Prior research suggests that a firm's capacity to both sustain itself and contribute to societal sustainability is fundamentally dependent on the continuity of its customer base. Adopting an agency theory perspective, this study investigates how external corporate governance (takeover protection) and internal corporate governance (board independence) influence future customer satisfaction. We hypothesize that by reducing the disciplinary role of the market for corporate control, takeover protection fosters managerial entrenchment and resource misallocation with a consequent negative impact on future customer satisfaction. In contrast, we predict that board independence, by emphasizing long-term sustainability control systems, is positively associated with future customer satisfaction. Utilizing a sample of 736 observations from 111 US firms over the period 1994 to 2006 and employing takeover protection data made available in 2022, we find support for both theoretical predictions. We also predict and show that board independence acts as a vital countervailing force: independent boards not only positively influence satisfaction but also significantly moderate the negative impact of takeover protection. These findings suggest that strong internal oversight is essential to preserving long-term customer satisfaction in environments characterized by strong takeover protection. Our work offers unique insights for practitioners and academics concerned with sustainability, the design of a firm's corporate governance architecture, strategic performance measurement systems, and the related integration of sustainability-driven metrics.

In this study, we develop and test theory on whether , when , and how the prevalence of women in firms’ top management influences workplace safety – an important ‘do no harm’ dimension of corporate social performance. Consistent with our theorizing, we find that there is a negative relationship between the prevalence of women executives in firms’ top management and workplace safety violations. We show that the relationship is amplified by board gender diversity and ownership by institutional investors who advocate for greater gender diversity in firms’ upper echelons. We also show that the relationship is partially mediated by employee workload. Our findings have important implications for the management literature on the gender profile of firms’ top management and for the workplace safety literature.

Ofosu, Don O'Sullivan, Madhu Veeraraghavan, Leon Zolotoy (2024) Rank-and-File Workplace Safety. Management Science

In this study, we explore the relationship between perceived CEO greed and workplace safety. Drawing on insights from the social psychology literature, we theorize that CEOs are cognizant that their perceived greed has implications for how observers respond to failures in workplace safety. Our theorizing points to a somewhat counterintuitive positive relationship between perceived CEO greed and workplace safety. Consistent with our theorizing, we find that the relationship is attenuated when the CEO is insulated from how observers respond to firm conduct and is amplified when the CEO’s characteristics have a larger impact on how observers respond to adverse firm-level events. We contribute to business ethics research on executive greed, on the relationship between CEO traits and (ir)responsible corporate conduct, and on the antecedents of workplace safety.

We provide robust evidence that rank-and-file employee stock options (R&F options) lead to lower work-related injury rates. These findings are consistent with the view that R&F options improve workplace safety by facilitating employee retention and cooperation. To establish causality, we employ difference-in-differences analysis around the passage of FAS 123R option expensing regulation and instrumental variable estimation. In cross-sectional analysis, we find that the documented effect is amplified among firms with higher labor mobility rates and among firms with greater scope for employee free-riding. The results of supplemental analysis suggest that work-related injuries adversely impact firm performance and rule out reduced employee whistleblowing about workplace safety issues as an alternative mechanism driving our findings.

Drawing on behavioural agency theory, we revisit the incentive alignment qualities of stock options. Using behavioural agency's logic, we theorize that chief executive officers (CEOs) are likely to perceive efforts directed at firm productivity as a means of protecting their option wealth (the value of previously awarded stock options). Our reasoning suggests that CEO option wealth positively influences firm productivity and that productivity mediates the relationship between CEO option wealth and firm value. Our theory also points to boundary conditions at the CEO level and the firm level. Our study advances research on the utility of stock options by focusing on effort and productivity as the mechanism through which option incentives affect CEO behaviours. We demonstrate that option risk bearing can align CEO-shareholder interests.

This paper studies the impact of board gender diversity on firm value during a crisis period. We provide robust evidence that stocks of firms with gender-diverse boards experienced higher abnormal returns when the negative market sentiment induced by the outbreak of the COVID-19 pandemic was at its peak. In cross-sectional analysis, we find that the documented effect was amplified among financially constrained firms, firms with a longer cash conversion cycle, and firms with higher information uncertainty, while it was mitigated among firms with higher managerial ability. Overall, our findings are consistent with the narrative that investors view gender diverse boards as being better equipped to monitor and advise management during such periods.

