The SEC intended CEO-employee pay ratio disclosures to provide transparency into firm compensation policies. However, these ratios are difficult to interpret because identifying the median employee depends on the firm's "consistently applied compensation measure" (CACM). We group CACMs into a simple, practitioner-friendly framework that ranges from basic salary to complex total-compensation measures. Because more complex CACMs tend to produce lower pay ratios, we show how this framework can help interpret disclosed ratios. We find that stock market investors respond negatively to low ratios constructed using complex CACMs. Firms facing greater regulatory, labor, or social pressure to disclose lower pay ratios are more likely to use complex CACMs. Our results suggest that pay ratios are most informative when interpreted jointly with the estimation method.

We examine how firms estimate CEO-employee pay ratios in response to the CEO pay ratio rule, the first mandated pay inequality disclosure for U.S. firms. Our findings reveal that firms disclose lower pay ratios when they use more complex methods to identify the median employee. The relation between the estimation method and the disclosed pay ratio is stronger for firms headquartered in states with a greater societal aversion to income inequality and is weaker when CEO pay in the prior year is lower. Firms' estimation choices do not merely represent selection bias or potentially omitted variables such as firm size, industry, compensation design complexity, or workforce composition - including the presence of foreign, temporary, seasonal, or highly paid employees. Although firms that use more complex methods to identify the median employee disclose lower pay ratios, we find no evidence of real changes in pay inequality among these firms. Our results suggest that some firms use estimation discretion to appear to conform to stakeholders' preferences instead of taking real actions. These practices call into question the informativeness of CEO pay ratio disclosures, highlighting a potential cost of granting discretion in mandatory ESG disclosures.

Ethics are multifaceted; there is no universal standard to judge different business decisions or even the same decision made by different firms. When different aspects of ethics conflict, what guidance do firms follow to deal with ethical dilemmas? We use the context of firms’ decisions to leave or stay in Russia after Russia invaded Ukraine to shed light on this question. Specifically, we rely on Maslow’s hierarchy of needs (Maslow, 1943) to hypothesize that the concerns about essential human needs (EHN) for survival dominate other ethical considerations. The contrast between firms serving essential human needs and non-EHN firms shows that EHN firms are 45% less likely to leave Russia. Unlike non-EHN firms, shareholders do not respond negatively to their stay decisions. The positive market reactions are concentrated in firms with block ownership by blockholders with higher social scores, and blockholders with higher social scores are more likely to increase their holdings in staying EHN firms. Combined, these findings indicate that aligned ethical values between firms and investors serve as a mechanism to facilitate corporate decisions and shareholder reactions. Our results remain robust after controlling for demand inelasticity, tradability, operation scope in Russia, and other economic factors, suggesting that ethics plays a vital role in business decisions.

We use granular and transparent data from the NBA to examine industry tournament incentives and outcomes when agents carry out multiple activities. Both agent (player) and principal (team) performance and agent aggressiveness relate positively to the tournament prize of higher pay associated with greater playing time. These results are driven by outcomes related to the primary roles of specific positions. Better performance stems from aggressiveness and risk taking. We find no evidence that tournament incentives encourage agents to improve skills. Overall, our analysis informs on the relation between outcomes and tournament incentives when agents can exert effort across multiple activities.

We use a novel dataset to follow the evolution of family ownership, firm value and firm policies for up to 25 years post initial public offering (IPO). Firm value, measured by Tobin's Q, increases as family ownership decreases over time. Firms with higher family ownership invest less in research and development (R&D) and have greater R&D sensitivity to internal cash flow. A path analysis reveals the lower R&D investment as a mechanism through which firm value relates negatively to family ownership. Firms with higher family ownership rely more on debt financing, and firms with higher levels of family ownership at the IPO are less likely to conduct seasoned equity offerings. Altogether, the valuation, investment and financing patterns are consistent with the premise that firms with higher levels of family ownership are unwilling to issue equity and dilute family ownership. A reluctance to issue equity creates financing constraints that limit the firms’ abilities to fully exploit their investment opportunities and contributes to lower firm value among firms with more concentrated family ownership.

