Sterling Huang

Family Firms and Labor Market Regulation

In a panel of more than 6,900 firms in 28 countries over 10 years we provide evidence that family control and labor market regulation are substitute governance mechanisms. First, family firms have performance advantages over non-family firms in countries with less regulated labor markets. This is robust to matching and using survey-based instruments for family control. Second, in less regulated labor markets, family firms have lower employment level variations supporting the claim that labor relations drive family firms’ performance advantages. Third, the performance advantages in less regulated labor markets is smaller in industries with high labor intensity and high labor volatility.

Marital Status and Earnings Management

Abstract In this note, we examine the effect of CEO marital status on the riskiness of financial reporting. Using multiple proxies, we find that firms headed by a single CEO display a higher degree of earnings management than those headed by a married CEO. The effect is economically significant. Our results persist in an instrumental variable regression, suggesting that our results are not driven by innate heterogeneity in preferences.

Not Clawing the Hand That Feeds You: The Case of Co-Opted Boards and Clawbacks

Clawbacks can create significant tension between boards and management because the enforcement of clawbacks in the event of financial misreporting requires boards to recover compensation that has already been paid to management. We examine how board co-option, defined as the fraction of the board comprising directors appointed after the CEO assumed office, is related to clawbacks. We find that more co-opted boards are less likely to have clawbacks and this finding is robust to the use of director deaths as an instrument for board co-option. Moreover, we find that board co-option is an important underlying mechanism through which longer-tenured CEOs reduce the likelihood of clawbacks. Finally, we find that the negative effect of co-opted boards on clawbacks is more pronounced when there are co-opted directors on the compensation committee and when there is a higher likelihood of future enforcement of clawbacks. Our paper contributes to a better understanding of how board beholdenness can influence policies to punish management for financial misreporting.

Does Litigation Encourage or Deter Real Earnings Management

In this paper, we rely on an exogenous shock to examine the impact of litigation risk on real earnings management (REM). We conduct differences-in-differences tests centered on an unanticipated court ruling that reduced litigation risk for firms headquartered in the Ninth Circuit. REM increases significantly following the ruling for Ninth-Circuit firms relative to other firms, consistent with litigation risk deterring REM. Additional analyses reveal that REM rises more following the ruling when firms issue more optimistic disclosures. The evidence is consistent with litigation deterring REM by constraining managers’ ability to issue optimistic and misleading disclosures that can conceal the myopic and opportunistic motives underlying REM. We further document that an increase in REM in response to a decline in litigation risk is more pronounced when managers have higher incentives to manipulate earnings and governance mechanisms are weaker.

Corporate Hedging and the Design of Incentive-Compensation Contracts

We use the introduction of exchange-traded weather derivative contracts as a natural experiment to examine the relation between risk and incentives. Specifically, we examine how executives’ ability to hedge weather-related risk that was previously difficult and costly to manage influences the design of their incentive-compensation contracts. Using both traditional and fuzzy differences-in-differences research designs, we find that the CEOs of firms that are relatively more exposed to weather risk — and therefore stand to benefit the most from hedging this source of risk — receive less annual compensation and have fewer equity incentives following the introduction of weather derivatives. We attribute the former finding to a reduction in the risk premium that CEOs demand for exposure to firm risk. The latter finding suggests that uncertainty in firms’ operating environments and equity incentives are complements for our sample firms. Collectively, our results show that hedging corporate risk alters the nature of agency conflicts and influences the design of executives’ incentive-compensation contracts.

In Alignment or Conflict? The Role of Shareholder Heterogeneity in the Relation Between Shareholders and Debtholders in Near-Insolvent Firms

The 1991 Delaware court ruling involving Credit Lyonnais expanded the fiduciary duties of managers towards debtholders when a firm is close to insolvency. The ruling arguably increased shareholders’ and managers’ aversion to near-insolvency situations; we examine the possibility that this led to a re-orientation of focus at Delaware firms towards long-term competitiveness rather than short-term goals. Using a differences-in-differences approach that exploits the exogenous shock, we find that the 1991 ruling induced managers of Delaware firms to place a greater emphasis on investments that foster long-term innovation, and a reduced focus on achieving myopic earnings goals. Further, we find a shift away from transient to dedicated institutional ownership after the court ruling. In other words, the shareholder base adjusts to the re-orientation of Delaware firms towards the longer term.

Real Effects of State Corporate Tax Rate Changes: Evidence from Corporate Headquarters Relocations

The state tax apportionment formula used to determine state taxes is a function of the taxable income attributable to the state and state corporate tax rates. In this study, we rely on changes in state corporate income tax rates and other inducements across time and states as a quasi-natural experiment to examine the effect of state taxation on corporate headquarters (HQ) relocation. We find that changes in HQ state corporate income tax rates significantly affect the likelihood of cross-state HQ relocation. Other inducements also reduce the likelihood of relocation. The results of the cross-sectional analysis suggest that the likelihood of HQ relocation is less affected by changes in HQ state corporate tax rates when (i) the state-level factor weights used to determine income attributable to the state favor property and payroll and (ii) the firm engages in tax planning to reduce taxable income. We contribute to the literature on corporate tax planning by providing further evidence of how state taxation policies affect real corporate decisions that have significant economic consequences for the state.

Increased Creditor Rights, Institutional Investors and Corporate Myopia

The 1991 Delaware court ruling involving Credit Lyonnais expanded the fiduciary duties of managers towards debtholders when a firm is close to insolvency. The ruling arguably increased shareholders’ and managers’ aversion to near-insolvency situations; we examine the possibility that this led to a re-orientation of focus at Delaware firms towards long-term competitiveness rather than short-term goals. Using a differences-in-differences approach that exploits the exogenous shock, we find that the 1991 ruling induced managers of Delaware firms to place a greater emphasis on investments that foster long-term innovation, and a reduced focus on achieving myopic earnings goals. Further, we find a shift away from transient to dedicated institutional ownership after the court ruling. In other words, the shareholder base adjusts to the re-orientation of Delaware firms towards the longer term.

Marital Status and Earnings Management (A Note)

In this note, we examine the effect of CEO marital status on the riskiness of financial reporting. Using multiple proxies, we find that firms headed by a single CEO display a higher degree of earnings management than those headed by a married CEO. The effect is economically significant. Our results persist in an instrumental variable regression, suggesting that our results are not driven by innate heterogeneity in preferences.

Agency Environment, Innovation and Managers’ Long-Term versus Short-Term Focus

The 1991 Delaware court ruling involving Credit Lyonnais expanded the fiduciary duties of managers towards debtholders when a firm is close to insolvency. The ruling arguably increased shareholders’ and managers’ aversion to near-insolvency situations; we examine the possibility that this led to a re-orientation of focus at Delaware firms towards long-term competitiveness rather than short-term goals. Using a differences-in-differences approach that exploits the exogenous shock, we find that the 1991 ruling induced managers of Delaware firms to place a greater emphasis on investments that foster long-term innovation, and a reduced focus on achieving myopic earnings goals. Further, we find a shift away from transient to dedicated institutional ownership after the court ruling. In other words, the shareholder base adjusts to the re-orientation of Delaware firms towards the longer term.