Research Summary Despite an extensive upper echelons literature on how CEOs' prior experiences influence firm behavior, we know little about the influence of traumatic experiences early in CEOs' lives. Drawing on post-traumatic growth theory, we describe how traumatic experiences early in CEOs' lives influence corporate social performance. Our theory points to the asymmetric impact of CEO early-life trauma on responsible and irresponsible corporate social performance and to two boundary conditions: CEO age at the time of the traumatic event and the severity of the event. We develop and test our arguments in the context of large-scale disasters experienced early in the CEO's life. Our findings advance strategic management research on the relationship between CEO experiences and firm outcomes. Managerial Summary We consider how traumatic experiences in childhood shape CEO cognition and values and, therefore, firm behavior. Our findings suggest that CEOs who have had to deal with traumatic early-life events may gain psychological strength from such experiences and that their psychological growth informs firm conduct. Specifically, our findings indicate that experience of trauma early in the CEO's life is positively associated with corporate social performance. The implication is that boards aspiring to enhance this aspect of corporate performance may wish to consider the early-life experiences of prospective CEOs. While early-life experiences are unlikely to feature on a prospective CEO's resume, the typical selection process for senior executive appointments is well placed to unearth executives' life histories.

Infusing stakeholder agency theory with insights from behavioural agency theory, we describe a frame‐dependent relationship between CEO stock option incentives and tax avoidance. Our theoretical framework highlights the role of competing shareholder demands in providing a salient reference point for a CEO contemplating the implications of tax avoidance for their stock option wealth. In a study of 2,573 publicly listed U.S. firms between 1993 and 2014, we show that the implications of CEO stock option incentives are contingent on whether the firm’s effective tax rate is anticipated to be below or above the tax rate of peer firms – an outcome that the CEO can cast as balancing stakeholder demands. Consistent with our theoretical reasoning, we also show that, both above and below this reference point, the implications of option incentives for corporate tax avoidance are amplified by the level of activist institutional ownership and attenuated by the CEO’s ability to unwind their bond with shareholders through hedging. In doing so, our study offers an impetus for a broader stakeholder approach to governance research examining CEO incentive alignment.

This study examines the influence of mood ('affect') on corporate philanthropic giving. Drawing on group emotions theory and affect-infused decision theory, we advance the argument that firms allocate greater resources to philanthropy when headquarters-based employees are in a more positive affective state. We also describe three boundary conditions in this relationship-executives' embeddedness in the firm, executives' latitude to engage in philanthropic giving, and the firm's track record of corporate social irresponsibility. We test our arguments using a longitudinal dataset of philanthropic giving by U.S. firms. Our study contributes to the literature by shedding light on the role of affect in shaping the decision to allocate resources to corporate philanthropy.

This study explores the relationship between corporate social responsibility ( CSR ), financial misstatements and SEC enforcement actions. We find that firms with higher CSR are less likely to receive SEC enforcement actions for financial misstatements. Drawing on insights from stakeholder theory and the reputational literature, we identify two channels underpinning this relationship: (i) firms with higher CSR are less likely to engage in financial misstatements and (ii) the reputational effect of CSR reduces the likelihood of SEC enforcement actions. We find empirical evidence consistent with both channels.

We explore the impact of religious norms on the relationship between corporate social responsibility (CSR) and firm value. Employing a longitudinal sample of publicly listed U.S. firms, we document that strong local religious norms in the area surrounding firms’ headquarters attenuate the positive effect of CSR on firm value. In cross-sectional analyses, we find that the attenuating effect of strong local religious norms is amplified for firms with heightened litigation risk. We also find that the positive effect of CSR on firm value is amplified for firms headquartered in areas where prevailing religious norms are more tolerant of risk-taking. Further, we find that strong religious norms attenuated the positive association between CSR and abnormal stock returns during the 2008–2009 financial crisis. Taken together, our findings cast local religious norms as an important contextual factor that influences the insurance value of CSR—the protection that CSR affords against stakeholder reactions to negative events.