Some firms combine CEO and board chair positions after observing CEO performance. We propose that this approach, known as "passing the baton" (PTB), enables the board to learn about the ability and suitability of the CEO before awarding additional title of board chair. Consistent with learning, idiosyncratic stock-return volatility declines following the CEO-chair combination. The market responds positively (Cumulative Abnormal Return (CAR) = 1.31%) to early promotions, suggesting that early promotions reveal directors' private information about CEO quality. Compared to a matched benchmark, we observe no decline in firm's accounting performance in subsequent years. Although match-adjusted stock returns begin to decline 2 years after combination in homogeneous industries, there is no stock-return decline in heterogeneous industries where learning is more important. The evidence reveals the potential for entrenchment over time, but we find no evidence to suggest that CEO-chair combinations in PTB firms result from agency problems. Our results underscore the importance of balancing both learning and agency problems in corporate governance.

We examine how incentive compensation for nonfamily executives in family firms differs from incentive compensation for executives in nonfamily firms. Nonfamily executives in family firms receive significantly less performance-based pay and equity-based pay. Family monitoring, risk aversion, and a reluctance to dilute family ownership all contribute to the pay differences. Although incentive pay and total pay are lower in family firms, nonfamily executives receive safer pay and enjoy greater job stability. An analysis of executives’ moves across firms suggests that ownership structure, not executives’ preferences, is more likely the driver of pay differences between family and nonfamily firms.

We show that firms report lower CEO-employee pay ratios when they use complex methods to identify the median employee, whose total pay is the denominator in the ratio. Firms choose complex methods when their headquarter states have stronger prosocial attitudes toward income equality and when CEO compensation is higher. Neither industry nor compensation design differences explain this choice. We find no evidence that firms make pay changes to reduce the pay differential between CEOs and general employees. Together, our results suggest that some firms strategically estimate pay ratios in response to social pressure, which alters the efficacy of compensation disclosure.

We use director elections to analyze outsider shareholder perspectives of agency problems in family firms. Compared to nonfamily firms, outsider shareholders in family firms provide weaker support for director slates proposed by the firms' nominating committees. Outside shareholder support decreases when families receive private benefits of control, when family members serve in leadership roles, or when family members serve on board monitoring committees. We do not find similar results for other actively engaged concentrated owners. Our results provide new insights into outsider shareholders' satisfaction with family control in publicly held firms and their perceptions of the family-outsider agency conflicts.

Recent literature has shown that gender diversity in the boardroom seems to influence key monitoring decisions of boards. In this paper, we examine whether the observed relation between gender diversity and board decisions is due to a confounding factor, namely, directors’ geographic distance from headquarters. Using data on residential addresses for over 4,000 directors of S&P 1500 firms, we document that female directors cluster in large metropolitan areas and tend to live much farther away from headquarters compared to their male counterparts. We also reexamine prior findings in the literature on how boardroom gender diversity affects key board decisions. We use data on direct airline flights between U.S. locations to carry out an instrumental variables approach that exploits plausibly exogenous variation in both gender diversity and geographic distance. The results show that the effects of boardroom gender diversity on CEO compensation and CEO dismissal decisions found in the prior literature largely disappear when we account for geographic distance. Overall, our results support the view that gender-diverse boards are “tougher monitors” not because of gender differences per se, but rather because they are more geographically remote from headquarters and hence more reliant on hard information such as stock prices. The findings thus suggest that board gender policies, such as quotas, could have unintended consequences for some firms.

We examine how the director independence mandates of the Sarbanes-Oxley Act (SOX) and related reforms affected board geography and the quality of financial reporting. Using 1998-2006 data on the residential addresses of individual directors, we document that the geographic proximity to headquarters of audit committees and other monitoring committees declined upon implementation of the mandates. The decrease in proximity was especially large for those firms that were both SOX noncompliant and supply constrained in local director labor markets at the time the reforms were enacted. Moreover, firms with larger SOX-related losses of director proximity experienced significantly greater post-SOX declines in earnings quality. Our findings therefore suggest that, for some firms, the director independence mandates had unintended consequences for financial reporting quality.

