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Table of Contents

Trust, But Verify: MD&A Language and the Role of Trust in Corporate Culture

Robert Audi, University of Notre Dame - Mendoza College of Business
Tim Loughran, University of Notre Dame
Bill McDonald, University of Notre Dame - Mendoza College of Business - Department of Finance

Overconfident Managers and Internal Controls

Sheng�Syan Chen, National Taiwan University - Department of Finance
Shu-Miao Lai, Kainan University - Department of Accounting
Chih-Liang Liu, Xiamen University
Sarah E. McVay, University of Washington

Projecting Different Identities: A Longitudinal Study of the 'Whipsaw' Effects of Changing Leadership Discourse About the Triple Bottom Line

Julie Bayle-Cordier, Catholic University of Lille - Institut d'Économie Scientifique et de Gestion (IESEG)
Philip Mirvis, Boston College
Bertrand Moingeon, HEC Paris (Groupe HEC) - Strategy & Business Policy

How CEO Hubris Affects Corporate Social (Ir)responsibility

Yi Tang, Hong Kong Polytechnic University
Cuili Qian, City University of Hong Kong
Guoli Chen, INSEAD - Singapore
Rui Shen, Nanyang Technological University (NTU) - Division of Accounting

Behavioral Differences between Founder CEOs and Professional CEOs: The Role of Overconfidence

Joon Mahn Lee, Purdue University - Krannert School of Management
Byoung-Hyoun Hwang, Cornell University - Dyson School of Applied Economics and Management, Korea University - Department of Finance
Hailiang Chen, City University of Hong Kong - Department of Information Systems


CORPORATE GOVERNANCE & SOCIOLOGY OR PSYCHOLOGY eJOURNAL
Sponsored by IRRC Institute

"Trust, But Verify: MD&A Language and the Role of Trust in Corporate Culture" Free Download

ROBERT AUDI, University of Notre Dame - Mendoza College of Business
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TIM LOUGHRAN, University of Notre Dame
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BILL MCDONALD, University of Notre Dame - Mendoza College of Business - Department of Finance
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Trust is ethically important and essential for business, but difficult to measure. Several papers hypothesize that increasing its role within a corporation will lessen the need for external monitoring and contracts. To assess this, we need a way to gauge whether a firm has a trusting corporate culture. This paper provides one way to do that objectively. We develop a measure of trust in a firm’s corporate culture by counting the number of times 21 trust-related words appear in an important kind of document: the Management Discussion and Analysis section of the annual report. We report two significant findings: that, contrary to what one might think, firms with a trusting culture frequently use audit and control-type words and that trust is positively linked with subsequent share price volatility. We propose explanations of both findings.

"Overconfident Managers and Internal Controls" Free Download

SHENG�SYAN CHEN, National Taiwan University - Department of Finance
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SHU-MIAO LAI, Kainan University - Department of Accounting
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CHIH-LIANG LIU, Xiamen University
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SARAH E. MCVAY, University of Washington
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We examine the association between managerial overconfidence and internal controls. We hypothesize and find that firms with overconfident managers are more likely to maintain ineffective internal controls. Moreover, we find no evidence that these managers are more able to mitigate the known negative consequences of ineffective internal controls (inefficient investments, lower future operating efficiency, and lower financial reporting quality). We corroborate our main findings by examining changes around CEO turnovers and differential effects of CEO versus CFO overconfidence. We also document that firms with overconfident managers but strong corporate governance are more likely to maintain effective internal controls, and that better managers — as opposed to overconfident managers — are more able to operate effectively despite ineffective controls. Our findings suggest that the threshold for “cost-effective� internal controls will differ across firms based on the characteristics of their management team. This finding should be of interest to researchers, regulators, and market participants.

"Projecting Different Identities: A Longitudinal Study of the 'Whipsaw' Effects of Changing Leadership Discourse About the Triple Bottom Line" Free Download
HEC Paris Research Paper No. SPE-2014-1056

JULIE BAYLE-CORDIER, Catholic University of Lille - Institut d'Économie Scientifique et de Gestion (IESEG)
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PHILIP MIRVIS, Boston College
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BERTRAND MOINGEON, HEC Paris (Groupe HEC) - Strategy & Business Policy
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This paper focuses on changes in leadership’s discourse about the "triple bottom line" in Ben & Jerry’s ice cream from its founding days through to its acquisition by and integration into Unilever. For this study, we analyzed CEO claims about "who we are" from their letters in annual reports (what we label projected identity). A sample of employees (both long-service and relative newcomers) were interviewed about their perceptions of B&J’s over the thirty years covered.