Prior studies in business ethics highlight the role of philanthropy in shaping stakeholders’ perceptions of a firm’s underlying moral tendencies and values (“character”). Scholars argue that philanthropy-based character inferences influence whether and how stakeholders engage with firms. We extend this line of reasoning to examine the impact of philanthropy on firms’ contracting costs in the capital market. We posit that philanthropy-based character inferences reduce investors’ agency concerns, thereby reducing firms’ cost of capital. We also posit that the strength of the philanthropy–cost of capital relationship is contingent on uncertainty regarding a firm’s character, visibility of a firm, and prevailing philanthropic norms. We test and find support for our arguments in a longitudinal study of philanthropy and the cost of capital. Our findings have implications for business ethics research on corporate philanthropy and corporate social performance and for organizational research on social judgment.

We advance behavioral agency theory by exploring the influence of mood or "affect" on the behavioral consequences of stock option incentives. Drawing on insights from psychology and behavioral decision theory, we describe how affect influences agent risk behavior. We argue that positive affect amplifies both the extent to which executives reduce strategic risk taking in response to risk bearing and engage in strategic risk taking in response to incentives for further enrichment. Building again on the psychology literature, we describe how CEO accountability attenuates the influence of affect on CEO risk behavior in response to stock option incentives. We test our expectations in a longitudinal data set of CEO stock option incentives, affect, and strategic risk taking by U.S. firms.