We use over 22,000 firm-year observations from 1995-2010 to investigate whether combining roles of CEO and board-chair causes poor performance. Our research design allows us to reconcile disagreement in the literature about whether CEO-chair duality impacts shareholder value. CEOs are awarded the additional title of board-chair following superior firm performance. A naive analysis indicates a drop in firm performance following CEO promotion to chair. However, a research design that controls for the propensity to combine roles and performance mean-reversion reveals no post-appointment underperformance. Consistent with a learning explanation, investors react positively to combining both roles early in CEO’s tenure, but exhibit no reaction to combinations later in CEO’s tenure. Increases in post-combination compensation are unrelated to proxies for managerial power. Overall, there is no evidence that combining the CEO-chair positions hurts shareholder interests.

Using data on over 4,000 individual residential addresses, we find that geographic distance between directors and corporate headquarters is related to information acquisition and board decisions. The fraction of a board's unaffiliated directors who live near headquarters is higher when information-gathering needs are greater. When the fraction of unaffiliated directors living near headquarters is lower, nonroutine chief executive officer (CEO) turnover is more sensitive to stock performance. Also, the level, intensity, and sensitivity of CEO equity-based pay increase with board distance. Overall, our results suggest that geographic location is an important dimension of board structure that influences directors' costs of gathering information.

Adams and Ferreira (2009) demonstrate the effects of gender diversity in corporate governance. We extend their research by accounting for a potentially critical omitted factor: directors’ geographic distance from headquarters. Using data on the residential addresses for over 4,000 directors of S&P 1500 firms during 2004-2007, we reexamine the finding in the prior literature that boards with greater gender diversity rely more heavily on stock price performance to monitor top management. Our tests reveal that, once we account for geographic distance, boardroom gender diversity is no longer associated with the stock-price sensitivity of CEO dismissals and CEO compensation. Our evidence calls into question the view that female directors are inherently “tougher” monitors.

AbstractWe examine the relation between mutual fund votes on shareholder executive compensation proposals and pension-related business ties between fund families and the firms. In unconditional tests, we find that fund families support management when they have pension ties to the firm. We find no relation when we stratify by fund family in conditional tests, which suggests that fund families with pension ties vote with management at both client and nonclient firms. We confirm this result in an analysis of nonclient firms. Overall, our results suggest that pension-related business ties influence fund families to vote with management at all firms.

Using data on the qualifications and residential locations of directors, we study boards “in practice.” We find that directors’ qualifications and distance from headquarters are related to factors such as the proximity of headquarters to a large city, firm size, CEO power, and the board’s need for tacit information. Directors’ proximity to headquarters reflects a trade-off between better acquisition of tacit information and greater management influence. The stock market responds positively to the appointment of proximate directors, but only when CEO tenure is short. The market reaction to forced CEO turnover is negative for boards with proximate directors and long-tenured CEOs. Neither the appointment of a remote director nor the dismissal of a CEO by a remote board leads to abnormal market reactions on average. These appointment and turnover results suggest that distant directors act as “market proxies,” while proximate directors add a credible “two-sided” element to governance. We also observe that when a CEO is highly “legitimate,” such as in a family firm, she faces less stringent incentives from incentive pay and a reduced threat of dismissal. In sum, our empirical findings support Williamson’s (2008) arguments that stress the importance of understanding credible contracting between boards and management and that raise concerns about public policy aimed at achieving “boards in principle.”

We examine the relation between CEO employment history and the CEO-firm match. Much of the empirical evidence on the CEO-firm match focuses on the choice of insider or outsider when there is CEO turnover. However, outside CEOs differ in their work experience, so do inside CEOs. CEOs that have worked for multiple employers (varied-experience CEOs) have experience in formulating and implementing different approaches in different organizations. If the status quo is not working, a CEO with varied experience is better equipped to try different strategies until they find one that works. Thus, one would expect that firms in need of change to prefer varied-experience CEOs.

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Using a sample of over 99,000 firm year observations encompassing >13,800 firms from 1978 to 2007, we analyze how changes in labor market conditions influence the disciplining effect of debt on employee productivity. We document that better (worse) outside employment opportunities weaken (strengthen) the disciplinary effect of debt on employee output. The influence of outside employment options on leverage-output relation is robust to various controls for endogeneity, including using instrumental variables, a quasi-natural experiment, both firm and industry-level analysis, alternative model specifications, and controls for employees' work conditions and changes in work efficiencies. Altogether, our findings highlight the importance of labor market conditions on the efficacy of corporate financial policies and our understanding of how these policies influence economic outcomes.