Papers Corporate Governance & Social Responsibility
Contents
L1 Executive compensation .............................................................................................................................. 2
Are CEOs Rewarded for Luck? (Bertrand and Mullainathan 2001) ................................................................... 2
L3,4,5,6 Board of Directors ............................................................................................................................... 2
Does board size matter? Jenter, Urban Schmidt (2018) ................................................................................... 2
The impact on firm valuation of mandated female board representation Ahern, Dittmar (2012) ......................... 3
Valuation Effects of Norway’s Board Gender-Quota Law Revisited. Eckbo, Nygaard, Thorburn (2022)............ 3
Differences in the main findings of both papers about Norway’s Gender Quota: ............................................... 3
L7, 8, 9 Shareholder activism............................................................................................................................ 3
The Cost and Benefits of Shareholder Domocraxy: Gadflies and Low-Cost Activism (Gantchev, N. and
Giannetti, M., 2020)......................................................................................................................................... 3
How does hedge fund activism reshape corporate innovation? (Brav, Jiang, Ma, Tian, 2018) ........................... 4
L10 Payout Policy .............................................................................................................................................. 4
The Effect of institutional ownership on payout policy. Crane, A., Michenaud, S. & Weston, J.P. 2016 ............. 4
The real effect on share repurchases Almeida, H., Fos, V. and Kronlund, M., 2016 .......................................... 5
L11 Passive and Common Ownership.............................................................................................................. 5
Do exogenous changes in passive institutional ownership affect corporate governance and firm value? Schmid,
C. and Fahlenbrach, R., 2017 .......................................................................................................................... 5
Paper: Passive Investors, not passive Owners. Appel, I.R., Gormley, T.A. and Keim, D.B., 2016 ..................... 6
Common Ownership, Competition, and Top Management Incentives (Anton, Edere, Gine, Schmalz, 2020) ..... 6
L14 CSR: History and Measures ....................................................................................................................... 7
Husted (2015): Subsections on the United States, Japan and Germany; Discussion ........................................ 7
Berg et al (2022): Aggregate Confusion: The Divergence of ESG Ratings ........................................................ 7
L15 CSR: Incentives and Criticism ................................................................................................................... 7
Friedman (1970): The social responsibility of business is to increase its profits ................................................ 7
Ferell et al. (2014): Socially responsible firms .................................................................................................. 8
L17 CSR and Firm Value 1: Customers and Employees .................................................................................. 8
Servaes & Tamayo (2013): The impact of corporate social responsibility on firm value: The role of customer
awareness ...................................................................................................................................................... 8
Podcast: Freakonomics ................................................................................................................................... 9
L18 CSR and Firm Value: Investors .................................................................................................................. 9
Chava (2014): Environmental externalities and cost of capital .......................................................................... 9
L19 Impact of CSR ........................................................................................................................................... 10
Bertrand et al. (2020): Tax-exempt lobbying: Corporate philanthropy as a tool for political influence .............. 10
L20 CSR and Social Impact ............................................................................................................................. 11
Naaraayanan (2020): The Real Effects of Environmental Activist Investing .................................................... 11
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L1 Executive compensation
Are CEOs Rewarded for Luck? (Bertrand and Mullainathan 2001)
• The paper come up with several ways to look at luck an disentangle it from genuine good performance
• Measurements of luck:
- Oil prices in the oil industry
o Large movements in oil prices tend to affect firm performance, most of the time
CEO pay and oil price move hand in hand
- “Industry-level” exchanges rates for firms in traded goods sector
o Affect important penetration and competitiveness, thus firm probability
- Industry mean performance as proxy for “economic fortune”
o Taking the pulse of the industry in general
• Skimming theory: CEO can take control of compensation process and set their own pay in good
times. Achieves due to:
- Entrenchment: packing the board with supporters
- Complexity of the pay process
• Methodology:
- Estimate performance due to luck ->
- Regress executives pay on luck-related performance ->
- Regress executives pay on luck and governance ->
• Findings:
- Luck plays a huge role in executive pay
- CEO is at least as much rewarded for luck as general
- Consistent with skimming, better governed firms pay less for luck. These effects are
strongest for the presence of large shareholders on the board. So, pay for luck is higher
among poorly governed firms.
o Poorly governed firms fit the predictions of skimming view
o Well-governed firms fit the predictions of contracting view.
