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Abstract:
Firms with busy boards, those in which a majority of outside directors hold three or more directorships, are associated with weak corporate governance. These firms exhibit lower market-to-book ratios, weaker profitability, and lower sensitivity of CEO turnover to firm performance. Independent but busy boards display CEO turnover-performance sensitivities indistinguishable from those of inside-dominated boards. Departures of busy outside directors generate positive abnormal returns. When directors become busy as a result of acquiring an additional directorship, other companies in which they hold board seats experience negative abnormal returns. Busy outside directors are more likely to depart boards following poor performance.

Directorships, Board of directors, Corporate governance, Firm performance

Abstract:
We present evidence that busy outside directors are associated with weak corporate governance based on a sample of U.S. industrial firms from 1989 to 1995. When a majority of outside directors serve on three or more boards, firms exhibit lower market-to-book ratios as well as weaker operating profitability. Appointments of busy outside directors appear unrelated to company performance, but such directors are more likely to depart boards following poor firm performance. When a majority of outside directors are busy, the sensitivity of CEO turnover to performance is significantly lower than when a majority of outside directors are not busy. Investors applaud departures of busy outside directors, and this effect is more pronounced for firms where the departure results in the majority of the remaining outside directors being not busy. When directors become busy as a result of acquiring an additional board seat, firms where they serve as directors experience negative abnormal returns.

Directorships, Board of directors, Corporate governance, Firm performance

Abstract:
The reciprocal interlocking of chief executive officers (CEOs) is a non-trivial phenomenon of the composition of boards of directors and of corporate governance: among large companies in 1991, about one company in seven was part of a relationship whereby the CEO of one company sat on a second company's board and the second company's CEO sat on the first company's board. We are aware of no previous efforts to explain these reciprocal relationships. We hypothesize that reciprocal CEO interlocks are (a) more likely when a board has more outside directorships, (b) less likely when a CEO has more of his total annual compensation paid in the form of stock options, (c) less likely when a company's board is more active and holds more meetings, (d) less likely when a CEO has a larger ownership share of his company, and (e) more likely when there are more CEOs from other companies as outside directors on a CEO's board. Using a sizable sample of large companies in 1991, we employ simple probit and step probit models to test these hypotheses, with the use of control variables that encompass other company, board, and CEO characteristics. These multivariate analyses support our first three conjectures but do not support the remaining two.

Since there is considerable academic and policy debate concerning board composition and the effectiveness of interlocking directorships in general, investigations focusing on reciprocal CEO interlocks, which link the highest ranked executives of two different firms, represent a significant contribution to the knowledge base in this field.

Interlocking directorates, CEOs, Board of directors, Corporate governance; Stock options

Abstract:
In this paper we show that when bidders are in the S&P 500 Index, risk arbitrage portfolio returns are 85 percent larger than when they are not. We also show that acquisitions by S&P 500 buyers are more likely to be completed, and take less time to complete, than are deals by different buyers. These results indicate that risk arbitrage returns can be extended by strategies involving S&P 500 bidders. In addition, we find share price runups followed by price reversals on all buyer types when stock, and not cash, is used as currency for the acquisition. This phenomenon occurs around merger completion, which is a non-information day. Thus, our finding documents that the buyers' short-run demand curve exhibits inelastic behavior, and is evidence in support for Scholes' (1972) price-pressure hypothesis.

Risk arbitrage, S&P 500 Index, Price Pressure Hypothesis

Abstract:
We examine the characteristics of firms that adopt stock-option plans for outside directors using a sample of 2,088 firm-year observations of Fortune 1000 firms from 1997-1999. Using fixed-effects models that account for self-selectivity bias, we find that firms with outside director option plans have significantly higher market to book ratios and profitability metrics. Adoptions of these option plans are also associated with significantly positive cumulative abnormal stock returns (CARs) as well as with favorable revisions in analysts' earnings forecasts. In addition, announcements of outside director appointments are related with CARs close to zero for firms with option plans, but with significantly negative CARs for firms without option plans. We conclude that stock option plans for outside directors help align the incentives of outside directors and shareholders, thereby improving firm value.