We advance behavioral agency theory by exploring the influence of mood or “affect” on the behavioral consequences of equity incentives. Drawing on insights from psychology and behavioral decision theory, we describe how affect influences agent risk behavior. We argue that positive affect amplifies both the extent to which executives reduce strategic risk taking in response to risk bearing and engage in strategic risk taking in response to incentives for further enrichment. Building again on the psychology literature, we describe how CEO accountability attenuates the influence of affect on CEO risk behavior in response to equity incentives. We test our expectations in a longitudinal dataset of CEO equity incentives and strategic risk taking by U.S. firms for the period 1994—2013. Affect and CEO Risk Taking 1 “Consideration of the role of an affect heuristic in decision making is probably the most important development in the study of judgment heuristics in the last decades” Kahneman, Nobel Acceptance Speech (2002: 470) Agency theorists have explored the role of equity-based pay in shaping the risk preferences of executives (e.g., Fama, 1980; Hölmstrom, 1979). Drawing on insights from prospect theory (e.g., Kahneman & Tversky, 1979), management scholars have extended classical agency theory’s predictions on the behavioral consequences of equity incentives by examining the role of decision framing (e.g., Beatty and Zajac, 1994; Wiseman and Gómez-Mejía, 1998) and risk perception (Sitkin and Pablo, 1992). The Behavioral Agency Model (BAM) suggests that executives subjectively endow (include in estimations of personal wealth) compensation considered assured, such as the value of options previously granted. Endowed equity wealth is included in executives’ assessment of wealth-at-risk of loss (risk bearing) in the event of failure from risk taking, leading to executives becoming more risk averse (Devers, McNamara, Wiseman and Arrfelt, 2008; Larraza-Kintana, Wiseman, Gómez-Mejía, and Welbourne, 2007). We offer a refinement to BAM’s formulation by describing how CEO mood or “affect” influences the relationship between equity incentives and risk taking. The influence of an individual’s affective state is typically assumed away in both classical agency theory (Jensen and Meckling, 1976) and prospect theory—at least as the latter was originally formulated— (Kahneman and Tversky, 1979). Therefore, it is perhaps unsurprising that the influence of affect on the behavioral consequences of incentives is largely unexplored in the behavioral agency literature. Yet, extensive research in psychology and behavioral decision theory suggests that affect is an important factor in decision making (Johnson and Tversky, 1983; Slovic, Finucane, Peters, and MacGregor, 2002; Raghunathan and Pham, 1999) and in shaping individual risk Affect and CEO Risk Taking 2 preferences (Arkes, Herren, and Isen, 1988; Nygren, Isen, Taylor, and Dulin, 1996). The influence of affect on decision making has been observed in a wide range of business settings (George and Brief, 1996; Staw, Sutton, and Pelled, 1994; Seo, Goldfarb, and Barrett, 2010). Moreover, affect is thought to have greatest influence on decision making in contexts of uncertainty—contexts common in executive decision making. In such settings, affect is more likely to tip the balance towards specific decisions than when outcomes are more predictable (Baron, 2008; Forgas, 1995, 2000). Decision theorists argue that affect influences decision making through two mechanisms: affect maintenance and affect congruence (Isen, 2008; Johnson and Tversky, 1983). Affect maintenance refers to the tendency of individuals in a positive affective state to demonstrate a higher negative utility on losses (Isen, 2008). Behavioral decision theorists attribute this tendency to an individual’s efforts to avoid decisions that threaten a positive mood (Arkes et al., 1988; Epstein, 1994). Affect congruence refers to the tendency of individuals in a positive affective state to make more optimistic assessments of the probability of success from risk taking. This tendency is attributed to individuals taking affect as a heuristic—mental shortcut— in the decision making process (Johnson and Tversky, 1983). In sum, affect impacts on the individual’s estimate of two core components of decision making under risk—utility and probability—albeit in functionally opposite ways: when considering possible losses, affect maintenance increases an individual’s estimate of the negative utility of losses and when considering possible gains, affect congruence increases subjective assessments of the probability 1 We use the term “affect” to refer to a mild affective state or a mood induced by either the environment or specific events (Jones and George, 1998). 2 Knight (1921) defined risk as relating to known probabilities and uncertainty as relating to unknown probabilities. However, uncertainty and risk are often used interchangeably by scholars and practitioners, given known payoffs are rare in business decision making (Bromiley, Miller and Rau, 2001). Affect and CEO Risk Taking 3 of gains. The impact of affect on decision making is frame dependent (Isen and Geva, 1987; Nygren et al., 1996). When potential losses are significant, affect maintenance dominates and individuals in a positive affective state bet less than people in a neutral affective state. However, when there is little to lose, affect congruence dominates leading people in a positive affective state to bet more. We reason that affect maintenance and affect congruence are each likely to influence the relationship between CEO equity incentives and strategic risk taking: affect maintenance by increasing risk aversion and affect congruence by increasing risk seeking behavior. To develop our arguments, we integrate insights from psychology on the role of affect in decision making with arguments from BAM on decision framing and the behavioral consequences of equity incentives. In particular, we draw on the insights that, previously awarded stock options increase CEO risk bearing, as they are endowed in estimates of personal wealth (Wiseman and GómezMejía, 1998), whereas prospective equity wealth (potential wealth gains if risk taking is successful) increases CEO willingness to take risk (Martin, Wiseman, and Gómez-Mejía, 2013). Building on these insights, we describe how affect influences both risk aversion in response to endowed equity wealth and risk seeking in response to prospective equity wealth. To add further texture to our study, we also consider how CEO accountability shapes the impact of affect. The psychology literature suggests that the impact of affect on decision making varies with the extent to which an agent has to account for their actions (Bodenhausen, Kramer, and Suesser, 1994; Lerner, Goldberg, and Tetlock, 1998). Therefore, we examine how CEO accountability influences the interplay between CEO affect, equity incentives, and strategic risk taking. As affect is not directly observable, the psychology and decision theory literatures on the role of affect is largely built on analysis of the relationship between observable stimuli that are Affect and CEO Risk Taking 4 thought to prime effect—such as music or light—and an individual’s subsequent behavior (e.g., Isen and Patrick 1983; Johnson and Tversky, 1983). Within these literatures, scholars make extensive use of laboratory experiments. However, as with upper echelons literature on the relationship between executive cognition and firm outcomes, we are challenged by the practicalities of getting senior executives to participate in laboratory-style tests (Cycyota and Harrison, 2006; Hambrick and Mason 1984). In light of this challenge, management scholars rely on proxies for the CEOs’ psychological state—such as demographic data (e.g., Chatterjee and Hambrick, 2011), media praise, and recent firm performance (Hayward and Hambrick, 1997). A related approach adopted in recent studies is to use real life natural experiments in the form of shocks to executive cognition (e.g., Dahl et al., 2012; Shi, Hoskisson, and Zhang, 2016). Shi for example take the death of an independent director as a primer of CEO reflection and reevaluation of life goals, ultimately impacting on acquisition decisions. Adopting a natural experiment approach, we take weather conditions in the area surrounding firms’ headquarters as an observable, exogenous source of variation in CEO affect. There are several reasons why weather conditions provide an attractive context for exploring the impact of CEO affect on decision making. First, research on the impact of affect on decision making is built primarily on studies of mild incidental affect (e.g., Johnson and Tversky, 1983; Keller, Lipkus, and Rimer, 2002; Townsend and Campbell, 2004)—the kind of affect induced by ambient weather conditions (Leppämäki, Partonen, and Lonnquist, 2002; Schwarz and Clore, 1983). As individuals tend not to attend consciously to background conditions that give rise to mild changes in incidental affect, such stimuli are thought to have a pronounced impact on 3 Scholars commonly distinguish between two forms of affect: integral and incidental. Integral affect arises from the task at hand—for example, job anxiety, and incidental affect arises from factors unrelated to the task at hand—for example, the weather (Altman and Rogoff, 1987) or the performance of sports teams (Arkes et al., 1988). Affect and CEO Risk Taking 5 decision making (Isen, 2008). In contrast, when a person attends to the origin of their affective state, the influence of affect on decision making can become muted (Schwartz and Clore, 1983). Second, there is abundant evidence that the affect induced by ambient weather influences decision making (Cunningham, 1979; Howarth, and Hoffman, 1984; Larrick, Timmerman, Carrton, and Abrevaya, 2011). Of particular relevance in our setting, prior research points to th

