Using data from China’s public debt markets, we study the value of corporate reputation and how it interacts with legal and cultural forces to assure accountability. Exploring lawsuits that change corporate reputation, we find that firms involved in lawsuits experience a decrease in bond values and a tightening of borrowing terms. Using the heterogeneities in legal and social capital environments across Chinese provinces, we find the effects are more pronounced for private firms, firms headquartered in provinces with low legal protections, and firms headquartered in provinces with high social capital. The results show that lawsuits that allege misconduct are associated with reputational penalties and that such penalties serve as substitutes for legal protections and as complements to cultural forces to provide ex post accountability and motivate ex ante trust.

We examine the impact of the COVID-19 pandemic on the credit risk of companies around the world. We find that increased infection rates affect firms more adversely as reflected by the wider increase in their credit default swap (CDS) spreads if they are larger, more leveraged, closer to default, have worse governance and more limited stakeholder engagement, and operate in more highly exposed industries. We observe that country-level determinants such as GDP, political stability, foreign direct investment, and commitment to crisis management (income support, health and lockdown policies) also affect the sensitivity of CDS spreads to COVID-19 infection rates. A negative amplification effect exists for firms with high default probability in countries with fiscal constraints. A direct comparison between global CDS and stock markets reveals that the CDS market prices in a distinct set of corporate traits and government policies in pandemic times.

We empirically investigate whether firms doing business in regions characterized as having high social trust receive preferential treatment on loan contractual terms by foreign banks. Tracing cross-border syndicated lending activities in China, we document that firms located in provinces with higher social trust scores obtain significantly low costs of bank loans and experience less stringent collateral requirement. To address the potential endogeneity issues, we adopt an instrumental variable approach and a two-sided matching model, and report consistent results. We also estimate a system of three equations through three-stage-least square estimator to accommodate the joint determination of price and non-price terms in loan contracts. In addition, we find that the effect of social trust on cost of bank loans is more prominent for firms located in provinces with relatively less developed formal institutions.

Purpose: The aim of the paper is to investigate the associations between hedge fund activism and corporate internal control weaknesses.

Design/methodology/approach: In this paper, the authors identify hedge fund activism events using 13D filings and news search. After matching with internal control related information from Audit Analytics, the authors utilize ordinary least square (OLS) and propensity score matching (PSM) to analyze the data.

Findings: The authors find that after hedge fund activism, target firms report additional internal control weaknesses, and these identified internal control weaknesses are remediated in subsequent years, leading to better financial-reporting quality.

Originality/value: The findings indicate that both managers and activists have incentives to develop a stronger internal control environment after targeting.

Despite widespread criticism, credit ratings continue to be commissioned and paid for by the firms they ought to scrutinize, raising concerns about the reliability of these issuer-paid ratings. We use an experiment to evaluate whether financial reputation concerns can effectively alleviate rating inflation and find that they are only partially sufficient to discipline rating agencies. However, introducing accountability mechanisms into the rating process effectively reduces rating inflation and almost extinguishes it in our model. Our results emphasize that financial reputation and accountability are important but different factors, which combined can effectively alleviate rating inflation and therefore provide a powerful mechanism of control over rating agencies.

Equity pay has been the primary component of managerial compensation packages at US public firms since the early 1990s. Using a comprehensive sample of top executives from 1992-2020, we estimate to what extent they trade firm equity held in their portfolios to neutralize increments in ownership due to annual equity pay. Executives accommodate ownership increases linked to options awards. Conversely, increases in stock holdings linked to option exercises and restricted stock grants are largely neutralized through comparable sales of unrestricted shares. Variation in stock trading responses across executives hardly appears to respond to diversification motives. From a theoretical standpoint, these results challenge (i) the common, generally implicit assumption that managers cannot undo their incentive packages, (ii) the standard modeling practice of treating different equity pay items homogeneously, and (iii) the often taken for granted crucial role of diversification motives in managers’ portfolio choices.

Mutual fund families increasingly hold bonds and stocks from the same firm. We study the implications of such dual holdings for corporate governance and firm decision-making. We present evidence that dual ownership allows financially distressed firms to increase investments and to refinance by issuing bonds with lower yields and fewer restrictive covenants. As such, dual ownership reduces shareholder-creditor conflicts, especially when families encourage cooperation among their managers. Overall, our results suggest that mutual fund families internalize the shareholder-creditor agency conflicts of their portfolio companies, highlighting the positive governance externalities of intra-family cooperation.

Workers at larger firms outperform on average. For example, equity analysts working for more reputable brokerage firms produce more accurate earnings forecasts. Analysts employed by the highest ranked brokerages are about 6% more accurate than those employed by the lowest ranked brokerages, which is equivalent to an advantage of 17.5 years of more experience. This outperformance is driven by two significant effects: more reputable firms provide more resources that improve analysts' forecasting ability (influence), while more reputable firms also attract more talented candidates (sorting). We estimate a two-sided matching model to disentangle these two effects. We find that the direct influence effect accounts for 73% of the total impact while the sorting effect accounts for the remaining 27%.

We examine the relationship between protracted CEO successions and stock returns. In protracted successions, an incumbent CEO announces his or her resignation without a known successor, so the incumbent CEO becomes a “lame duck.” We find that 31% of CEO successions from 2005 to 2014 in the S&P 1500 are protracted, during which the incumbent CEO is a lame duck for an average period of about 6 months. During the reign of lame duck CEOs, firms generate an annual four-factor alpha of 11% and exhibit significant positive earnings surprises. Investors’ under-reaction to no news on new CEO information and underestimation of the positive effects of the tournament among the CEO candidates drive our results.

Higher incentive pay is associated with better firm performance. I introduce a model of CEO-firm matching to disentangle the two confounding effects that drive this result. On one hand, higher incentive pay directly induces more effort; on the other hand, higher incentive pay indirectly attracts more talented CEOs. I find both effects are essential to explain the result, with the selection effect accounting for 12.7% of the total effect. The relative importance of the selection effect is the largest in industries with high talent mobility and in more recent years.