How Do Investors Perceive Corporate General Counsel? The Role of Monitoring and Advising Demand

Abstract

We find that firms with a general counsel (GC) in top management (GC firms) have a higher ex-ante cost of equity implied in stock prices and analysts’ earnings forecasts. Lead-lag changes analysis shows that the cost of equity increases after, but not before, the appointment of GCs to top management. Cross-sectional analyses suggest that the cost of equity difference between GC and non-GC firms and the cost of equity increase following the appointment of GCs to top management are more pronounced for firms with greater monitoring demand and less pronounced for firms with greater advising demand. We also observe negative market reactions to proxy statements that reveal the appointment of a GC to top management. Finally, our falsification tests find no evidence that investors react to the addition of Chief Marketing Officers, Chief Operating Officers, or Chief Financial Officers to top management. Overall, our results suggest that investors’ perceptions of including GCs in top management depend on the firm’s demand for monitoring and advising.

Keywords: cost of equity, general counsel, monitoring demand, advising demand

JEL Classification: G12, K00, G34, G32, M41