Hostname: page-component-5c6d5d7d68-lvtdw Total loading time: 0 Render date: 2024-08-06T15:58:55.877Z Has data issue: false hasContentIssue false
  • English
  • Français

Managerial Entrenchment and Information Production

Published online by Cambridge University Press:  03 September 2019

Chen Lin ,
Lai Wei  and
Wensi Xie
Chen Lin
Affiliation:
Lin, chenlin1@hku.hk, University of Hong Kong Faculty of Business and Economics
Lai Wei
Affiliation:
Wei, laiwei2@ln.edu.hk, Lingnan University Faculty of Business
Wensi Xie*
Affiliation:
Xie, wensixie@cuhk.edu.hk, Chinese University of Hong Kong Business School
*
Xie (corresponding author), wensixie@cuhk.edu.hk
Get access Rights & Permissions [Opens in a new window]

Abstract

In this article, we evaluate the effect of managerial entrenchment on corporate information production using the voting outcomes of shareholder-initiated proposals intended to mitigate managerial entrenchment. We focus on the proposals that are passed or rejected by a small margin of votes, which generate plausibly exogenous variations in managerial entrenchment. We find that a reduction in managerial entrenchment enhances corporate information production. The effects are stronger for firms with greater information asymmetries and severer agency frictions. Overall, the evidence is consistent with the view that reducing managerial entrenchment enhances corporate disclosure by aligning the incentives of managers and shareholders.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 8 , December 2020 , pp. 2500 - 2529
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are grateful to an anonymous referee, Thorsten Beck, Hendrik Bessembinder (the editor), Thomas Chemmanur, Craig Doidge, Stuart L. Gillan, Marcin Kacperczyk, Jun-Koo Kang, Patrick Kelly, Ross Levine, Craig Lewis, Thomas Schmid, Frank Song, Sheridan Titman, Junbo Wang, Hong Zou, and seminar participants at the Vanderbilt University Owen Graduate School of Management, Tsinghua University PBC School of Finance, Peking University Guanghua School of Management, and New Economic School for their helpful comments and suggestions. Lin acknowledges financial support from the National Natural Science Foundation of China (no. 71790601).

