Sharing the Pain between Workers and Management: Evidence from the COVID-19 Pandemic and 9/11 Attacks

We examine the rhetoric in ESG literature that managers “share the pain” of employees who are laid off or whose benefits are cut by committing to reduce CEO pay or by enacting other positive worker friendly actions during the Covid crisis. Using the exogenous shock of the COVID pandemic and a unique database, we examine more than 4,062 positive and negative actions targeted at workers taken by the S&P 1500 firms in 2020 in response to the pandemic. Our findings indicate that economic considerations such as exposure to the pandemic and poor stock performance prior to the pandemic are the primary determinants of management’s decision to share the pain of employees. Stakeholder concerns, proxied by higher employee-related corporate social responsibility scores, lower pay disparity between the CEO and the median employee, or a signatory to the Business Roundtable Statement, are not associated with managers’ sharing of the pain. Evidence of such pain sharing from another unexpected crisis from the past –the September 11, 2001, terrorist attacks – is remarkably similar. Sharing the pain is not associated with future stock returns performance. Finally, we show that the median CEO’s wealth increased nearly 18-fold relative to the CEO pay cut for firms that enforced CEO pay cuts and laid off employees during the Covid crisis. The paper adds to growing evidence that U.S. firms do not appear to “walk the talk” of concerns for stakeholders

Essays on the Role of Social Networks and Social Capital in Accounting and Finance

Social capital, as an important construct in social sciences, captures shared common beliefs and density of associational networks within a community. Regions with high social capital tend to have higher levels of mutual trust and display greater contract enforceability through the power of the community. Sociologists argue that communities with dense associational networks face a harsher punishment for deviation from norms, which deters individuals from acting opportunistically. In the long run, this results in fostering a norm-conducive environment that encourages cooperation among individuals and mitigates norm-deviant behavior. Research in economics and sociology shows that social capital brings several benefits to the community. For instance, regions with higher levels of social capital have effective governance mechanisms, higher economic growth, better health, lower income inequality, fewer suicides, higher education attainment ratios, and reduced levels of crime compared to regions with lower levels of social capital. Recently, researchers in corporate finance and accounting have also encompassed the idea of social capital and studied its influences in mitigating norm-deviant behavior by firms. For instance, researchers show that firms headquartered in high social capital counties have a lower tendency to avoid taxes, commit less financial reporting fraud, and use their resources more efficiently. The first two essays of this dissertation contribute to this recent literature and extend it by studying how social capital influences corporate reporting culture and accounting conservatism, and proportion of female directors on corporate boards and corporate governance mechanisms. Using county-level data on social capital in the United States, the first essay illustrates that firms headquartered in high social capital counties have higher accounting conservatism as managers in such firms are less likely to withhold information in the form of bad news. The second essay studies how social capital influences boardroom gender diversity and corporate governance mechanisms. The findings indicate that social capital enhances oversight mechanisms and reduces inequality within a society, leading to lower supply-side barriers for female directors. This ultimately results in a higher proportion of female directors on corporate boards of firms located in high social capital. Networks formed through social interactions and personal relationships are an important dimension of social capital and vital in almost all economic activities. The third essay relates to the role of social networks in disseminating information to the market. The findings of this essay suggest that insiders with larger networks are more likely to have access to channels of information and resource exchange, which ultimately result in a higher market reaction to their insider trades. This dissertation contributes to the existing literature on two important social constructs – social networks and social capital – and their influence on different processes in accounting and finance through three distinct but related essays. The main contribution of the whole dissertation is the empirical evidence on how social networks influence insider trading and how social capital affects corporate governance and accounting conservatism

Corporate culture and financial statement comparability

In this paper, I empirically examine the influence of corporate culture on the comparability of financial statements. I predict that firms with strong corporate cultures have less-opportunistic managers, who make homogenous decisions when faced with similar economic events, resulting in greater accounting comparability. For a sample of U.S. companies, I find empirical evidence consistent with this prediction: firms with strong corporate cultures have greater peer- and industry-level comparability. These results are robust to using an entropy-balanced sample, correcting for sample selection bias using Heckman’s two-step procedure, and employing different measures of corporate culture strength. Further analysis reveals that sudden CEO turnovers that move firms towards (away from) a stronger corporate culture positively (negatively) influence post-turnover accounting comparability. My results provide new insights on the role of corporate culture for financial reporting.peerReviewe

Network centrality and value relevance of insider trading: Evidence from Europe

We examine the value relevance of insider trades in Europe and find that both purchases and sales of well-connected insiders are positively associated with long-term abnormal returns. We argue that the market perceives the purchases of networked insiders as more informative, leading to higher returns. For sales of networked insiders, the market decreases their negative information content, leading to lower negative returns. Our results do not support the view that insiders use their informational advantage to extract economic rents in the form of dollar profits. We posit that they use their networks to provide signals to the market when trading.peerReviewe

Boardroom Centrality and Firm Performance : Evidence from Private Firms

We study the link between boardroom centrality and operating performance in private firms. We argue that the centrality-performance relationship is stronger for private firms whose increased connectedness is likely to provide certification benefits, decrease transaction costs by reducing information asymmetry, and improve access to critical resources. Using a sample of Finnish and Swedish private firms, we find that private firms with more central boards have better performance, growth, and efficiency than private firms with less central boards. Moreover, in a sample of private and public firms, we find that private firms with greater eigenvector centrality outperform size-matched public firms. Subsample analyses further show that networks are crucial for young firms. This is consistent with the view that better-connected directors provide firms with informational resources when they need them the most. Overall, our findings show that boardroom interlocks are positively associated with immediate economic benefits to private firms.peerReviewe

Economic uncertainty and corruption: Evidence from public and private firms

We study the influence of policy uncertainty on the moral behavior of firms. When facing uncertainty, managers perceive various socioeconomic obstacles as more severe and disruptive to their business. Using data from policy uncertainty spouts in 93 countries, we document that some firms engage in norm-deviant behavior by cheating on taxes and paying more bribes. While private firms prefer to cheat on taxes, public firms choose bribery as a favorite tool to “grease the wheels” during periods of uncertainty. Strong social capital (local trust and religiosity) breaks this link between uncertainty and corruption.peerReviewe

Climate change denial and corporate environmental responsibility

This paper examines whether corporate environmental responsibility is influenced by regional differences in climate change denial. While there is an overwhelming consensus among scientists that climate change is happening, recent surveys still indicate widespread climate change denial across societies. Given that corporate activity causing climate change is fundamentally rooted in individual beliefs and societal institutions, we examine whether local perceptions about climate change matter for firms’ engagement in environmental responsibility. We use climate change perception surveys conducted in the U.S. to compute a novel measure of climate change denial for each U.S. county. We find that firms located in counties with higher levels of climate change denial have weaker environmental performance ratings, are more likely to commit environmental violations, and impose greater environmental costs on society. Regional differences in religiosity, social capital, political leaning, or county-level demographic characteristics cannot explain these results. Furthermore, we document that strong corporate governance mechanisms and corporate culture moderate the negative relationship between climate change denial and corporate environmental responsibility. Overall, our findings offer new insights into how local beliefs and perceptions about climate change may influence firm-level sustainability practices.</p