Abstract

The upper echelons theory postulates that the cognitive frameworks of top executives shape organizational decisions and behaviors. Based on this theory, this study contributes to the literature by analyzing the effects of the chief executive officer’s (CEO) political ideology and political climate on variations in the market value of tourism firms resulting from their innovation activities. An empirical application was conducted on major U.S. hotel companies that have traded on the stock market for the last 25 years (1998–2022) and made innovation-related announcements. This application shows that, although the implementation of innovative activities positively affects a firm’s market value, both the CEO’s political ideology and the political climate influence the degree of change in the said market value. This study has fundamental theoretical implications for upper echelons theory by improving the understanding of how cognitive diversity derived from political ideology influences decision-making and its outcomes.

Introduction

Do the values of chief executive officers (CEOs) of publicly traded tourism companies influence their behavior? To what extent can these personal beliefs influence the effect of innovation on the market value of the companies they lead? Does the national political climate affect stock profitability when tourism organizations undertake innovative actions?

Innovation has been widely recognized as a critical element for tourism and hospitality companies and emerges as an indispensable strategic factor for their long-term success and growth (Gao & Zhang, 2023; Martínez-Ros & Orfila-Sintes, 2009; Pikkemaat et al., 2019; Sundbo et al., 2007; Vu & Hartley, 2022). Tourism literature has highlighted multiple benefits associated with innovation: it enables the tourism sector to be more resilient, productive, and adaptable (Zenker & Kock, 2020); it helps cope with an increasingly competitive and uncertain environment (Gao & Zhang, 2023; Martínez-Ros & Orfila-Sintes, 2009; Vu & Hartley, 2022); it facilitates the creation of new products and tourist experiences (or improves the quality and efficiency of existing processes and services) that contribute to stimulating demand and increasing business performance (Hall & Williams, 2019; Hjalager, 2010; Nicolau & Santa-María, 2013a, 2013b; Raad et al., 2023; Sharma et al., 2021; Zach et al., 2020); and it helps tourism companies grow (Love et al., 2011) and remain competitive (Aldebert et al., 2011; Martín-Rios & Ciobanu, 2019; Pikkemaat et al., 2019). In the context of hotel management, Chen (2011) states that “innovation appears to be the only means for an organization to convert change into opportunities and thus succeed [in the market]” (p. 64).

Conclusions

This study has assessed the potential effects of a CEO’s political ideology on the abnormal returns resulting from hotels’ innovations investments. In particular, the empirical application looks into the major U.S. hotel companies that have traded on the stock market for the last 25 years (1998–2022) and made innovation-related announcements. The results show that, although the implementation of innovation activities positively affects the market value of hotels, a CEO’s political ideology affects the level of reaction on the part of shareholders. Specifically, the implementation of innovation activities by hotel companies led by liberal CEOs (compared with those led by conservative CEOs) results in low abnormal returns. Moreover, when a liberal party has greater control over the governing bodies than a conservative party, the implementation of innovation activities leads to high positive effects on a hotel’s market value.

These results have relevant theoretical implications. First, this study represents a significant advancement in the literature related to tourism innovation, as it strengthens the connection between the hospitality industry and political ideology. While existing literature has highlighted that political decisions profoundly impact the development of tourism activities (including innovation), this study goes a step further by revealing that hotels must consider the ideology of their CEOs as a critical factor when evaluating and implementing tourism innovations. The political beliefs of these top executives significantly influence the ability of hotels to generate positive abnormal returns through the announcement of any innovative initiative. This approach not only optimizes the positive impact associated with innovations in the stock market but also provides a pathway for companies in the sector to increase their market value in an increasingly dynamic and complex competitive environment.

Abstract

This study investigates the roles of management experience and management practices towards innovation activities across ASEAN nations. Notably, the moderating role of the female CEOs in the management experience management practices—innovation relationship is also examined. The data came from the World Bank’s Enterprise Survey, consisting of 180,000 enterprises worldwide. This study extracted data from seven economies in ASEAN (Vietnam, Thailand, Indonesia, Philippines, Malaysia, Laos, and Cambodia). To deal with the hierarchical/multilevel structure of the study’s data set, the study uses the multilevel mixed-effects ordered logit model. The findings reveal that both management practices and management experience have positive impacts on innovation activities, particularly product innovation. Furthermore, this paper highlights the positive moderating role of female CEOs in the management experience management practices—innovation relationship.