References

Ajinkya, B.; Bhojraj, S.; and Sengupta, P.. “The Association between Outside Directors, Institutional Investors and the Properties of Management Earnings Forecasts.” Journal of Accounting Research, 43 (2005), 343–376.CrossRefGoogle Scholar
Anilowski, C.; Feng, M.; and Skinner, D. J.. “Does Earnings Guidance Affect Market Returns? The Nature and Information Content of Aggregate Earnings Guidance.” Journal of Accounting and Economics, 44 (2007), 36–63.CrossRefGoogle Scholar
Armstrong, C. S.; Core, J. E.; and Guay, W. R.. “Do Independent Directors Cause Improvements in Firm Transparency? ” Journal of Financial Economics, 113 (2014), 383–403.CrossRefGoogle Scholar
Armstrong, C. S.; Guay, W. R.; and Weber, J. P.. “The Role of Information and Financial Reporting in Corporate Governance and Debt Contracting.” Journal of Accounting and Economics, 50 (2010), 179–234.CrossRefGoogle Scholar
Bebchuk, L. A., and Cohen, A.. “The Costs of Entrenched Boards.” Journal of Financial Economics, 78 (2005), 409–433.CrossRefGoogle Scholar
Bebchuk, L. A.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance? ” Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
BlackRock, Inc. Global Corporate Governance and Engagement Principles. Available at https://www.sec.gov/Archives/edgar/data/1053988/000119312515334862/d92408dex99corpgov.htm(2014).Google Scholar
Bradley, D.; Kim, I.; and Tian, X.. “Do Unions Affect Innovation? ” Management Science, 63 (2016), 2251–2271.CrossRefGoogle Scholar
Brockman, P.; Khurana, I. K.; and Martin, X.. “Voluntary Disclosures around Share Repurchases.” Journal of Financial Economics, 89 (2008), 175–191.CrossRefGoogle Scholar
Brockman, P.; Martin, X.; and Puckett, A.. “Voluntary Disclosures and the Exercise of CEO Stock Options.” Journal of Corporate Finance, 16 (2010), 120–136.CrossRefGoogle Scholar
Cattaneo, M. D.; Jansson, M.; and Ma, X.. “Manipulation Testing Based on Density Discontinuity.” STATA Journal, 18 (2018), 234–261.CrossRefGoogle Scholar
Chemmanur, T. J.; Paeglis, I.; and Simonyan, K.. “Management Quality and Antitakeover Provisions.” Journal of Law & Economics, 54 (2011), 651–692.CrossRefGoogle Scholar
Chemmanur, T. J., and Tian, X.. “Communicating Private Information to the Equity Market before a Dividend Cut: An Empirical Analysis.” Journal of Financial and Quantitative Analysis, 49 (2015), 1167–1199.CrossRefGoogle Scholar
Chemmanur, T. J., and Tian, X.. “Do Antitakeover Provisions Spur Corporate Innovation? A Regression Discontinuity Analysis.” Journal of Financial and Quantitative Analysis, 53 (2018), 1163–1194.CrossRefGoogle Scholar
Cheng, Q.; Luo, T.; and Yue, H.. “Managerial Incentives and Management Forecast Precision.” Accounting Review, 88 (2013), 1575–1602.CrossRefGoogle Scholar
Chuk, E.; Matsumoto, D.; and Miller, G. S.. “Assessing Methods of Identifying Management Forecasts: CIG vs. Researcher Collected.” Journal of Accounting and Economics, 55 (2013), 23–42.CrossRefGoogle Scholar
Core, J. E.; Guay, W. R.; and Larcker, D. F.. “Executive Equity Compensation and Incentives: A Survey.” Economic Policy Review, 9 (2003), 27–50.Google Scholar
Core, J. E.; Guay, W. R.; and Rusticus, T. O.. “Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors’ Expectations.” Journal of Finance, 61 (2006), 655–687.CrossRefGoogle Scholar
Cremers, M., and Ferrell, A.. “Thirty Years of Shareholder Rights and Firm Value.” Journal of Finance, 69 (2014), 1167–1196.CrossRefGoogle Scholar
Cunat, V.; Gine, M.; and Guadalupe, M.. “The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value.” Journal of Finance, 67 (2012), 1943–1977.CrossRefGoogle Scholar
DeAngelo, H., and DeAngelo, L.. “Proxy Contests and the Governance of Publicly Held Corporations.” Journal of Financial Economics, 23 (1989), 29–59.CrossRefGoogle Scholar
Dey, A.“Corporate Governance and Agency Conflicts.” Journal of Accounting Research, 46 (2008), 1143–1181.Google Scholar
Diamond, D. W., and Verrecchia, R. E.. “Disclosure, Liquidity, and the Cost of Capital.” Journal of Finance, 46 (1991), 1325–1359.CrossRefGoogle Scholar
Djankov, S.; La Porta, R.; López de Silanes, F.; and Shleifer, A.. “The Law and Economics of Self-Dealing.” Journal of Financial Economics, 88 (2008), 430–465.CrossRefGoogle Scholar
Easley, D., and O’Hara, M.. “Information and the Cost of Capital.” Journal of Finance, 59 (2004), 1553–1583.CrossRefGoogle Scholar
Ertimur, Y.; Ferri, F.; and Stubben, S. R.. “Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Proposals.” Journal of Corporate Finance, 16 (2010), 53–72.CrossRefGoogle Scholar