Findings reveal that successive CEO’s stressed different "logics" about the business and what would make it successful over the years with the founders emphasizing a strong linkage between the economic, product, and social components of the company’s triple bottom line and their next three successors decoupling these components and pushing, each in different ways, for stronger financial returns. As a result, organization members were "whipsawed" between their CEOs’ different logics and identity claims.

The CEO letters exhibit a progression over time from a more normative to utilitarian tone familiar in the organizational identity literature. The messaging shifts, however, when a fifth CEO takes charge and re-integrates the firm’s triple bottom line. Thus the firm’s projected identity evolved in a U pattern starting with an integrated triple bottom line logic, shifting to a more linear logic where the economic mission dominates, and then reintegration where multiple bottom lines are embraced once again.

Here we explore both the strategic (external) and personal (internal) challenges informing the different CEOs’ messages over years, the whipsaw effect on staff, and the longer term evolution of projected identity in the company and reemergence of its integrated triple bottom line. This study contributes to the CSR and organization identity literatures by documenting how CEO’s (and their company) must struggle with maintaining an integrated triple bottom line in the context of commercial challenges and major changes involved in M&A. It also speaks to the practical matters of keeping normative traditions alive amidst competing pressures for change.

"How CEO Hubris Affects Corporate Social (Ir)responsibility" Free Download
Strategic Management Journal, Forthcoming

YI TANG, Hong Kong Polytechnic University
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CUILI QIAN, City University of Hong Kong
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GUOLI CHEN, INSEAD - Singapore
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RUI SHEN, Nanyang Technological University (NTU) - Division of Accounting
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Grounded in the upper echelons perspective and stakeholder theory, this study establishes a link between CEO hubris and corporate social responsibility (CSR). We first develop the theoretical argument that CEO hubris is negatively related to a firm’s socially responsible activities but positively related to its socially irresponsible activities. We then explore the boundary conditions of hubris effects and how these relationships are moderated by resource dependence mechanisms. With a longitudinal dataset of S&P 1500 index firms for the period 2001-2010, we find that the relationship between CEO hubris and CSR is weakened when the firm depends more on stakeholders for resources, such as when its internal resource endowments are diminished as indicated by firm size and slack, and when the external market becomes more uncertain and competitive. The implications of our findings for upper echelons theory and the CSR research are discussed.

"Behavioral Differences between Founder CEOs and Professional CEOs: The Role of Overconfidence" Free Download

JOON MAHN LEE, Purdue University - Krannert School of Management
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BYOUNG-HYOUN HWANG, Cornell University - Dyson School of Applied Economics and Management, Korea University - Department of Finance
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HAILIANG CHEN, City University of Hong Kong - Department of Information Systems
Email:

We provide evidence based on a sample of large S&P 1500 companies that founder CEOs are more overconfident than their non-founder counterparts (“professional CEOs�). We approximate overconfidence via CEO tweets, CEO statements during earnings conference calls, management earnings forecasts, and CEO option-exercise behavior. Compared with professional CEOs, we find that founder CEOs use substantially more optimistic language in their tweets and in their statements during earnings conference calls. In addition, founder CEOs predict their firms’ earnings to be significantly higher and are more likely to perceive their firm to be undervalued than professional CEOs, as implied by their option-exercise behavior. Further, we find that the difference in overconfidence between founder CEOs and professional CEOs is larger among more senior CEOs but smaller among CEOs who graduated from an elite school. Finally, we provide evidence that, to date, investors are unaware of the overconfidence bias among founders.

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About this eJournal

Sponsored by: IRRC Institute

This eJournal distributes working and accepted paper abstracts that deal with all aspects of governance related to sociology and psychology. The journal welcomes research with a focus on using tools and methods from the fields of sociology and psychology to study corporate governance. Topics of interest include, but are not limited to, how corporate governance arrangements are shaped by or shape social norms, psychological inclinations, and cognitive perceptions.

