Private Firms

We provide one of the first large sample comparisons of cash policies in public and private U.S. firms. We first show that despite higher financing frictions, private firms hold, on average, about half as much cash as public firms do. By examining the drivers of cash policies for each group, we are able to attribute the difference to the much higher agency costs in public firms. By combining evidence from across public and private firms as well as within public firms across different qualities of governance, we are able to reconcile existing mixed evidence on the effects of agency problems on cash policies. Specifically, agency problems affect not only the target level of cash, but also how managers react to cash in excess of the target.

Nonmonetary Benefits, Quality of Life, and Executive Compensation

We examine the effects of nonmonetary benefits on overall executive compensation from the perspective of the living environment at the firm headquarters. Companies in polluted, high crime rate, or otherwise unpleasant locations pay higher compensation to their chief executive officers (CEOs) than companies located in more livable locations. This premium in pay for quality of life is stronger when firms face tougher competition in the managerial labor market, when the CEO is hired from outside, and when the CEO has short-term career concerns. Overall, the geographic desirability of the corporate headquarters is an effective substitute for CEO monetary pay.

CEO Turnover-Performance Sensitivities in Private Firms

We compare CEO turnover in public and private firms to gain insight into whether and how investor horizon influences CEO firing decisions. Controlling for governance structures, public firms have higher CEO turnover rates and exhibit greater turnover-performance sensitivity than private firms. Performance improvement and corporate policy changes around CEO turnover are more evident for private firms than for public firms. We conclude that investor myopia is the main cause of the differences and provide evidence of segmentation in the CEO labor market as an explanation for how differing turnover risks can persist in public versus private firms.We compare CEO turnover in public and large private firms. Public firms have higher turnover rates and exhibit greater turnover-performance sensitivities than private firms. Controlling for pre-turnover performance, performance improvements are greater for private firms than for public firms. We investigate whether these differences are due to differences in quality of accounting information, the CEO candidate pool, CEO power, board structure, ownership structure, investor horizon, or some unobservable differences between public and private firms. One factor contributing to public firms’ higher turnover rates and greater turnover-performance sensitivities appears to be investor myopia.

Innovation Strategy of Private Firms

We compare innovation strategies of public and private firms based on a large sample over the period 1997–2008. We find that public firms’ patents rely more on existing knowledge, are more exploitative, and are less likely in new technology classes, while private firms’ patents are broader in scope and more exploratory. We investigate whether these strategies are due to differences in firm information environments, CEO risk preferences, firm life cycles, corporate acquisition policies, or investment horizons between these two groups of firms. Our evidence suggests that the shorter investment horizon associated with public equity markets is a key explanatory factor.

The Even-Odd Nature of Audit Committees and Corporate Earnings Quality

We apply voting theory to the context of audit committees and examine how the even–odd nature of audit committees is related to earnings quality. We hypothesize that an audit committee with an odd number of directors can improve the committee’s voting efficiency by better aggregating directors’ information and thus enhance the quality of committee decisions, as compared with an audit committee with an even number of directors. Supporting this implication, we find that an odd audit committee is associated with lower likelihood of financial restatements than an even audit committee, and that this relation is stronger when the committee members have more heterogeneous opinions, hold less equity ownership, are in a smaller audit committee, and face a more entrenched management.

Human Capital Driven Acquisition: Evidence from the Inevitable Disclosure Doctrine

We present evidence that the desire to gain human capital is an important motive for corporate acquisitions. Our tests exploit the staggered recognition of the Inevitable Disclosure Doctrine by U.S. state courts, which prevents a firm’s employees from working for other firms. We find a significant increase in the likelihood of being acquired for firms headquartered in states that recognize such a doctrine relative to firms headquartered in states that do not. Heterogeneous treatment effects confirm the human capital channel: our result is stronger for firms with greater human capital and for firms whose employees have better ex-ante employment mobility.

Stakeholder Orientation and the Cost of Debt: Evidence from a Natural Experiment

We examine the causal effect of stakeholder orientation on firms’ costs of debt. Our test exploits the staggered adoption of state-level constituency statutes, which allow directors to consider stakeholders’ interests when making business decisions. We find a significant drop in loan spreads for firms incorporated in states that adopted such statutes relative to firms incorporated elsewhere. The effect is stronger among firms whose stakeholders’ interests are more likely to be ignored. Overall, our findings support the view that stakeholder orientation mitigates conflicts of interest between shareholders (residual claimants) and other stakeholders (fixed claimants), and thus reduces agency costs of debt.

Going Public and Innovation Strategy: The Role of Ownership Structure

This paper examines two related research questions: (1) Does a firm’s innovation strategy affect its going public (vs. staying private) decision? (2) Does the change of ownership associated with going public influence a newly public firm’s subsequent innovation strategy? Using a dataset consisting of both private and newly public U.S. firms’ patent and financial data over the period 1997-2008, we find that private firms doing exploitative innovation are more likely to go public, and that once public, these firms pursue even more exploitative innovation. Importantly, we show that the positive relationship between going public and doing exploitative innovation is weakened if there is a higher proportion of dedicated institutional shareholding, a higher proportion of management shareholding, or a dual-class ownership structure in the newly public firm. We conclude that innovation strategy is an important antecedent to, and shaped by, the decision to go public. Implications for theory and practice are discussed.

The Real Effect of Smoking Bans: Evidence from Corporate Innovation

We identify a positive causal effect of healthy working environments on corporate innovation, using the staggered passage of U.S. state-level smoke-free laws that ban smoking in workplaces. We find a significant increase in patents and patent citations for firms headquartered in states that have adopted such laws relative to firms headquartered in states without such laws. The increase is more pronounced for firms in states with stronger enforcement of such laws and in states with weaker pre-existing tobacco controls. We present suggestive evidence that smoke-free laws affect innovation by improving inventor health and productivity and by attracting more productive inventors.

Can Online Annual General Meetings Increase Shareholders’ Participation in Corporate Governance? Evidence from China

We find that annual shareholder meetings conducted online can greatly increase the participation of shareholders, especially retail shareholders. This finding is more evident when the cost of physically attending such a meeting is higher and when the firm’s ownership is more dispersed. We further document significant positive stock returns when firms initiate online annual meetings. We also find that retail shareholders indeed actively voice their concerns by voting against the proposals that potentially hurt their interests. Overall, we provide evidence that online shareholder meetings provide shareholders a cost-effective way to participate in governance issues.