Finance - Accounting Seminars

Members of the board of directors (BOD) are expected to play an active role in shaping the firm’s strategic direction through their influence on the decision-making processes. However, the question remains whether this objective can be realized through the effective engagement of all board members in the decision-making. To answer this question, we employ a game-theoretic analysis that explores all possible equilibrium dominant-coalitions that emerge among BOD members and the associated distribution of power to influence decision-making. We show that, under plausible governance design settings, it is impossible to achieve an effective influence of all directors on the decision-making process. Specifically, under CEO duality, while all board members participate in the emerged dominant coalition, non-CEO directors have negligible power to influence decision-making. Furthermore, under CEO/Chairperson role separation, while the extreme power of the CEO is somewhat mitigated by the Chairperson, the power to influence decision-making of all non-CEO/Chairperson directors is even further diminished. Moreover, we show that, when the CEO and Chairperson are hypothetically assumed to have no peculiar role-power in the firm, a minimal majority dominant coalition is formed, where directors outside this coalition have null power over decision-making. Our analysis thus delineates the impossibility of realizing an equilibrium in which all BOD members effectively influence the decision-making process.

We examine the effectiveness of both implicit and explicit contracting in linking executive compensation to environmental and social targets (“ES Pay”). Consistent with predictions from contract theory, firms with explicit ES Pay schemes demonstrate better ES performance for targets that can be precisely measured, such as emissions. By contrast, implicit ES Pay schemes are ineffective for targets that are easily measurable. However, they are effective and can even outperform explicit schemes for targets with less precise performance measures, such as community engagement. These findings highlight the crucial role that contractual structure plays in determining the effectiveness of ES Pay.

During 2005-2007, the SEC conducted a randomized trial in which it removed short-sale restrictions from one-third of the Russell 3000 firms. Early studies found no effect of removing the restrictions on short interest, share returns, volatility, or price efficiency. In prior work, we confirm the lack of evidence for a natural causal channel that could explain these results (Black et al., 2024). Yet over 80 studies report evidence for a wide range of indirect effects on firms from the experiment. Given the lack of a causal channel, many of these results are likely to be false positives. We confirm that suspicion by closely reexamining the principal results from 10 of these studies using a simple specification with firm and year fixed effects. None of the results survive. We then examine best-match specifications that closely follow the sample selection, methodology and specification reported in the respective papers. Again, we mostly obtain null results. The gaps between reported and best match results reflects reported coefficients being much larger in magnitude, reported standard errors being much smaller than best-match, or both. The large gaps between best-match and reported results implies that the study authors made choices that are not evident from the explanation of their research design, which strongly affected the reported results. Our results suggest that researchers retain extensive discretion over the sample and model specification, even (as here) for a true randomized experiment. The choices in these studies produced statistically significant results when other reasonable choices would not. We draw lessons from our analysis for empirical practice and for ways in which researchers can find false positives results.

Evidence indicates Institutional Investor's (I/I) star analysts are more influential than non-stars, but the reason is unclear. We investigate two hypotheses: influence stems from status or superior quality. Our findings support the quality hypothesis, showing no evidence that status affects influence. Analysts making influential recommendations are likelier to become stars. We introduce “blunder” as negative performance measure, demonstrating how voters in I/I’s ranking can balance their interests with I/I's by adjusting weights on influential recommendations and blunders. This system encourages reliability in ordinary analysts and bold research from stars. Additionally, we observe seasonal voting pattern consistent with seasonal analyst behavior.