Introduction

There is growing research on firm innovation in all sectors as it is a vital determinant of a firm’s growth and performance. Notably, the Covid-19 pandemic generates huge challenges and turbulence, and worldwide firms have to try their best to survive. Millions of businesses have to redesign and reconsider many aspects such as their business model (Dovbischuk, Citation2022), management leadership, or supply chain management (Sarkis, Citation2020). Among those determinants of business resilience, the innovation capability is emphasized by extant literature (Cuel et al., Citation2022; Li et al., Citation2021; Xie et al., Citation2022) as it provides a series of new ideas and models to match with uncertainties flexibly.

Prior studies regarding firms’ innovation have focused on broad topics, including determinants of innovation and outcomes of innovation. In the first line, scholars have found many determinants of innovation, consisting of inbound and outbound factors. The inbound factors include leadership, capabilities, firm structure, knowledge management, and gender diversity. On the other hand, the second line focuses on the results of innovation. Innovation is a fundamental driver of sustainable development and the survival and success of businesses (He & Shen, Citation2019; Zhong et al., Citation2021). Porter (Citation1992) and Solow (Citation1957) both emphasized how innovation is frequently seen as the most important factor in determining an economy’s competitiveness.

Results

Table 1 presents the descriptive statistics. There are nearly 7% of firms conducting “Innovation but only new the firm”, and more than 14% of firms had “Innovation and new to the market”. Nearly 18% of firms performed new management practices. The average management experience is nearly 18 years. Moreover, 30% of firms have female CEOs.

Table 2 reports the pairwise correlations. The pairwise correlation coefficients between independent and control variables are lower than 0.5, suggesting that there are no signals of multicollinearity (Dormann et al., 2013).

Table 3 presents the multilevel mixed-effects ordered logit estimation results. Regarding the hierarchical data issue, the likelihood-ratio tests comparing the multilevel mixed-effects ordered logit with standard ordered logit regression are reported in each model. It is interesting to find that the likelihood-ratio test statistics are statistically significant in all models. Therefore, the multilevel mixed-effects ordered logit is preferred to the standard ordered logit regression in estimating this specific data set.

Abstract

     This research examines whether the characteristics of top management teams are related to financial statement comparability. Considering the foreign experienced CEOs (FCEOs) in Chinese listed firms from 2005 to 2018, we show that it can increase financial statement comparability. We argue that firms led by FCEOs will enhance information environment and governance mechanisms by minimizing agency issues, consequently generating more comparable financial statements. Through further investigation, we find that the relationship between FCEOs and comparability is stronger when CEOs possess a financial and accounting background and when they have overseas professional experiences. fthe relationship is weaker with the existence of higher economic policy uncertainty. Finally, we identify financial reporting as an important channel that explains the relationship between FCEOs and comparability. Findings remain consistent after numerous robustness checks and supplementary investigations comprising lag of independent variables, generalized method of moment, instrumental variable approach, propensity score matching, and alternative comparability measures. Overall, the findings suggest that CEOs’ foreign experiences are associated with corporate outcomes.

Introduction

     Top management team (TMT) characteristics, especially of CEOs, substantially influence corporate decisions (Lai and Liu 2018; Zhang 2018). Despite scholarly recognition of CEOs’ traits, such as expertise, tenure, personality traits, duality, education, and gender, CEO foreign experiences are a few of the factors currently gaining research interest. This stream of literature claims that foreign experienced CEOs1 (FCEOs) have a possible influenfgce on corporate decisions, such as compensation (Conyon et al. 2019), undertaking foreign IPOs (Duan, Hou, and Rees 2020), performance (Duan and Hou 2017), and corporate investment (Dai, Kong, and Liu 2018). However, one of the important issues that has not received scholarly attention is financial statement comparability (comparability, hereafter). Accordingly, the current study contributes to the literature by investigating how FCEOs affect comparability

     Comparability is a crucial element in financial reporting (International Accounting Standard Board 2010). Users of financial statements benefit from it given its role to facilitate understanding of accounting information and thus in coming up with informed decisions. Studies (e.g., De Franco, Kothari, and Verdi 2011; Zhang 2018) suggests that comparability enhances information quality while reducing acquisition and processing costs. Comparability can correspondingly diminish information asymmetry, which leads to higher innovation efficiency (Chircop et al. 2020); more efficient resource allocation (Kim et al. 2020); higher stock price information quality (Choi et al. 2019); greater accounting information’s relevance (Kim, Kim, and Musa 2018); lower cost of capital (Imhof, Seavey, and Smith 2017); and higher analyst coverage and forecast accuracy and lower forecast dispersion (De Franco, Kothari, and Verdi 2011). Despite extensive scholarly attention to the antecedents of comparability, research has scarcely focused on its determinants (Dhole et al. 2015; Francis, Pinnuck, and Watanabe 2014; Imhof, Seavey, and Watanabe 2018). We add to this line of research by studying how TMT characteristics (CEOs’ foreign experiences) explain comparability.

