Zhichuan Frank Li

Industry Tournament Incentives

We empirically assess industry tournament incentives for CEOs, as measured by the compensation gap between a CEO at one firm and the highest-paid CEO among similar (industry, size) firms. We find that firm performance, firm risk, and the riskiness of firm investment and financial policies are positively associated with the external industry pay gap. The industry tournament effects are stronger when industry, firm, and executive characteristics indicate high CEO mobility and a higher probability of the aspirant executive winning. Received October 21, 2012; editorial decision March 26, 2017 by Editor Laura Starks.

Measuring Firm Size in Empirical Corporate Finance

In empirical corporate finance, firm size is commonly used as an important, fundamental firm characteristic. However, no research comprehensively assesses the sensitivity of empirical results in corporate finance to different measures of firm size. This paper fills this hole by providing empirical evidence for a “measurement effect” in the “size effect”. In particular, we examine the influences of employing different proxies (total assets, total sales, and market capitalization) of firm size in 20 prominent areas in empirical corporate finance research. We highlight several empirical implications. First, in most areas of corporate finance the coefficients of firm size measures are robust in sign and statistical significance. Second, the coefficients on regressors other than firm size often change sign and significance when different size measures are used. Unfortunately, this suggests that some previous studies are not robust to different firm size proxies. Third, the goodness of fit measured by R-squared also varies with different size measures, suggesting that some measures are more relevant than others in different situations. Fourth, different proxies capture different aspects of “firm size”, and thus have different implications. Therefore, the choice of size measures needs both theoretical and empirical justification. Finally, our empirical assessment provides guidance to empirical corporate finance researchers who must use firm size measures in their work.

Mutual Monitoring and Agency Problems

This paper empirically examines whether the number two executive in a firm could possibly mitigate the agency problems by monitoring the CEO from bottom up. While the CEO has always been the focus, little work has been done on the number two executive. This study promotes a comprehensive understanding of these top executives and their roles in the bottom-up monitoring mechanism. The results suggest that (1) the bottom-up monitoring provided by number two executives improves firm value; (2) the effect is greater for firms with weaker corporate governance or CEO incentive alignment; (3) the bottom-up monitoring is more important in the post-SOX environment; (4) such monitoring reduces the CEO’s ability to pursue the “quiet life�? but has no effect on “empire building.�?

CSR-Contingent Executive Compensation Contracts

Firms have increasingly started tying their executives’ compensation to CSR-related objectives. In this paper, we attempt to understand why firms offer CSR-contingent compensation and the conditions under which such compensation improves corporate social performance. Using hand-collected data from proxy statements, we find that this emerging compensation practice varies significantly across industries and across different CSR categories. Further, well-governed firms are more likely to offer CSR-contingent compensation, and such compensation does lead to higher corporate social standing. Such firms are more likely to offer formula-based, Objective CSR-contingent compensation. However, our results suggest that non-formulaic, Subjective CSR-contingent compensation also helps improve companies’ social performance when firm outcomes are more volatile and unpredictable, and therefore executives’ effort and performance are harder to evaluate, and when firms have better corporate governance.

Don't Cover Me: Analyst Innate Ability and Insider Trading

This paper employs a novel measure of sell-side financial analyst innate ability or natural talent and explores its effects on insider trading. When a firm is covered by high-ability analysts, we find significantly less insider trading prior to positive earnings news, but not prior to negative earnings news. The results mostly reside in opportunistic trades by insiders rather than routine trades. When a firm is initially covered by an analyst, we find decreased subsequent insider trading prior to earnings news and the change in subsequent insider trading is also strongly associated with analyst innate ability. We also document an association between analyst ability and insider trading profitability. Overall, our results suggest that (1) high-ability analysts contribute more than lowability analysts to a firm’s information environment and reduce both the intensity and the profitability of insider trading; and (2) high-ability analysts may help impound firm-specific information possessed by corporate insiders. Unscrupulous insiders attempting to expropriate profits from their trades may prefer to not be covered by high-ability analysts.

Corporate Social Responsibility and CEO Risk-Taking Incentives

In this paper, we explore how firms adjust CEO compensation incentives in response to corporate social responsibility (CSR) standing. Specifically, we focus on the effect of CSR standing on CEO’s risk-taking incentives. We hypothesize that because firms possessing better social performance generate insurance-like moral capital that protects managers from market discipline, risk averse managers tend to take less risk than is optimal for shareholders. Firms should respond to this agency problem by offering greater risk-taking incentives to managers. Employing a large sample of the US firms from 1992 to 2010, we find strong empirical evidence to support our hypothesis. Indeed, CSR standing is positively related to CEO pay-risk sensitivity (Vega), and this association is driven by CSR strengths rather than CSR concerns. Further, we provide evidence that firm overall risk and idiosyncratic risk negatively moderate the association between CSR and Vega.