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Corporate Governance

Paper Session

Sunday, Jan. 8, 2017 3:15 PM – 5:15 PM

Sheraton Grand Chicago, Sheraton Ballroom II
Hosted By: American Finance Association
  • Chair: Todd Gormley, Washington University-St. Louis

Older and Wiser, or Too Old to Govern?

Ronald Masulis
,
University of New South Wales
Cong Wang
,
Chinese University of Hong Kong
Fei Xie
,
University of Delaware
Shuran Zhang
,
Chinese University of Hong Kong

Abstract

We examine the implications of boardroom aging at large U.S. public corporations. Our analysis indicates both monitoring deficiencies and advising benefits associated with independent directors aged 65 or above. These elderly independent directors are more likely to miss board meetings and less involved with major board committees. Their presence on corporate boards is associated with higher CEO compensation, poorer financial disclosure quality, lower total payouts, worse acquisition decisions, and a lower CEO turnover-performance sensitivity. On average, a greater representation of aging independent directors on corporate boards is related to lower firm performance, but this relation becomes insignificant or sometimes even positive in situations where firms have more advising needs. Finally, we find that investors react negatively to firm appointments of old independent directors and company policy changes that increase the mandatory retirement age of directors.

Is Skin in the Game a Game Changer? Evidence From Mandatory Changes of D&O Insurance Policies

Chen Lin
,
University of Hong Kong
Micah Officer
,
Loyola Marymount University
Thomas Schmid
,
University of Hong Kong
Hong Zou
,
University of Hong Kong

Abstract

Exploiting a German law change in 2009 that innovatively introduced a mandatory deductible in D&O insurance, we examine the economic consequences of increased legal liability for company executives. Comparing German firms with D&O insurance before the law change (i.e., treatment firms) with those that do not carry D&O insurance and Austrian firms as control firms reveals positive announcement returns for treatment firms when proposed mandatory deductible was first announced. Our difference-in-differences analyses also show an increase in long-run firm valuation and a decrease in the cost of capital for treatment firms after the law change. In addition, the law change appears to have changed D&Os’ behaviors in financial decisions as evidenced by less risk-taking in treatment firms. Overall, our findings indicate that increased legal liability has significant economic consequences that benefit firms’ owners and German government’s novel approach to addressing corporate governance and risk management failures appears noteworthy.

Contrasts in Governance: Newly Public Firms Versus Mature Firms

Laura Field
,
University of Delaware
Michelle Lowry
,
Drexel University

Abstract

While the percentage of S&P1500 firms with classified boards has decreased from nearly 60% to less than 40% since 1990, trends among IPO firms have gone strongly in the opposite direction. The percent of firms going public with a classified board has increased from 40% in 1990 to nearly 80% today. Results provide strong support for differences in the value of classified boards across firms contributing toward these trends, with market forces pushing each group in the value-increasing direction. We find little evidence that the increased tendency of IPO firms to adopt classified boards is driven by agency issues. Rather, results suggest that classified boards potentially protect newly public firms from the influence of shareholders that may not appreciate the unique aspects of these firms and may push for change that is not in the firm’s best interests.
Discussant(s)
Dirk Jenter
,
London School of Economics and Political Science
Ian Appel
,
Boston College
Jeffrey Coles
,
University of Utah
JEL Classifications
  • G3 - Corporate Finance and Governance