James S. Linck

What Happens to CEOs After They Retire? New Evidence on Career Concerns, Horizon Problems, and CEO Incentives

This paper provides evidence on a previously unidentified source of managerial incentives: concerns about post-retirement board service. Both the likelihood that a retired CEO serves on his own board two years after departure, as well as the likelihood of serving as an outside director on other boards, are positively and strongly related to his performance while CEO. Retention on the CEOs own board depends primarily on stock returns, while service on outside boards is better explained by accounting returns. The evidence also suggests that firms consider ability in choosing board members.

Boundaries of the Firm: Evidence from the Banking Industry

Agency theory implies that asset ownership and decision authority are complements. Using 1998 data from Texas commercial banks, we test whether the likelihood of local ownership of bank offices increases with the importance of granting local managers greater decision authority (for example, due to location or customer base). Our empirical evidence is consistent with this hypothesis. It suggests that complementarities between strategy and organizational structure can foster differentiation among firms in terms of location, customers, and products. It also supports the growing view that small locally-owned banks have a comparative advantage over large banks within specific environments.

Can Managers Use Discretionary Accruals to Ease Financial Constraints? Evidence from Discretionary Accruals Prior to Investment

Despite a large literature on discretionary accruals, how the use of discretionary accruals impacts corporate financial decisions is not well understood. We hypothesize that a financially constrained firm with valuable projects can use discretionary accruals to credibly signal positive prospects, enabling it to raise capital to make the investments. We examine a large panel of firms during 1987 to 2009 and find that financially constrained firms with good investment opportunities have significantly higher discretionary accruals prior to investment compared to their unconstrained counterparts. Constrained high-accrual firms have higher earnings-announcement returns than constrained low-accrual firms, obtain more equity and debt financing, and invest in projects that appear to improve performance. These results provide supporting evidence that the use of discretionary accruals can help constrained firms with valuable projects ease those constraints and increase firm value.The evidence suggests that firms do manage earnings, but how earnings management impacts corporate financial decisions is not well understood. We hypothesize that if a firm is financially constrained but has positive NPV projects, it can use earnings management to signal positive prospects, enabling it to raise capital to make investments. In this the situation, earnings management corrects“ ” the market misvaluation of the firm’s investment prospects. Using abnormal accruals to detect earnings management, weempirical ly evaluate our hypotheses with a large panel of firms 1987during to 2009. We find that financially constrained firms have significantly higher discretionary accruals in the two quarters prior to investment compared to unconstrained firms. onstrained high-accrual firms have higher Cearnings-announcement returns than constrained low-accrual firms, obtain more equity and debt financing, and invest in positive NPV projects. Thus, we find support for the hypothesis that earnings management can be consistent with firm value maximization.

Does the Decision to Retain Retiring Executives on the Board of Directors Help to Control Agency Problems in American and Japanese Firms

Prospects for promotion provide incentives to lower-level managers in America and Japan. Promotion incentives, however, do not exist for top managers who are at the apex of their firms’ hierarchies. One little explored mechanism that might provide promotion-like incentives to top managers is the prospect of being retained on the board of directors after retirement (e.g., as chairman of the board). Incentives only exist if the retention decision is based on the top manager’s performance during active employment. This paper summarises past and present research on the board retention/performance relation for retiring managers of Japanese and American firms. The evidence suggests a positive and statistically significant relation between retention and performance for retiring managers in both countries. This study extends the existing research by providing new evidence on the importance of relativeperformance evaluation in the retention decision for US firms. We find that absolute performance is more important than performance relative to the market or industry in explaining the retention decision.

Board Roles, Director Compensation, and CEO power

Prior research suggests that the effectiveness of corporate directors depends on their qualifications. We investigate whether directors’ qualifications are reflected in their pay. We find significant variation in director compensation both across and within boards, with more than a third of the variation in director pay attributable to differences among members of the same board. On average, more qualified directors receive higher pay, while CEO-appointed (“co-opted”) directors do not. However, co-opted directors receive higher pay on boards where the CEO’s influence is high. We also provide evidence that the market values qualified directors and discounts co-opted ones.

Do Qualifications Matter? New Evidence on Director Compensation

Prior research suggests that the effectiveness of corporate directors depends on their qualifications. We investigate whether directors’ qualifications are reflected in their pay. We find significant variation in director compensation both across and within boards, with more than a third of the variation in director pay attributable to differences among members of the same board. On average, more qualified directors receive higher pay, while CEO-appointed (“co-opted”) directors do not. However, co-opted directors receive higher pay on boards where the CEO’s influence is high. We also provide evidence that the market values qualified directors and discounts co-opted ones.