Jesus M. Salas

Entrenchment, governance, and the stock price reaction to sudden executive deaths

To study managerial entrenchment, I use the stock price reaction to unexpected senior executive deaths. If a highly effective manager dies unexpectedly, the stock price reaction should be negative. If, however, death removes an entrenched manager when the board would or could not, the stock price reaction should be positive. While, individually, age and tenure only weakly correlate with the stock price reaction to a sudden death, the reaction is strongly positive (6.8%) if: (1) the executives tenure exceeds 10 years, and (2) abnormal stock returns over the last three years are negative.

Why Do Firms Engage in Selective Hedging

Surveys of corporate risk management document that selective hedging, where managers incorporate their market views into firms’ hedging programs, is widespread in the U.S. and other countries. Stulz (1996) argues that selective hedging could enhance the value of firms that possess an information advantage relative to the market and have the financial strength to withstand the additional risk from market timing. We study the practice of selective hedging in a 10-year sample of North American gold mining firms and find that selective hedging is most prevalent among firms that are least likely to meet these valuemaximizing criteria -- (a) smaller firms, i.e., firms that are least likely to have private information about future gold prices; and (b) firms that are closest to financial distress. The latter finding provides support for the alternative possibility suggested by Stulz that selective hedging may also be driven by asset substitution motives. We detect weak relationships between selective hedging and some corporate governance measures, especially board size, but find no evidence of a link between selective hedging and managerial compensation.

Minimum Variance Hedging when Spot Price Changes are Partially Predictable

In many markets, changes in the spot price are partially predictable. We show that when this is the case: (1) although unbiased, traditional regression estimates of the minimum variance hedge ratio are inefficient, (2) estimates of the riskiness of both hedged and unhedged positions are biased upward, and (3) estimates of the percentage risk reduction achievable through hedging are biased downward. For natural gas cross hedges, we find that both the inefficiency and bias are substantial. We further find that incorporating the expected change in the spot price, as measured by the futures-spot price spread at the beginning of the hedge, into the regression results in a substantial increase in efficiency and reduction in the bias.

Governance, Conference Calls and CEO Compensation

We study the relations between governance mechanisms (internal and external), conference call voluntary disclosures (incidence and length), and CEO compensation using hand-collected data on conference calls, corporate governance, and compensation. We hypothesize and show that institutions push for more frequent and longer conference calls in order to obtain more information with which to evaluate their investment. While independent directors push to hold conference calls, they may also prefer to have shorter conference calls to avoid potential lawsuits, proprietary costs, and/or loss of reputation that can arise from releasing too much information. Entrenched executives seek to minimize risk (such as employment and/or litigation risk) by limiting the length of conference calls or by avoiding conference calls altogether. In addition, contrary to recently proposed hypotheses, we find that executives do not receive additional compensation for bearing the risks of holding voluntary conference calls.

Do Investors Care About Director Tenure? Insights from Executive Cognition and Social Capital Theories

Governance scholars debate the value of directors as an effective governance mechanism. We suggest that this value varies with director tenure. We study both how shareholder assessments of the value of individual directors vary with director tenure and whether director tenure actually makes a practical difference to governance effectiveness. Using data from abnormal stock price reactions to the sudden deaths of 274 outside directors, and integrating executive cognition and social capital perspectives applied to the dual roles of director monitoring and advising, our results confirm a curvilinear relationship between the assessed value of directors and tenure. We find that directors are more highly valued by investors over a tenure period between 7 and 18 years, moderated by director involvement on key committees. Further, in examining the S&P 1,500, we find that a one standard deviation increase in the percentage of outside directors in this prime tenure period strengthens the CEO pay-performance linkage ...

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.