Towards the end of any long-term incentive program for CEOs, the short term awaits – but it doesn’t need to be bad news

After the financial crisis, shareholders and regulators have become increasingly concerned about short-term pressures in business decision-making. Moqi Xu examines two potential remedies that firms use to set long-term incentives and what happens when they eventually run out. When long-term compensation eventually becomes available to executives, it rewards them for extremely short-term behaviour, such as timing news releases for their own personal benefit. When long-term employment contracts come close to the renewal decision, by contrast, executives are exposed to the scrutiny of the board, which forces them to focus and commercialize long-term investments previously made

CEOs strategically time news releases for their own benefit

Firms release more news in their chief executive's equity vesting months, finds Moqi Groen-X

Looming REF deadlines lead to a rush in publication of lower quality research

The increased significance of research assessments and their implications for funding and career prospects has had a knock-on effect on academic publication patterns. Moqi Groen-Xu, Pedro A. Teixeira, Thomas Voigt and Bernhard Knapp report on research that reveals a marked increase in research productivity immediately prior to an evaluation deadline, which quickly reverses once the deadline has passed. Moreoever, the quality of papers published just before deadlines is lower, as measured by citations. Those who design research assessments should consider having cycles of varying lengths across different fields, affording researchers the time and opportunity to pursue more novel, risky projects

CEO Turnover and Volatility under Long-Term Employment Contracts

© 2019 Cambridge University Press. We study the role of the contractual time horizon of CEOs for CEO turnover and corporate policies. Using hand-collected data on 3,954 fixed-term CEO contracts, we show that remaining time under contract predicts CEO turnover. When contracts are close to expiration, turnover is more likely and is more sensitive to performance. We also show a positive within-CEO relation between remaining time under contract and firm risk. Our results are similar across short and long contracts and are driven neither by firm or CEO survival, nor technological cycles. They are consistent with incentives to take long-term projects with interim volatility

Strategic News Releases in Equity Vesting Months

This is a pre-copyedited, author-produced version of an article accepted for publication in Review of Financial Studies following peer review. The version of record Alex Edmans, Luis Goncalves-Pinto, Moqi Groen-Xu, Yanbo Wang, Strategic News Releases in Equity Vesting Months, The Review of Financial Studies, Volume 31, Issue 11, November 2018, Pages 4099–4141, https://doi.org/10.1093/rfs/hhy070 is available online at: https://doi.org/10.1093/rfs/hhy070

CEO job security and risk-taking

We use the length of employment contracts to estimate CEO turnover probability and its effects on risk-taking. Protection against dismissal should encourage CEOs to pursue riskier projects. Indeed, we show that firms with lower CEO turnover probability exhibit higher return volatility, especially idiosyncratic risk. An increase in turnover probability of one standard deviation is associated with a volatility decline of 17 basis points. This reduction in risk is driven largely by a decrease in investment and is not associated with changes in compensation incentives or leverage

The costs and benefits of long-term CEO contracts

This paper uses a new dataset of 3,717 US CEO employment contracts to study the time horizon of CEOs. Longer contracts offer better protection against dismissals: turnover probability increases by 20% each year that passes towards contract expiration. In theory, this should encourage CEOs to pursue long-term projects. Using an instrumental variable approach based on inter-state judicial differences, I show that contract horizon is indeed positively correlated with investment. However, longer contracts also make it harder to dismiss undisciplined managers and therefore impose less discipline. Consistent with this argument, CEOs under short-term contracts perform better in (the fewer) acquisitions that they make, and CEOs under longer contracts enjoy more salary increases and perquisites. Overall, firm value does not differ across contract types

Rights offerings, trading, and regulation: a global perspective

We study rights offerings using a sample of 8,238 rights offers announced during 1995-2008 in 69 countries. Although shareholders prefer having the option to trade rights, issuers deliberately restrict tradability in 38% of the offerings. We argue that firms restrict rights trading to avoid the execution risk associated with strict prospectus requirements, a prolonged and uncertain transaction process, and the potentially negative information signaled via the price of traded rights. In line with this argument, we find that issuers restricting tradability are those with more to lose from reduced participation or that are more likely to face execution risk

Timing complex news to target attention

Investors have limited and time-varying attention. These constraints are heterogeneous across investors, which can create asymmetric information and adverse selection problems. We show how firms take these constraints into account: they release harder-to-process news in periods when investor attention is higher. We use an institutional discontinuity within the U.S. corporate filing system to measure these effects. Filings before 5:30 pm become available immediately, while filings after 5:30 pm only become visible the next morning and attract less attention. Firms release longer and more complex news just before the cutoff, giving investors the longest possible period to absorb the information before markets open. Firm experience faster price convergence and more liquidity after pre-cutoff news despite their complexity, which is consistent with the additional attention that they attract. We outline a framework in which the need for investors to spread their attention across different ideas induces firms to file their more complex filings at times when investor attention is higher. Our results are consistent with an equilibrium in which investors pay more attention to complex news and in which firms with complex news time them to target investor attention

The value of (stock) liquidity in the M&A market

We study the value of stock liquidity in the market for corporate control and show that the target firm’s liquidity has an impact on the transaction itself as well as on the resulting merged entity. We use a sample of US M&A transactions 1987 through 2007 to show that acquiring a more liquid firm makes the stock of the acquirer more liquid. This has consequences on M&A activity and pricing. Public acquirers are more likely than private acquirers to acquire more liquid targets. It also translates into a greater likelihood of completing the deal and higher compensation for the target