Compensation, board of directors, incentives, stock options, financial performance, outside directors

Abstract:
We investigate the reputational impact of financial fraud for outside directors based on a sample of firms facing shareholder class action lawsuits. Following a financial fraud lawsuit, outside directors do not face abnormal turnover on the board of the sued firm but experience a significant decline in other board seats held. This decline in other directorships is greater for more severe allegations of fraud and when the outside director bears greater responsibility for monitoring fraud. Interlocked firms that share directors with the sued firm exhibit valuation declines at the lawsuit filing. Fraud-affiliated directors are more likely to lose directorships at firms with stronger corporate governance and their departure is associated with valuation increases for these firms.

Director reputation, Financial fraud, Interlocking directorships, Class action lawsuits

Abstract:
I analyze 1,493 first-time director appointments to the boards of Fortune 1000 firms during 1997-1999, to investigate whether certain outside directors are better than others. I find that investor reactions to director appointments are significantly higher when appointees are CEOs of other firms than when they are not. I also find that CEOs of other companies are more likely to become outside directors in organizations with considerable growth opportunities. Because for these firms a large portion of their value hinges upon realizing their growth potential, I conclude that CEOs of other firms are sought in order to enhance firm value.

Outside directors, event-study, Fortune 1000, growth opportunities

Abstract:
We explore whether the motivation for CEO deal-making activities is related more to expected compensation increases or signals of CEO quality. We analyze firms executing joint ventures, strategic alliances, seasoned equity offerings, and spin-offs and find that total CEO compensation increases, on average, from these activities, even when the deals are not expected to improve firm value or when monitoring appears to be weak, as proxied by busy and/or hand-picked boards. Our results also indicate that deal-making CEOs are less likely to be fired for poor performance. Overall, the results support the CEO activity hypothesis over the CEO quality signaling hypothesis.

Deals, Executive Compensation, Corporate Governance

Abstract:
Unscheduled stock options to target CEOs are a non-trivial phenomenon during private merger negotiations. In 920 acquisition bids during 1999-2007, over 13% of targets issue these grants. We examine whether these unscheduled options benefit target CEOs receiving them and/or shareholders in the firms granting them. We show that target CEOs obtaining these options are more likely to complete acquisitions and to negotiate lower than expected offers. Consequently, on average, target value drops by 62 dollars for every dollar CEOs receive from unscheduled options. These results have public policy implications related to executive compensation, corporate governance, and securities laws concerning insider trading.

Merger negotiations, Option timing, Sarbanes-Oxley

Abstract:
While the previous literature addresses the existence of golden parachutes, it does not consider their relative importance to CEOs. This importance is critical because it correlates with the moral hazard problem facing the firm’s top decision maker. When firms become acquisition targets, their CEO has important influence over the deal’s outcome. In these cases, an incorrectly sized parachute relative to other executive compensation could produce either a ‘rush to sale’ or ‘unyielding resistance’ despite the acquisition price offered. Either of these attitudes might harm target shareholders. We examine 851 acquisition offers from 1999-2007 to investigate whether golden parachutes benefit the executives receiving them, the shareholders in the firms that grant them, or both. Although we do find evidence of incentive alignment and ex-post settling up, our primary results are consistent with rent extraction.

Golden Parachutes, Acquisitions, Moral Hazard

Abstract:
The recent wave of revelations involving corporate governance problems has created significant interest in the relationships between chief executive officers (CEOs) and their boards of directors. In this paper we focus on one important but previously uninvestigated characteristic of boards: the tendency of many boards to have two (or more) directors who are also members of another company's board. We define this relationship as a mutual interlock. We explore the consequences of this phenomenon for CEO compensation and CEO turnover.

Our empirical analyses - conducted for a sample of 366 large companies, in which 87% of the companies have at least one mutual interlock - show that CEO compensation tends to be higher and CEO turnover tends to be lower when the CEO's board has one or more pairs of board members who are mutually interlocked with another company's board. There are two possible interpretations of these results. One is that the mutual interlocks are an indication of and a contributor to CEO entrenchment, and the higher compensation and lower turnover follow from this entrenchment. The other is that the mutual interlocks are an indication of the strengthening of an important and valuable strategic alliance for the company, and the higher CEO compensation and lower turnover are the CEO's reward for arranging the alliance. We believe that the first interpretation is more accurate, for the reasons discussed in the paper.

Interlocks, CEO Compensation, CEO Turnover