➔ Corporate governance reduce the ability of skimming due to better monitoring/supervision by
the board
L3,4,5,6 Board of Directors
Does board size matter? Jenter, Urban Schmidt (2018)
Advantage small boards Advantage large boards
Little friction in group decisions More individuals -> more monitoring
Reduces coordination and free-rider problems More information and knowledge
Fast decision making Greater diversity of backgrounds and options
Positive or negative impact between number of directors and firm performance?
- Problem 1: reverse causality: Poor performance leads to adding more directors
- Problem 2: omitted variables. Confounding factors that both affect the number of
directors and firm performance
o Diversified firms need more expertise -> larger boards
o Boards grow when firms are active in M&A
- Root cause of problem: board size is endogenous
Board structure:
- Diversified board important -> more views improve decision making -> broader view
about risk/opportunities -> large employee pool, more people are willing to work for you
- Better measure than board attendance -> participation and quality of questions
- Advantage of a mix tenures -> directors who are sitting on the board for a long time
constrained themselves to only think about new situation by comparing it with their pas
experience.
• Research question: Do large board reduce firm performance?
• Methodology: Germany has a minimum board size requirements if employees >10k. Regressed the
discontinuity design around this threshold.
• Findings:
- Regulation actually works. Not much of manipulation, they don’t reduce the number of
employees to stay under 10,000 -> relatively smooth around the threshold
- Forcing increase in board size has negative effect on firm performance and firm value
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, - At threshold ROA drops by 2/3% and Tobin’s Q by 0.2-0.25
- Firm above the threshold engage more in value destroying acquisitions
- Board effectiveness declines when board becomes too large
➔ But what is the optimal firm size? Maybe regulation is right, but not the threshold
The impact on firm valuation of mandated female board representation Ahern, Dittmar (2012)
• Methodology: Looking at effect of law in Norway: at least 40% of board members should be women.
• Hypothesis; what while happen to firm value if:
A. Board chosen to maximize firm value, and law represents a constraint?
- Expectation: share price decline
B. Board chosen to maximize private benefits, and law represents a constraint?
- Expectation: positive share price respond, might force board to be optimal
C. Law does not represent a constraint, but rather diversity creates opportunities?
- Expectation: creates new opportunities, not expect something to happen
• Findings:
- Stock prices react negatively to gender quota and even more negative if firm didn’t have
woman directors on board before (they have to make larger adjustments)
- 12% decline in Tobin’s Q
- Quota les firms grow in size -> more acquisitions
- New female directors have less experience and were younger, but more educated
- Change in firm policy: increase in firms’ risk -> higher leverage, lower cash holding
- More private limited firms and less firms after quota
Valuation Effects of Norway’s Board Gender-Quota Law Revisited. Eckbo, Nygaard, Thorburn (2022)
• Research question: Does the gender quota impose significant costs on shareholders?
• Methodology: event study, used Ahern and Dittmar paper (previous one) to illustrate:
1. The difficulties in attributing quota-related news to specific dates
2. The need to account for contemporaneous cross-correlation of stock returns when looking at
statistically significance of AR
3. Difficulty of separating quote valuation effect from firm characteristics and macroeconomic
event effects.
• Findings:
- Find evidence suggesting that the valuation effect of Norway’s quota was statistically
insignificant. -> exclude five large government-controlled firms (who did very well during
the financial crisis)
- Showed that negative AR is in response to a second event which decreased the likelihood
of a quota law
- Supply of qualified female candidates was high enough to avoid the negative
consequences of the quota highlighted previously in the literature
- Long run stock performance is insignificant and identical across firms with all male and
firms with women prior to the quota
Differences in the main findings of both papers about Norway’s Gender Quota:
• First one found that quota led to a decrease in firm value -> they didn’t include 5 new events
• Second one found that the negative market return is a response to the second new event which
decreased the likelihood of a quota
• Second one analyse the timeline of the events in detail and choose a different date for the date on
which the market learns about the quota for the first time
• Second one take into account cross-sectional correlations of AR
L7, 8, 9 Shareholder activism
The Cost and Benefits of Shareholder Domocraxy: Gadflies and Low-Cost Activism (Gantchev, N. and
Giannetti, M., 2020)
• Research question: Do harmful proposals receive majority support? And if implemented, do they
destroy shareholder value?
• Methodology: Document that a large proportion of individual shareholders’ proposals are submitted by
few active sponsors. These active sponsors could mitigate agency problems, but the concern is that
they make one-size-fits-all propels which do not fit the company, no expertise in evaluating CG
provisions.
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