Jesse A. Ellis

Proprietary Costs and the Disclosure of Information About Customers

In deciding how much information about their firms’ customers to disclose, managers face a trade-off between the benefits of reducing information asymmetry with capital market participants and the costs of aiding competitors by revealing proprietary information. This paper investigates the determinants of managers’ choices to disclose information about their firms’ customers using a comprehensive dataset of customer-information disclosures over the period 1976-2006. We find robust evidence in support of the hypothesis that proprietary costs are an important factor in firms’ disclosure choices regarding information about large customers.

Globalization, Governance, and the Returns to Cross-Border Acquisitions

Using a sample of control cross-border acquisitions from 61 countries from 1990 to 2007, we find that acquirers from countries with better governance gain more from such acquisitions and their gains are higher when targets are from countries with worse governance. Other acquirer country characteristics are not consistently related to acquisition gains. For instance, the anti-self-dealing index of the acquirer has opposite associations with acquirer returns depending on whether the acquisition of a public firm is paid for with cash or equity. Strikingly, global effects in acquisition returns are at least as important as acquirer country effects. First, the acquirers industry and the year of the acquisition explain more of the stock-price reaction than the country of the acquirer. Second, for acquisitions of private firms or subsidiaries, acquirers gain more when acquisition returns are high for acquirers from other countries. We find strong evidence that better alignment of interests between insiders and minority shareholders is associated with greater acquirer returns and weaker evidence that this effect mitigates the adverse impact of poor country governance.

Hedge Funds and Discretionary Liquidity Restrictions

We study hedge funds that imposed discretionary liquidity restrictions (DLRs) on investor shares during the financial crisis. DLRs prolong fund life, but impose liquidity costs on investors, creating a potential conflict of interest. Ostensibly, funds establish DLRs to limit performance-driven withdrawals that could force fire sales of illiquid assets. However, after they restrict investor liquidity, DLR funds do not reduce illiquid stock sales and underperform a control sample of non-DLR funds. Consequently, DLRs appear to negatively impact fund family reputation. After the crisis, funds from DLR families faced difficulties raising capital and were more likely to cut their fees.During the recent financial crisis, more than 30% of hedge fund managers used their discretion to restrict investor liquidity through the use of “gates” or “side pockets.” Using a database of hedge fund investor interests, this paper is the first to empirically examine the determinants of these discretionary liquidity restrictions (DLRs) and their consequences for hedge fund investors. We find that funds enacted DLRs following poor performance and when their portfolio assets were more illiquid. However, despite claims from managers that DLRs protected investor interests by preventing fire-sales, funds that enacted DLRs continued to underperform comparable funds. Consistent with DLRs reflecting agency problems, we find that restricting investor liquidity during the crisis had a negative impact on fund reputation that spilled over across the hedge fund family. DLR funds and their family affiliates had a more difficult time raising capital and were more likely to cut their fees in the post crisis era. 1 We thank Chris Schelling and Clay McDaniel for valuable comments on discretionary hedge fund liquidity. We thank Xin Hong, Nathaniel Graham, and John Handy for valuable research assistance. Send correspondence to: Chris Clifford, Gatton School of Business, University of Kentucky; telephone 859-257-3850; email chris.clifford@uky.edu. Discretionary liquidity: Hedge funds, side pockets, and gates Abstract: During the recent financial crisis, more than 30% of hedge fund managers used their discretion to restrict investor liquidity through the use of “gates” or “side pockets.” Using a database of hedge fund investor interests, this paper is the first to empirically examine the determinants of these discretionary liquidity restrictions (DLRs) and their consequences for hedge fund investors. We find that funds enacted DLRs following poor performance and when their portfolio assets were more illiquid. However, despite claims from managers that DLRs protected investor interests by preventing fire-sales, funds that enacted DLRs continued to underperform comparable funds. Consistent with DLRs reflecting agency problems, we find that restricting investor liquidity during the crisis had a negative impact on fund reputation that spilled over across the hedge fund family. DLR funds and their family affiliates had a more difficult time raising capital and were more likely to cut their fees in the post crisis era. During the recent financial crisis, more than 30% of hedge fund managers used their discretion to restrict investor liquidity through the use of “gates” or “side pockets.” Using a database of hedge fund investor interests, this paper is the first to empirically examine the determinants of these discretionary liquidity restrictions (DLRs) and their consequences for hedge fund investors. We find that funds enacted DLRs following poor performance and when their portfolio assets were more illiquid. However, despite claims from managers that DLRs protected investor interests by preventing fire-sales, funds that enacted DLRs continued to underperform comparable funds. Consistent with DLRs reflecting agency problems, we find that restricting investor liquidity during the crisis had a negative impact on fund reputation that spilled over across the hedge fund family. DLR funds and their family affiliates had a more difficult time raising capital and were more likely to cut their fees in the post crisis era.

