Publication:

Shareholder Litigation Rights and the Cost of Debt: Evidence from Derivative Lawsuits (with Xiaoran Ni), Journal of Corporate Finance 48, 169-186, 2018.

Abstract

We exploit the staggered adoption of universal demand (UD) laws in 23 states as exogenous shocks to derivative lawsuits and find that weakened shareholder litigation rights cause a significant increase in the cost of debt. Deteriorated corporate governance, increased information asymmetry, and heightened managerial risk-taking incentives appear to be underlying channels. Interestingly, it seems that shareholders respond to weakened litigation rights by providing managers with weaker incentives for risk-taking. Overall, our findings suggest that the disciplining effect of shareholder litigation rights is important to creditors.

 

CEO Educational Background and Acquisition Targets Selection (with Ye Wang), Journal of Corporate Finance 52, 238-259, 2018. 

Abstract

Using hand-collected CEO education data of 3,574 CEOs over the period of 2000 to 2015, we document that CEOs are significantly more likely to acquire targets that are headquartered in those states where the CEOs received their undergraduate and graduate degrees. Education-state deals are larger, have higher completion rates, and exist with both public and private targets. Acquirers pay a lower target premium for education-state deals and the cumulative abnormal announcement returns are positive. The combined evidence suggests that education-state acquisitions are more likely to be driven by bidder CEO’s information advantage toward firms headquartered in the education state. 

 

Working Paper:

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Non-compete Contracts and CEO Turnover Performance Sensitivity (With Omesh Kini and Ryan Williams) -- Review of Financial Studies -- Revise and Resubmit
 

Abstract

Non-compete agreements limit the mobility of employees, thereby imposing significant costs on them by reducing their outside options. In this paper, we focus on CEO non-competition agreements because CEOs have a better ability to negotiate their employment contracts than rank-and-file employees. We use staggered state-level variation in non-compete enforceability to examine: (i) the determinants of CEO non-compete agreements, (ii) the impact of CEO non-compete agreements on performance-turnover sensitivity, and (iii) the impact of CEO non-compete agreements on the level and structure of compensation. Consistent with the argument that the presence of a non-competition agreement is the outcome of a bargaining game between the CEO and the firm, we find that the CEO is less likely to have a non-competition agreement if she faces greater employment risk, has greater stock ownership, and if the firm is in a different life cycle stage than its competitors. In addition, we find that the CEO is more likely to have a non-competition agreement if the firm faces greater product market risk, has higher R&D expenses in a stronger enforceability regime, and is likely to be generating economic rents. Consistent with the idea that non-compete agreements lower the likelihood that a departing CEO could create economic harm to the firm by joining a competitor, we find that the performance-turnover sensitivity is significantly stronger when the CEO has a non-competition agreement in place. Finally, we find that CEO total compensation (CEO risk-taking incentives) is higher if CEOs have non-competition contracts – this result is stronger in regimes with more stringent enforceability of these contacts and holds true primarily in situations where the non-competition agreement is more likely to have a significant impact on the CEO’s outside options (when there are a larger number of in-state competitors, the CEO is a specialist, and the CEO is younger). Our paper illustrates the impact of restrictions on CEO mobility and how they are monitored and compensated by the firm.

Presentation

  • Auburn University*, University of Connecticut*, University of Arizona, ESCP-Paris*, Université Paris-Dauphine*, 2018 Financial Management Association Annual Meeting (FMA). 

 

Local Tournament Incentives and Firm Risk 

Abstract

Using the compensation gap between a CEO and the highest-paid CEO in the same Metropolitan Statistical Area (MSA) as a proxy for local tournament incentives, I document a significant positive relation between local tournament incentives and firm risk. Specifically, CEOs who face higher local incentives implement riskier policy, including higher R&D expenditures and more firm focus. Exploiting quasi-shocks to local incentives and cross-sectional variation in the probability of winning, I show that incentive effects vary systematically with theoretical predictions. The results are robust to alternative local tournament incentives measures, sample periods, and firm risk proxies.

Presentation

  • University of Mississippi, Babson College, California State University Fullerton, University of Manitoba, Miami University, Illinois State University, 2017 Financial Management Association Annual Meeting (FMA), University of Arizona, 2017 Northern Finance Association Annual Meeting (NFA), 2017 Midwest Finance Association Annual Meeting (MFA), 2016 Southern Finance Association Annual Meeting (SFA)   

 

Policy Uncertainty, Corporate Risk-Taking and CEO Compensation (With Mihai Ion)

Abstract

Using a news-based index of aggregate policy uncertainty in the US economy, we document a strong negative relationship between policy uncertainty and corporate risk-taking. We show evidence that high levels of policy uncertainty are associated with a higher propensity to use financial hedging instruments, a higher preference for diversifying acquisitions and significantly lower future return volatility. Furthermore, we find that CEOs sell more own-fi rm shares and exercise fewer options when policy uncertainty is high. The relation between policy uncertainty and return volatility is stronger (more negative) when CEOs have higher delta and when they have more specialized skills, and it is weaker when they have higher vega. These results are consistent with the idea that CEOs manage the potential effects that policy uncertainty may have on their wealth by adjusting both the risks taken by their rm, as well as their portfolios' exposure to their own rm. Furthermore, our results support the notion that the effect of policy uncertainty on the real economy is highly dependent on CEO risk-taking incentives.

Presentation

  • University of Wisconsin-Madison*, University of Arizona

 

 

The Real Effect of Short Selling in an Emerging Market (with Xiaoran Ni) 

Abstract

This paper studies the effect of short selling threats on firm risk-taking. In March 2010, the China Securities Regulatory Commission (CSRC) initiates a pilot program that gradually removes short-sales constraints of stocks. We exploit this regulatory change as a quasi-natural experiment and find that pilot firms undertake less risk. Further analyses indicate that the negative relation is largely driven by managers' increased short-term concerns facing with downside risk. We also find that pilot ´ firms accumulate more cash, take less debt, invest less in R&D, involve in fewer M&A, have lower asset growth rate, worse financial performances, and lower market values. These findings confirm that capital market frictions can affect real economic activities in emerging markets.

Presentation

  • 2016 Northern Finance Association  Annual Meeting (NFA), 2016 World Finance Conference, 2016 Financial Management Association European Conference (FMA European), 2016 Midwest Finance Association Annual Meeting (MFA), 2016 Southwestern Finance Association Annual Meeting (SWFA) – Best Paper in Corporate Governance, 2016 Eastern Finance Association Annual Meeting (EFA), 2016 AAA Mid-Atlantic Region Meeting – Best Ph.D. Paper Award

 

 

​​​Employee-level Pay Dispersion and Firm Performance

Abstract

This paper examines the effect of pay dispersion on firm performance. Specifically, I compare and contrast these effects of pay dispersion among rank-and-file employees with the effects among executives. Using a novel dataset from a large online job search platform that provides employee-level salary and satisfaction data from 2008 to 2015, I find that pay dispersion among rank-and-file employees negatively affects employee satisfaction and firm performance. Further, the negative effects are amplified among labor-intensive firms and firms that require cooperation among workers. IV estimates indicate that the observed effect is not caused by omitted variables. Evidence from this paper suggests that although pay dispersion positively motivates corporate executives in the form of executive tournaments (Kale, Reis, and Venkateswaran, 2009), lower-level employees respond negatively to pay inequality.

Presentation

  • 2018 Midwest Finance Association Annual Meeting (MFA)  

 

Department of Finance

Farmer School of Business

800 E. High St. 

Oxford, OH

45056
davidyin@miamioh.edu