Prior studies suggest that firms headquartered in areas with strong religious social norms have higher ethical standards. In this study, we examine whether the ethical standards associated with local religious norms influence the M&A announcement returns. We document that the M&A announcement returns of acquirer firms increase with the strength of religious social norms in the area surrounding firms’ headquarters. We also document that the relationship is attenuated when acquirer firms have strong corporate social responsibility credentials, is amplified when public trust that firms act in the best interest of stakeholders suffers a negative shock and when the M&A deal has greater economic significance for the acquirer, and manifests predominantly in the lower tail of the distribution of M&A returns. Our findings are consistent with investor assessments of firms’ ethical standards driving the relationship between local religious social norms and M&A announcement returns. We find no evidence for the competing explanation—that investor assessments of firms’ risk preferences drive the documented relationship.

In a study of life science firms, we find that, in accordance with predictions drawn from agency theory and behavioral agency theory, CEO stock ownership is negatively associated with licensing while CEO stock options are positively associated with licensing. Furthermore, by combining theoretical insights from the capabilities literature with both agency theory and behavioral agency theory, we predict that a key measure of capabilities in the licensing context—a firm's alliance experience—significantly influences the ways in which CEO equity incentives impact licensing. More specifically, we find that, in accordance with our theoretical predictions, alliance experience positively (negatively) moderates the relationship between CEO stock ownership (CEO stock options) and licensing. Our study contributes to the wider literature on the determinants of licensing by examining whether licensing is sensitive to CEO equity incentives. We also extend the capabilities literature on licensing by examining the contrasting influences of a firm's alliance experience on the relationship between CEO equity incentives and licensing. Our findings also inform behavioral agency-based research on the effects of equity incentives by highlighting the usefulness of a capabilities perspective in augmenting our understanding of the behavioral role of CEO equity incentives.

Drawing on arguments from institutional theory, this study examines how social normsspecifically, local religious social normsaffect the motivational impact of equity-based incentives. We test our model using longitudinal data on local religious norms, CEO equity incentives, and firm value. Consistent with our theoretical predictions, we find that local religious social norms attenuate the impact of CEO option incentives upon firm value. Furthermore, we find that the attenuating impact of local religious social norms increases with managerial discretion. These findings provide valuable insight for human resource professionals aiming to design compensation contracts for employees that are aligned with firm goals. Our findings also contribute to research on the motivational effect of equity incentives by demonstrating the importance of considering the social context in which executives are embedded.

In recent years, more companies have begun using non-financial measures as leading indicators of future financial performance. Corporate boards have extended executive compensation schemes to embrace measures for, among other things, customer satisfaction, employee engagement, and openness to innovation. Inclusion of such measures is thought to encourage behaviors that some say have the power to increase the company's long-term value rather than simply maximizing short-term financial performance. Although the notion of using nonfinancial metrics such as customer satisfaction to shape executive behavior is attractive to managers, the extent to which including these measures in compensation schemes actually improves company value and financial performance is a matter of debate. When it comes to nonfinancial metrics, there's no such thing as one size fits all. By utilizing the power inherent in our measures of lead indicator strength, companies can avoid the pitfalls and cost of incentivizing the wrong measures.