 Conclusio

     This study investigates whether FCEOs and their accounting and financial expertise are associated with comparability. It utilizes a sample of Chinese listed firms from 2005 to 2018 and found evidence that FCEOs significantly increase comparability. Notably, this this influence is more pronounced for CEOs with accounting and financial backgrounds. These conclusions remain valid after addressing endogeneity issues. Our additional analyses also suggest the following: the effect of FCEOs on comparability is stronger when CEOs have overseas employment experiences but weaker in the presence of higher EPU. Finally, we identify financial reporting quality as a channel explaining the nexus between FCEOs and comparability

      This research provides new evidence confirming the importance and influence of CEOs’ foreign experiences on comparability. It underscores the significance of foreign experiences as integral in the acquisition of human and social capital. It also adds to the increasing body of knowledge regarding the economic implications of CEOs’ foreign experiences. Our findings are useful to firms that wish to attract foreign talents by recognizing the prospect of FCEOs to minimize agency problems and offer potential external resources. For policymakers, acknowledging that FCEOs can effectively help improve comparability might inspire them to allocate potential resources to crafting policies that attract foreign expertise. Overall, the results offer important implications for policymakers and regulators with regard to the role of FCEOs

Abstract

1. Introduction

2. Hypothesis development

3. Sample and data

4. Research design

5. Results

6. Conclusion

Acknowledgements

References

Abstract

     We examine the role of CEO social capital as an important driver of the widespread practice of real earnings management (REM). Using the number of social connections to outside executives and directors to measure CEO social capital, we first find that well-connected CEOs associate with higher levels and volatilities of REM. The positive relation between REM and CEO network size is stronger when the CEO connects with more informed and influential persons, and when a more severe misalignment of interests can occur. Second, we find a contagion of REM among well-connected CEOs in an industry. Third, the level of REM induced by a large CEO social network associates negatively with future operating performance. This result is consistent with social capital circulating REM-related information ex-ante and increasing the power and influence for the CEO to deviate from optimal operating policies ex-post. Social capital shields the well-connected executive in the takeover and labor markets despite possible suboptimal future operating performance. While the prior literature finds that CEO social capital reduces accrual earnings management, our findings suggest a dark side of CEO social capital: it induces excessive levels and volatilities of REM costly to the firm in the long run while imposing relatively low personal risk on the top executive.

Introduction

     We examine whether executives’ social capital affects firms’ real earnings management (REM), a practice whereby a manager purposely alters the firm’s cash flow to report earnings based on departures from the timing or structuring of normal or optimal operations. Considering the pervasive and popular use of REM, especially after the Sarbanes-Oxley Act (Gilliam et al., 2015; Koh et al., 2008; Brown and Caylor, 2005; Larcker et al., 2013), a significant body of literature has examined what drives REM practices and their operating consequences (e.g., Barton and Simko, 2002; Demski et al., 2004; Ewert and Wagenhofer, 2005; Zang, 2012). However, extant studies overlook an important human factor underlying a decision to engage in REM, the social capital of the executive who develops and implements the financial reporting practices. We contribute to the literature by being the first to examine the impact on REM practices of CEO social capital and its role as an important channel through which REM affects future firm operating performance.

Conclusion

     Based on established proxies for real earnings management (REM), and after employing a wide array of controls for other possible factors, we find a positive relation between CEO network size and the level and volatility of REM. We theorize that this positive relation occurs because the information-sharing and power and influence channels from a large CEO social network enable the use of REM to confer net personal benefits on the connected executive. This may even make the practice firm-wise desirable in the short-term because the firm reports a superior trend of earnings, beats earnings benchmarks, and may reduce information asymmetry, all of which can increase firm value. In the long-term, however, we show that large REM adjustments by well-connected CEOs associate with worse future firm performance, even in the absence of detection. But with takeover and labor market insurance, a well-connected CEO may not care about the possibility of worse future firm performance from the consequences of departures from normal or optimal operations from the use of REM. These CEO network benefits may also explain the pervasive and successful use of REM in practice. To our knowledge, we are the first to show that larger CEO networks associate with higher levels of REM. Those higher earnings adjustments, however, can degrade firm performance in the longer term. Thus, when a large CEO network amplifies the power and influence of the top executive, our study indicates that such CEO networks have a darker side regarding future firm performance.

