Hye Seung Lee

CEO Compensation and the Role of In-House Experience

We hand collect a database that includes a direct measure of the incoming CEO’s in-house experience at the time of succession. In contrast to previous studies that rely on an insider-outsider binary variable, our continuous variable allows us to examine compensation incentives following CEO successions across a continuum of in-house experience. We hypothesize and confirm that more in-house experience prior to succession leads to lower CEO total compensation at succession. In addition to total compensation, we find significant differences in the components of compensation. CEOs with more in-house experience receive larger cash-based incentives and smaller performance-based incentives than CEOs with little or no in-house experience at succession. Consistent with expectations, CEOs with substantial in-house experience also have lower wealth-to-risk sensitivities. Overall, our results show that CEO incentive contacts are significantly influenced by the level of in-house experience.

Are Generalists Beneficial to Corporate Shareholders? Evidence from Exogenous Executive Turnovers

This study finds a positive, economically meaningful impact of generalist chief executive officers (CEOs) on shareholder value using 164 sudden deaths and 345 non-sudden exogenous turnovers. The higher a departing CEO’s general ability index (GAI), independently and relative to her successor, the lower is the abnormal stock return to turnover announcements. Returns reflect post-turnover changes in operating performance. Further, CEOs’ and successors’ GAIs are significantly positively related, but only for non-sudden turnovers. Consistently, for sudden deaths, we find positive stock returns to appointments of generalist successors. The results provide a market-based explanation for the generalist pay premium.

Are generalists beneficial to corporate shareholders? Evidence from sudden deaths

This study finds a positive, economically meaningful impact of generalist chief executive officers (CEOs) on shareholder value using 164 sudden deaths and 345 non-sudden exogenous turnovers. The higher a departing CEO’s general ability index (GAI), independently and relative to her successor, the lower is the abnormal stock return to turnover announcements. Returns reflect post-turnover changes in operating performance. Further, CEOs’ and successors’ GAIs are significantly positively related, but only for non-sudden turnovers. Consistently, for sudden deaths we find positive stock returns to appointments of generalist successors. The results provide a market-based explanation for the generalist pay premium.

CEO Experience and Financial Reporting Quality: Evidence from Management Forecasts

Internally-promoted CEOs should have a deep understanding of their firm’s products, supply chain, operations, business climate, corporate culture, and how to navigate among employees to get the information they need. Thus, we argue that internally-promoted CEOs are likely to produce higher quality disclosure than outsider CEOs. Using a sample of U.S. firms from the S&P 1,500 index from 2001 to 2011, we hand-collect whether a CEO is hired from inside the firm and, if so, the number of years they worked at the firm before becoming CEO. We then examine whether managers with more internal experience issue higher quality disclosures and offer three main findings. First, CEOs with more internal experience are more likely to issue voluntary earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Second, CEOs with more internal experience issue more accurate earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Finally, investors react more strongly to forecasts issued by insider CEOs than to those issued by outsider CEOs. In additional analysis, we find no evidence that these results extend to mandatory reporting quality (i.e., accruals quality, restatements, or internal control weaknesses), perhaps because mandatory disclosure is subjected to heavy oversight by the board of directors, auditors, and regulators. Overall, our findings suggest that when managers have work experience with the firm prior to becoming the CEO, the firm’s voluntary disclosure is of higher quality.

It's All in the Name: Evidence of Founder-Firm Endowment Effects

We use a subset of family firms (i.e., founder-named firms) to test for large-scale endowment effects in US capital markets. In contrast to previous studies that focus on laboratory experiments and surveys, we employ investor-based market valuations to examine the extent to which endowment effects influence real-world decision making. We find that founder-named firms are 7-8% less valuable than non-founder-named firms, and that founder-named-and-managed firms are 17-21% less valuable than their non-endowment susceptible counterparts. We posit that these valuation discounts are the result of founders operating their eponymous firms more from a “current personal use” perspective than from a “potential market exchange” perspective (Kahneman, 2011). Consistent with the presence of endowment effects, we find that founder-named-and-managed firms are less likely to engage in significant corporate restructuring, mergers and acquisitions, strategic asset sales, spinoffs, and major reorganizations. We examine alternative explanations for our findings (e.g., the presence of dual class structures, differential voting/cash flow rights, corporate opacity, CEO overconfidence, weak governance, compensation incentives) and show that none of these alternatives can account for our empirical findings.

Is the Variation of a Manager's Disclosure Tone Across Time Associated with Investors’ Assessment of Firm Risk?

