Miguel A. Ferreira

Does Governance Travel Around the World? Evidence from Institutional Investors

We examine whether institutional investors affect corporate governance by analyzing portfolio holdings of institutions in companies from 23 countries during the period 2003-2008. We find that firm-level governance is positively associated with international institutional investment. Changes in institutional ownership over time positively affect subsequent changes in firm-level governance, but the opposite is not true. Foreign institutions and institutions from countries with strong shareholder protection play a crucial role in promoting governance improvements outside of the U.S. Institutional investors affect not only which corporate governance mechanisms are in place, but also outcomes. Firms with higher institutional ownership are more likely to terminate poorly performing CEOs and exhibit improvements in valuation over time. Our results suggest that international portfolio investment by institutional investors promote good corporate governance practices around the world.

Does International Cross-Listing Improve the Information Environment?

We investigate whether cross-listing in the U.S. affects the information environment for non-U.S. stocks. Our findings suggest cross-listing has an asymmetric impact on stock price informativeness around the world, as measured by firm-specific stock return variation. Cross-listing improves price informativeness for developed market firms. For firms in emerging markets, however, cross-listing decreases price informativeness. The added analyst coverage associated with cross-listing likely explains the findings in emerging markets, rather than changes in liquidity, ownership, or accounting quality. Our results indicate that the added analyst coverage fosters the production of marketwide information, rather than firm-specific information.

Shareholders at the Gate? Institutional Investors and Cross-Border Mergers and Acquisitions

We study the role of institutional investors in cross-border mergers and acquisitions (M&As). We find that foreign institutional ownership is positively associated with the intensity of cross-border M&A activity worldwide. Foreign institutional ownership increases the probability that a merger deal is cross-border, successful, and the bidder takes full control of the target firm. This relation is stronger in countries with weaker legal institutions and in less developed markets, suggesting some substitutability between local governance and foreign institutional investors. The results are consistent with the hypothesis that foreign institutional investors act as facilitators in the international market for corporate control; they build bridges between firms and reduce transaction costs and information asymmetry between bidder and target. We conclude that cross-border portfolio investments of institutional money managers and cross-border M&As are complements in promoting financial integration worldwide.

Are U.S. CEOs Paid More? New International Evidence

This paper challenges the widely accepted stylized fact that CEOs in the United States are paid significantly more than their foreign counterparts. Using CEO pay data across 14 countries with mandated pay disclosures, we show that the US pay premium is economically modest and primarily reflects the performance-based pay demanded by institutional shareholders and independent boards. Indeed, we find no significant difference in either level of CEO pay or the use of equity-based pay between US and non-US firms exposed to international and US capital, product, and labor markets. We also show that US and non-US CEO pay has largely converged in the 2000s. The findings are robust to alternative methods for adjusting the risk of equity-based pay.

Have World, Country, and Industry Risks Changed over Time? An Investigation of the Volatility of Developed Stock Markets

This paper uses a volatility decomposition method to study the time-series behavior of equity volatility at the world, country, and local industry levels. Between 1974 and 2001, there is no noticeable long-term trend in any of the volatility measures. Then in the 1990s there is a sharp increase in local industry volatility compared to market and country volatility. Thus, correlations among local industries have declined. More assets are needed to achieve a given level of diversification, and there is more of a penalty for not being well diversified by industry. Local industry volatility leads the other volatility measures.

The Importance of Industry and Country Effects in the EMU Equity Markets

Most empirical studies find that country effects are larger than industry effects in stock returns, although industry effects have gained in importance recently. Our results support the dominance of country effects relative to industry and common effects in the EMU equity markets in the 1975–2001 period. However, there is an increasing importance of industry effect relative to country effect in the 1990s. In fact, industry effects is similar in magnitude to country effect in the post-euro period. The evolution of the ratio of country to industry effect is explained by the decrease in the cross-sectional variance of interest rate movements across EMU countries. Thus, there is evidence that nominal convergence has reduced the differences between national equity markets.

Lending Relationships and the Effect of Bank Distress: Evidence from the 2007-2009 Financial Crisis

We study the role of lending relationships in the transmission of bank distress to nonfinancial firms using the 2007-2008 financial crisis and a sample of publicly traded firms from 34 countries. We examine the effect of both bank-specific shocks (announcements of bank asset write-downs) and systemic shocks (failure of Bear Stearns and Lehman Brothers) that produced heterogeneous effects across banks. We find that bank distress is associated with equity valuation losses to borrower firms that have the strongest lending relationships with banks. The effect of relationship bank distress is not offset by borrowers’ access to public debt markets. Additionally, the effect is concentrated in firms with the greatest information asymmetry problems and with the weakest financial positions at the time of the shock. Overall, our findings suggest that the strength of firms’ lending ties with banks is a key determinant of their degree of bank dependence and exposure to bank distress. * We thank for helpful comments Murillo Campello, Sudheer Chava, Qinglei Dai, Harry DeAngelo, Isil Erel, Victoria Ivashina, Oguzhan Ozbas, Marco Pagano, Lori Santikian, Joao Santos, David Scharfstein, Jeremy Stein, and David Yermack; conference participants at the 2011 Western Finance Association Meetings, the 2011 FIRS Annual Conference, and the 5th California Corporate Finance Conference; and seminar participants at the Universidade Nova de Lisboa, University of Rotterdam, University of Southern California, and Tilburg University. We thank John Bai for excellent research assistance. † Corresponding author: University of Southern California, Marshall School, 3670 Trousdale Parkway, BRI-308, Los Angeles, CA 90089-1427, U.S.; E-mail: daniel.carvalho@marshall.usc.edu.

Generalists versus Specialists: Lifetime Work Experience and CEO Pay

We show that pay is higher for CEOs with general managerial skills gathered during lifetime work experience. We use CEOs’ resumes of S&P 1,500 firms from 1993 through 2007 to construct an index of general skills that are transferable across firms and industries. We estimate an annual pay premium for generalist CEOs — those with an index value above the median — of 19% relative to specialist CEOs, which represents nearly a million dollars per year. This relation is robust to the inclusion of firm- and CEO-level controls, including fixed effects. CEO pay increases the most when firms externally hire a new CEO and switch from a specialist to a generalist CEO. Furthermore, the pay premium is higher when CEOs are hired to perform complex tasks such as restructurings and acquisitions. Our findings provide direct evidence of the increased importance of general managerial skills over firm-specific human capital in the market for CEOs in the last decades.

Have World, Country and Industry Risk Changed Over Time? An Investigation of the Developed Stock Markets Volatility

This paper uses a volatility decomposition method to study the time series behavior of equity volatility at the world, country and local industry levels. Between 1974 and 2001 there is no noticeable long-term trend in any of the volatility measures. Then in the 1990s, there is a sharp increase in local industry volatility compared to market and country volatility. Thus, correlations among local industries have declined. More assets are needed to achieve a given level of diversification, and there is more of a penalty for not being well diversified by industry. Local industry volatility leads the other volatility measures.

Bank Ratings and Lending Supply: Evidence from Sovereign Downgrades

We study the causal effect of bank credit rating downgrades on the supply of bank lending. The identification strategy exploits the asymmetric impact of sovereign downgrades on the ratings of banks at the sovereign bound relative to bank that are not at the bound as a result of rating agencies’ sovereign ceiling policies. This asymmetric effect leads to greater reductions in rating-sensitive funding and lending of banks at the bound relative to other banks. Results for foreign borrowers and within lender-borrower relationships confirm that credit demand does not explain our findings.