1- Introduction

2- Data and sample characteristics

3- Multivariate analysis

4- Alternative explanations and robustness

5- Conclusion

References

Abstract

I find lower firm risk in the year of a CEO divorce. This lower volatility is consistent with a reduction in risk incentives, as CEOs pay large divorce settlements and are less able to diversify firm-specific risk from their portfolios. Divorce has a larger impact on firms with cash-poor CEOs who lack diversification. Cash flow and accruals have lower volatility in the year of divorce, which is likely due to smoother discretionary expenses. The sensitivity of compensation to both price and volatility is significantly higher after divorce, suggesting compensation incentives adjust to portfolio incentives, with total compensation increasing by over $2 million on average. I find no evidence the results relate to increased distraction or alternative explanations.

Introduction

How do managers’ personal lives affect the firm? Prior literature documents the importance of personal relationships in family firms, where domestic and corporate decisions intertwine. 1 Outside the family firm, there is growing evidence regarding the value of individual executives’ personal attributes, and recent work shows how companies suffer when executives are unable to perform due to personal conflicts, such as vacation, illness, or a death in the family. Despite evidence that personal events affect the firm, there is little evidence on how family and, specifically, family law affect s managers’ incentives and corporate policies. This paper studies the impact of CEO divorce on the firm. Divorce is a significant, personal event, and it carries both emotional and economic costs. In a recent high-profile case, Harold Hamm, CEO of Continental Resources, wrote a check for $1 billion to Sue Ann Arnall following an award from a lengthy court battle (Schneyer, 2015). Despite the costs, marital dissolution is common in the U.S. with 36% of first -time marriages ending within 10 years (Copen, Daniels, Vespa, and Mosher, 2012). Given the prevalence and gravity of divorce, it provides a unique setting to examine how personal experiences affect corporate managers and the firm. Moreover, divorce is associated with a large decrease in CEO wealth, providing a unique experiment on the importance of CEO wealth to risk incentives and compensation.

1- Introduction

2- Theories and hypotheses

3- Sample and methods

4- Results

5- Discussion and conclusions

References

Abstract

We study the impact of $1 CEO salaries on firm performance and CEO total compensation. We find that, on average, $1 CEO firms earn higher total compensation and lower stock market returns relative to their peers after the adoption of $1 salaries. The effect on total compensation is mitigated if the $1 CEO firm is undergoing restructuring or the CEO is entrenched and aggravated if the CEO is overconfident. The stock market underperformance especially affects firms not under a restructuring process and firms with entrenched or overconfident CEOs.

Introduction

Though scholars debate whether U.S. CEOs are drawing excessive compensation (Aguinis, Martin, Gomez-Mejia, O’Boyle, & Joo, 2018; Frydman & Jenter, 2010; Sauerwald, Lin, & Peng, 2016; Wade, O’Reilly, & Pollock, 2006), some CEOs have settled for an annual salary of only $1. During the last financial crisis (2007–2009), the CEOs of all three major U.S. automakers pledged to work for an annual salary of only $1. This presumably sacrificial step is not unique to economic crises. Scores of CEOs—including those with thriving firms such as Apple—have also adopted this compensation arrangement since the early 1990s. Many of these firms are household names from a very wide variety of industries.1 Although the $1 CEO salary is not a common arrangement, or perhaps because of that, announcements of $1 CEO salaries receive great public attention.2 Besides all the publicity surrounding the adoption of such compensation schemes, little is known about their impact on corporate outcomes. Researchers have always considered the fixed salary as a main pillar of a CEO compensation package (Murphy, 1999, chap. 38) and one of the major components of reservation utility in compensation contract models (see, for example, Garen, 1994; Dittmann & Maug, 2007). However, to the best of our knowledge, no study in the managerial compensation literature directly examines how salary cuts would affect total compensation design (including equity pay) and firm performance.

This study examines the impact of stock price crash risk on future CEO power. Using a large panel sample with 17,816 firm-year observations, we posit and find a significant negative impact of stock price crash risk on CEO power, suggesting that CEO power becomes smaller after stock price crashes. We also find that our results are stronger for firms with female CEOs and are largely driven by firms with shorter-tenure CEOs. In addition, we find that the significant negative impact of stock price crash risk on CEO power is diminished for firms with strong corporate governance. Our study responds to the call in Habib, Hasan, and Jiang (2018) by providing more empirical evidence on the consequences of stock price crash risk.