Are Turnaround Specialists Special? An Examination of CEO Reputation and CEO Succession

This paper examines the economic consequences for firms that hire CEOs who have a reputation for being turnaround specialists. Abnormal returns around announcements that turnaround specialists have been hired as CEOs are significantly positive and more than 6 percentage points larger than the returns associated with announcements of other CEO successions. Significant differences exist in the attributes of firms that hire turnaround specialists as CEOs versus firms that hire others as CEOs in ways consistent with several hypotheses that I develop. Specifically, firms that hire turnaround specialists face a higher probability of distress, lower profit rates, and lower pre-succession stock returns than firms that hire others as CEOs. Firms that hire turnaround specialists reduce operating scale and show significant improvement in operating performance on average, indicating that the turnaround specialists’ reputation is commensurate with their abilities and managerial style.

Hedge Fund Boards and the Market for Independent Directors

We provide the first examination of hedge fund boards and their directors. The majority of directorships are held by extremely busy independent directors. These directors are sought by funds because they have more reputational capital at stake, making them independent and credible monitors whose presence can certify fund quality to investors. Busy independent directors are more likely to be hired by high-quality funds, and their departure from the board is associated with investor withdrawals. Moreover, funds with busy independent directors are less likely to commit fraud, abuse discretionary liquidity restrictions, or engage in performance-based risk shifting.

Playing Favorites? Industry Expert Directors in Diversified Firms

We examine the influence of outside directors’ industry experience on segment investment, segment operating performance, and firm valuation for conglomerates. Given board composition is endogenous, we instrument for the presence of industry expert directors using the supply of experienced executives near conglomerate firms’ headquarters. We find that industry expert representation on the board causes increased segment investment. Consistent with experienced directors playing favorites rather than acting as dispassionate advisors, segment profitability (firm value) is lower for segments (firms) with industry expert outside directors. We do not find analogous negative profitability or valuation effects of director experience for single-segment firms.

Do Directors Learn From Forced CEO Turnover Experience

We study the dynamic relation between experience and monitoring. We find independent directors become more diligent monitors after experiencing a forced CEO turnover event in another firm. Specifically, their subsequent forced CEO turnover decisions are more sensitive to firm performance and are based upon more private information. The results hold when we only use experience acquired from other firms after the director joined the current firm and when we include director and firm fixed effects. Hence, our results are not driven by firm-director matching or innate director traits. We also find that such experience has important director labor market implications.

Corruption and Corporate Innovation

Using US Department of Justice data on local corruption convictions, we examine the relation between local political corruption and private sector innovation. We find that political corruption has a substantial negative impact on the quality, quantity, and efficiency of firms’ innovation. This result is robust in the presence of a wide range of covariates, variable definitions, and econometric methods. To help establish causality, we use instrumental variable techniques to address potential endogeneity concerns, such as reverse causality and the endogenous nature of headquarter location decisions. Overall, the results suggest that political corruption acts as a barrier to innovation.

How Does Forced CEO Turnover Experience Affect Directors

We study the dynamic relation between experience and monitoring. We find independent directors become more diligent monitors after experiencing a forced CEO turnover event in another firm. Specifically, their subsequent forced CEO turnover decisions are more sensitive to firm performance and are based upon more private information. The results hold when we only use experience acquired from other firms after the director joined the current firm and when we include director and firm fixed effects. Hence, our results are not driven by firm-director matching or innate director traits. We also find that such experience has important director labor market implications.

Learning from Forced CEO Turnover Experience

We study the dynamic relation between experience and monitoring. We find independent directors become more diligent monitors after experiencing a forced CEO turnover event in another firm. Specifically, their subsequent forced CEO turnover decisions are more sensitive to firm performance and are based upon more private information. The results hold when we only use experience acquired from other firms after the director joined the current firm and when we include director and firm fixed effects. Hence, our results are not driven by firm-director matching or innate director traits. We also find that such experience has important director labor market implications.