We argue that volatility in a manager’s disclosure tone across time should be a function of two components: (1) the firm’s innate operating risk, and (2) the extent to which the manager’s disclosure transparently reflects that risk. Consistent with this argument, we find that both operating risk and disclosure transparency are important determinants of disclosure tone volatility. We then examine whether investors incorporate the incremental information provided by disclosure tone volatility into their assessments of firm risk. If disclosure tone volatility primarily provides investors with incremental information about a firm’s operating risk, we should find a positive association between tone volatility and market-based assessments of risk. On the other hand, if disclosure tone volatility primarily provides investors with incremental information about a manager’s disclosure transparency, we should find a negative association between tone volatility and market-based assessments of risk. Consistent with an operating risk explanation, we find a positive association between disclosure tone volatility and market-based assessments of firm risk after controlling for a comprehensive set of proxies for operating risk and transparency. We find little support for an information risk explanation, even when we examine multiple measures specifically designed to capture information risk. Taken together, our results suggest that although disclosure tone volatility is a function of both a firm’s operating risk and a manager’s disclosure transparency, investors appear to respond as if disclosure tone volatility only provides incremental information about a firm’s operating risk.

Is the Volatility of a Manager's Disclosure Tone Associated with Investors’ Assessment of Firm Risk?

We argue that volatility in a manager’s disclosure tone across time should be a function of two components: (1) the firm’s innate operating risk, and (2) the extent to which the manager’s disclosure transparently reflects that risk. Consistent with this argument, we find that both operating risk and disclosure transparency are important determinants of disclosure tone volatility. We then examine whether investors incorporate the incremental information provided by disclosure tone volatility into their assessments of firm risk. If disclosure tone volatility primarily provides investors with incremental information about a firm’s operating risk, we should find a positive association between tone volatility and market-based assessments of risk. On the other hand, if disclosure tone volatility primarily provides investors with incremental information about a manager’s disclosure transparency, we should find a negative association between tone volatility and market-based assessments of risk. Consistent with an operating risk explanation, we find a positive association between disclosure tone volatility and market-based assessments of firm risk after controlling for a comprehensive set of proxies for operating risk and transparency. We find little support for an information risk explanation, even when we examine multiple measures specifically designed to capture information risk. Taken together, our results suggest that although disclosure tone volatility is a function of both a firm’s operating risk and a manager’s disclosure transparency, investors appear to respond as if disclosure tone volatility only provides incremental information about a firm’s operating risk.

Unexpected Disclosure Tone Volatility and Investor Risk Assessment

We argue that volatility in a manager’s disclosure tone across time should be a function of two components: (1) the firm’s innate operating risk, and (2) the extent to which the manager’s disclosure transparently reflects that risk. Consistent with this argument, we find that both operating risk and disclosure transparency are important determinants of disclosure tone volatility. We then examine whether investors incorporate the incremental information provided by disclosure tone volatility into their assessments of firm risk. If disclosure tone volatility primarily provides investors with incremental information about a firm’s operating risk, we should find a positive association between tone volatility and market-based assessments of risk. On the other hand, if disclosure tone volatility primarily provides investors with incremental information about a manager’s disclosure transparency, we should find a negative association between tone volatility and market-based assessments of risk. Consistent with an operating risk explanation, we find a positive association between disclosure tone volatility and market-based assessments of firm risk after controlling for a comprehensive set of proxies for operating risk and transparency. We find little support for an information risk explanation, even when we examine multiple measures specifically designed to capture information risk. Taken together, our results suggest that although disclosure tone volatility is a function of both a firm’s operating risk and a manager’s disclosure transparency, investors appear to respond as if disclosure tone volatility only provides incremental information about a firm’s operating risk.

Is the CEO’s In-House Experience Informative About Audit Risk?

Very little is known about whether personal characteristics of senior managers convey information about audit risk. We focus on one characteristic of the CEO, the number of years the CEO has worked in the firm before becoming the CEO (CEO in-house experience). We posit that the CEO’s in-house experience mitigates audit risk due to less uncertainty and more familiarity with the auditor. Using audit fees to proxy for audit risk, we find that audit fees are decreasing in CEO’s in-house experience. On average, audit fees are lower by 10% when CEO in-house experience changes from 2 to 6 years. Further, the relation between audit fees and the CEO’s in-house experience is conditional on the overall quality of corporate governance. While the CEO’s in-house experience is insignificant in firms with good governance, it is strongly significant in firms with weak governance.