Introduction

A large body of finance literature (e.g., Hong and Stein, 2003) documents that stock returns often exhibit negative skewness (i.e., more negative stock price movements than positive price movements). One critical factor that causes the negative skewness is the managerial tendency to withhold bad news for an extended period of time (e.g., Jin and Myers, 2006). When the accumulation of bad news reaches a relatively high level, the manager has to release or disclose the bad news to the investors, leading to a large negative stock price movement (i.e., a large price drop). This type of price drop risk is known as stock market crash risk (hereafter crash risk), which has recently received tremendous attention in academic research. Habib et al. (2018) find that the majority of recent research has centered on the determinants of crash risk, but little research has been devoted to investigate the consequences of crash risk.1 Hence, Habib et al. (2018) call for more empirical evidence to better understand the consequences of crash risk by stating that “we believe that there is immense potential for future research in the area of crash risk consequences (page 36)”. The purpose of this study is to respond to the call in Habib et al. (2018) by providing more empirical evidence on crash risk consequences. Specifically, we explore the relation between crash risk and future CEO power, an important managerial characteristic that has been extensively studied in accounting and finance literature. We hypothesize that crash risk is negatively related to future CEO power for two reasons. First, CEO power increases crash risk (Mamun et al., 2019). Habib et al. (2018) argue that rational firms should limit or eliminate certain factors that increase crash risk after stock price crashes. Hence, we expect that after price crashes, rational firms curtail CEO power. Second, CEO power is associated with negative firm outcomes including low market valuation, poor performance and low bond ratings (e.g., Liu and Jiraporn, 2010; Bebchuk et al., 2011).

1- Introduction

2- Data & sample

3- Empirical results

4- Identification and endogeneity issues

5- Conclusion

References

Abstract

Studies in social sciences suggest that a normative commitment to stable, biological married life is a potent catalyst for inculcating and nourishing prosocial values, preferences and behaviors among family members. Extrapolating from this literature, we investigate whether firms led by married chief executive officers (CEOs) are associated with better corporate social responsibility (CSR). Our analysis of 2163 U.S. public corporations from 1993 to 2008 shows that firms led by married CEOs are associated with significantly higher scores on a popular CSR index, after controlling for a wide range of firm characteristics and CEO attributes. Further, the observed positive relation is particularly sharper with the diversity and employee relations components of CSR. Our findings highlight CEO marital status as an important driver of socially responsible corporate decision making.

Introduction

There is a large body of literature on the virtues and drawbacks of marriage. Although the overall effect of marriage on the economic and physical health of the family is debatable, the social benefits of the union appear to be significant. Also, prior research has shown that personal attributes, values and experiences of top managers, such as gender, political affiliation, religion, having children, and education, affect corporate policy. Marital status of CEOs is one such personal attribute that may be correlated with both socially responsible activities of corporations as well as several other personal traits. The main objective of this study is to explore how the marital status of CEOs affects corporate social responsibility (CSR). Corporate social responsibility is broadly defined as a firm’s commitment to minimizing potential harmful effects of its operations on its stakeholders (owners, employees, customers, community and the society at large) and maximizing its long-run beneficial impact on society. There is considerable debate regarding the economic and social desirability of CSR, i.e., whether it is value creating or destroying (Berman et al., 1999; Hillman and Keim, 2001; Chatterji et al., 2009; Boehe and Cruz, 2010; Dhaliwal et al., 2011; El Ghoul et al., 2011; Barrios et al., 2014; Cheng et al., 2014; Jiraporn et al., 2014; Bereskin et al., 2016; Smith and Smith, 2016). Another body of literature indicates that top managers’ values, personal attributes, and experiences (including their marital status) affect a wide range of corporate policies (e.g., Bertrand and Schoar, 2003; Dahl et al., 2012; Roussanov and Savor, 2014). Managers’ personal values, attributes, attitudes and behaviors can influence employees’ response to the work environment and firm activities (Ambrose et al., 2013). CEOs’ religious affiliations (Catholic or Protestant) affect corporate decisions with respect to leverage, geographic diversification, and firm value (Baxamusa and Jalal, 2016).