Authors submitting their work to the CGN network should submit it to no more than two CGN eJournals. In particular, they should submit it to no more than one "methodological" CGN eJournal (CG & Accounting; CG & Economics; CG & Finance; CG & Law; CG & Management; CG & Sociology or Psychology; CG Educator; CG Practice Series), and should submit it to no more than one of the "sub-field" journals (Acquisitions, Mergers, Contests for Control, & Activism; Actors & Players; Arrangements & Laws; Bankruptcy, Financial Distress, & Reorganization; Capital Raising, Investments, Distributions, & Market Trading; Comparative; Compensation of Executives & Directors; Economic Consequences, History, Development, & Methodology; Disclosure, Internal Control, & Risk-Management; Governance, Organization, & Processes; Governance of Special Types of Firms; International/Non-US; or Social Responsibility & Social Impact).

Editor: Lucian A. Bebchuk, Harvard University

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CGN SUBJECT MATTER EJOURNALS

LUCIAN A. BEBCHUK
Harvard Law School, National Bureau of Economic Research (NBER), Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Email: bebchuk@law.harvard.edu

Please contact us at the above addresses with your comments, questions or suggestions for CGN-Sub.

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Corporate Governance & Sociology or Psychology eJournal

PATRICK BOLTON
Barbara and David Zalaznick Professor of Business, Columbia Business School - Department of Economics, Fellow, Centre for Economic Policy Research (CEPR), National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

BRIAN R. CHEFFINS
S.J. Berwin Professor of Corporate Law, University of Cambridge - Faculty of Law, Fellow, European Corporate Governance Institute (ECGI)

JOHN C. COFFEE
Adolf A. Berle Professor of Law and Director of the Center on Corporate Governance, Columbia Law School, Fellow, European Corporate Governance Institute (ECGI), Fellow, American Academy of Arts & Sciences

JULIAN R. FRANKS
Professor of Finance, London Business School, Fellow, Centre for Economic Policy Research (CEPR), Fellow, European Corporate Governance Institute (ECGI)

HENRY HANSMANN
Augustus E. Lines Professor of Law, Yale Law School, Fellow, European Corporate Governance Institute (ECGI)

OLIVER D. HART
Andrew E. Furer Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

BENGT R. HOLMSTRĂ–M
Paul A. Samuelson Professor of Economics, Massachusetts Institute of Technology (MIT) - Department of Economics, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)

KLAUS J. HOPT
Director (em.), Max Planck Institute for Comparative and International Private Law, European Corporate Governance Institute (ECGI)

MICHAEL C. JENSEN
Co-Founder, Chairman, Managing Director and Integrity Officer, Social Science Electronic Publishing (SSEP), Inc., Jesse Isidor Straus Professor of Business Administration, Emeritus, Harvard Business School, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

HIDEKI KANDA
Professor of Law, University of Tokyo - Graduate School of Law and Politics

STEVEN NEIL KAPLAN
Neubauer Family Professor of Entrepreneurship and Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

RAKESH KHURANA
Marvin Bower Professor of Leadership Development, Harvard Business School

DAVID F. LARCKER
James Irvin Miller Professor of Accounting, Stanford University - Graduate School of Business

CHRISTIAN LEUZ
J. Sondheimer Professor of International Economics, Finance and Accounting, University of Chicago - Booth School of Business, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI), Fellow, Center for Financial Studies (CFS), Fellow, University of Pennsylvania - Wharton Financial Institutions Center, Fellow, CESifo Research Network

MARCO PAGANO
Professor of Economics, University of Naples Federico II - Department of Economics and Statistics, Director, Centre for Studies in Economics and Finance (CSEF), President, Einaudi Institute for Economics and Finance (EIEF), Fellow, Centre for Economic Policy Research (CEPR), Fellow, European Corporate Governance Institute (ECGI)

RAGHURAM G. RAJAN
Eric J. Gleacher Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, International Monetary Fund (IMF), National Bureau of Economic Research (NBER)

ROBERTA ROMANO
Sterling Professor of Law and Director, Yale Law School Center for the Study of Corporate Law, Yale Law School, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ANDREI SHLEIFER
Professor of Economics, Harvard University - Department of Economics, Fellow, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

LAURA T. STARKS
Charles E. and Sarah M. Seay Regents Chair in Finance, University of Texas at Austin - Department of Finance

RENE M. STULZ
Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University (OSU) - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

JEAN TIROLE
Scientific Director, University of Toulouse 1 - Industrial Economic Institute (IDEI), University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ), Fellow, Centre for Economic Policy Research (CEPR)

LUIGI ZINGALES
Robert C. McCormack Professor of Entrepreneurship and Finance and David G. Booth Faculty Fellow, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER), Fellow, Centre for Economic Policy Research (CEPR), University of Chicago - Polsky Center for Entrepreneurship, Fellow, European Corporate Governance Institute (ECGI)