Foerster, S. R.; Sapp, S. G.; and Shi, Y.. “The Effect of Voluntary Disclosure on Firm Risk and Firm Value: Evidence from Management Earnings Forecasts.” Advances in Quantitative Analysis of Finance and Accounting, 12 (2014), 179–213.Google Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–156.CrossRefGoogle Scholar
Graham, J. R.; Li, S.; and Qiu, J.. “Corporate Misreporting and Bank Loan Contracting.” Journal of Financial Economics, 89 (2008), 44–61.CrossRefGoogle Scholar
Gu, Y.; Mao, C. X.; and Tian, X.. “Banks’ Interventions and Firms’ Innovation: Evidence from Debt Covenant Violations.” Journal of Law & Economics, 60 (2017), 637–671.CrossRefGoogle Scholar
Hahn, J.; Todd, P.; and Van der Klaauw, W.. “Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design.” Econometrica, 69 (2001), 201–209.CrossRefGoogle Scholar
He, J., and Tian, X.. “The Dark Side of Analyst Coverage: The Case of Innovation.” Journal of Financial Economics, 109 (2013), 856–878.CrossRefGoogle Scholar
Healy, P. M., and Palepu, K. G.. “Information Asymmetry, Corporate Disclosure, and the Capital Markets: A Review of the Empirical Disclosure Literature.” Journal of Accounting and Economics, 31 (2001), 405–440.CrossRefGoogle Scholar
Houston, J. F.; Lev, B.; and Tucker, J.. “To Guide or Not to Guide? Causes and Consequences of Stopping Quarterly Earnings Guidance.” Contemporary Accounting Research, 27 (2010), 143–185.CrossRefGoogle Scholar
Imbens, G., and Kalyanaraman, K.. “Optimal Bandwidth Choice for the Regression Discontinuity Estimator.” Review of Economic Studies, 79 (2012), 933–959.CrossRefGoogle Scholar
Jensen, M. C.“Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Johnson, W. C.; Karpoff, J. M.; and Yi, S.. “The Bonding Hypothesis of Takeover Defenses: Evidence from IPO firms.” Journal of Financial Economics, 117 (2015), 307–332.CrossRefGoogle Scholar
Karamanou, I., and Vafeas, N.. “The Association between Corporate Boards, Audit Committees, and Management Earnings Forecasts: An Empirical Analysis.” Journal of Accounting Research, 43 (2005), 453–486.CrossRefGoogle Scholar
Klein, A.“Audit Committee, Board of Director Characteristics, and Earnings Management.” Journal of Accounting and Economics, 33 (2002), 375–400.CrossRefGoogle Scholar
Lee, D. S.“Randomized Experiments from Non-Random Selection in U.S. House Elections.” Journal of Econometrics, 142 (2008), 675–697.CrossRefGoogle Scholar
Lee, D. S., and Lemieux, T.. “Regression Discontinuity Designs in Economics.” Journal of Economic Literature, 48 (2010), 281–355.CrossRefGoogle Scholar
Leuz, C.; Nanda, D.; and Wysocki, P. D.. “Earnings Management and Investor Protection: An International Comparison.” Journal of Financial Economics, 69 (2003), 505–527.CrossRefGoogle Scholar
Leuz, C., and Wysocki, P. D.. “The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research.” Journal of Accounting Research, 54 (2016), 525–622.CrossRefGoogle Scholar
Li, X.“The Impacts of Product Market Competition on the Quantity and Quality of Voluntary Disclosures.” Review of Accounting Studies, 15 (2010), 663–711.CrossRefGoogle Scholar
Malatesta, P. H., and Walkling, R. A.. “Poison Pill Securities: Stockholder Wealth, Profitability, and Ownership Structure.” Journal of Financial Economics, 20 (1988), 347–376.CrossRefGoogle Scholar
McCrary, J.“Manipulation of the Running Variable in the Regression Discontinuity Design: A Density Test.” Journal of Econometrics, 142 (2008), 698–714.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R. W.. “Do Managerial Objectives Drive Bad Acquisitions? ” Journal of Finance, 45 (1990), 31–48.CrossRefGoogle Scholar
Morse, A.; Wang, W.; and Wu, S.. “Executive Lawyers: Gatekeepers or Strategic Officers? ” Journal of Law and Economics, 59 (2016), 847–888.CrossRefGoogle Scholar
Scharfstein, D.“The Disciplinary Role of Takeovers.” Review of Economic Studies, 55 (1988), 185–199.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “Management Entrenchment: The Case of Manager-Specific Investment.” Journal of Financial Economics, 25 (1989), 123–139.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R. W.. “A Survey of Corporate Governance.” Journal of Finance, 52 (1997), 737–778.CrossRefGoogle Scholar
Stulz, R. M.“Managerial Control of Voting Rights: Financing Policies and the Market for Corporate Control.” Journal of Financial Economics, 20 (1988), 25–54.CrossRefGoogle Scholar