Pedro P. Matos

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.

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.

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.

Dividend Clienteles Around the World: Evidence from Institutional Holdings

We examine the relation between international institutional ownership and payout policy using a comprehensive data set of equity holdings from 37 countries over the years 2000-2007. We find that foreign institutional ownership is negatively associated with the likelihood that a firm pays dividends and the size of dividend payments. The greater the tax disadvantage of dividends to international investors, and the higher are transaction costs related to repatriating and reinvesting dividends, the more international investors push for fewer dividends. The results support the existence of dividend clienteles around the world. Finally, we find that firms that comply with foreign institutional shareholders preference for lower payouts are able to retain and invest more of their earnings.

Do General Managerial Skills Spur Innovation

We show that firms with chief executive officers (CEOs) who gain general managerial skills over their lifetime work experience produce more patents. We address the potential endogenous CEO-firm matching bias using firm-CEO fixed-effects and variation in the enforceability of non-compete agreements across states and over time during the CEO’s career. Our findings suggest that generalist CEOs spur innovation because they acquire knowledge beyond the firm’s current technological domain, and have skills that can be applied elsewhere should innovation projects fail. We conclude that an efficient labor market for executives can promote innovation by providing a mechanism of tolerance for failure.

International Corporate Governance Spillovers: Evidence from Cross-Border Mergers and Acquisitions

We test the hypothesis that foreign direct investment promotes corporate governance spillovers in the host country non-target firms. Using firm-level data from 22 countries, we find that cross-border M&A activity is associated with subsequent improvements in the governance of target firms’ rivals. The spillover is more pronounced when the acquirer’s country has stronger investor protection than the target’s country, and when the target operates in a competitive industry. Cross-border M&As also lead to increases in valuation and reductions in overinvestment of non-target firms. Our results suggest that the international market for corporate control promotes functional convergence in corporate governance.

Leviathan Inc. and Corporate Environmental Engagement

In a 2010 special report, The Economist magazine termed the resurgence of state-owned, publicly listed enterprises “Leviathan Inc.” and criticized the poor governance and low efficiency of these firms. We compile a new comprehensive dataset of state ownership of publicly listed firms in 44 countries over the period of 2004–2017 and show that state-owned enterprises are more responsive to environmental issues. The effect is more pronounced in economies lacking energy security and strong environmental regulation, and among firms with more local operations and higher domestic government ownership. We find a similar effect on corporate social engagement but not on governance quality. These results suggest a different role for “Leviathan Inc.,” especially in dealing with environmental externalities.