1- Introduction

2- Data, sample selection and variable definitions

3- CEO overconfidence and the value of cash

4- Additional results

5- Conclusion

References

Abstract

Cash holding is on average more valuable when firms are managed by overconfident CEOs. Economically, having an overconfident CEO on board is associated with an increase of $0.28 in the value of $1.00 cash holding. The positive effect of CEO overconfidence on the value of cash concentrates among firms that are more likely to suffer from the underinvestment problem (i.e., financially constrained firms which exhibit high growth opportunities). In addition, CEO overconfidence affects negatively the value of cash in firms that are financially unconstrained, a finding which is consistent with the overinvestment hypothesis. The results are robust to various tests and alternative explanations.

Introduction

Starting from the pioneering works of Faulkender and Wang (2006) and Pinkowitz et al. (2006), numerous studies have analyzed the value of cash holdings (i.e., the value the market assigns to an additional dollar of cash holding).1 The traditional views are that the value of cash depends: (i) on the information asymmetry between managers and the capital markets (Myers and Majluf (1984)); and (ii) on agency problems that arise due to misalignment of managerial and shareholders’ interests (Jensen and Meckling (1976)).2 These studies assume that CEOs are rational. However, a growing body in the corporate finance literature finds that CEO characteristics and behavioral biases affect corporate policies and decisions (see, for instance, Bertrand and Schoar (2003), Malmendier and Tate (2005), (2008), Hirshleifer et al. (2012) and Huang and Kisgen (2013)). Motivated by this literature, this study investigates how CEO overconfidence, one of the most prominent behavioral biases, affects the value of cash. To develop our empirical predictions, we build our theoretical reasoning based on the model derived in Malmendier and Tate (2005). The model assumes an efficient capital market where there are two types of CEOs in the economy: rational CEOs and overconfident CEOs. Both CEO types maximize shareholder value. The only friction in the model comes from the overconfident CEO’s perception about the firm’s future cash flows; that is, overconfident CEOs overestimate the firm’s future cash flows. This implies that: (i) overconfident CEOs perceive their firm as being undervalued by the market (Malmendier and Tate (2005)); and (ii) overconfident CEOs misperceive the cost of capital required by rational creditors and equity investors for providing external financing to the firm (Malmendier et al. (2011)).

1- Introduction

2- Literature review and hypothesis development

3- Research design

4- Main results

5- Additional tests

6- Conclusion

References

Abstract

Purpose – The purpose of this paper is to examine the impact of chief executive officer (CEO) power on corporate social responsibility (CSR) performance. Design/methodology/approach – The authors use regression analysis to investigate the research question. Findings – Using a 23-year panel sample with 1,574 unique US firms and 8,575 firm-year observations, the authors find a significant and negative relation between CEO power and CSR, suggesting that firms with more powerful CEOs engage in less CSR activities. Originality/value – The results reveal that more powerful CEOs become less responsive to the needs of stakeholder groups, confirming the validity of the stakeholder theory of CSR.

Introduction

Chief executive officer (CEO) power has recently received much attention in finance research. Much of the prior research has examined the impact of powerful CEOs on firms’ performance and outcomes. For example, studies find that CEO power is negatively related to market value and accounting performance of a firm (Bebchuk et al., 2011), bond credit ratings (Liu and Jiraporn, 2010), leverage ( Jiraporn et al., 2012), firm productivity (Cronqvist et al., 2009), the use of relative performance evaluation (Dikolli et al., 2014) and the informativeness of stock prices (Withisuphakorn and Jiraporn, 2015). The above research suggests that more CEO power leads to more agency and governance problems. Despite the surge of attention on the importance of powerful CEOs on firms’ performance and outcomes, there is surprisingly little evidence on how powerful CEOs influence corporate social responsibility (CSR), which has become an important corporate decision-making component. As the fundamental theory of CSR, the stakeholder theory argues that firms have multiple stakeholder groups including customers, suppliers, employees, community groups, investors and government agencies. The proper goal of managers is to meet or satisfy the objectives of these different stakeholder groups simultaneously. Hence, managers, especially CEOs, play an important role in the process of balancing and addressing the objectives of different stakeholder groups (Freeman and Evan, 1990; Donaldson and Preston, 1995; Jones, 1995; Pirson and Malhotra, 2011). However, when CEOs become more powerful, we argue that these CEOs are less likely to engage in CSR activities because they are more likely to take actions to maximize their own interests such as maintaining or even increasing their power at the expenses of stakeholders including shareholders (Bebchuk et al., 2011). Therefore, we posit a negative relation between CEO power and CSR.

1- Introduction

2- Sample and descriptive statistics

3- Empirical results

4- Additional analyses

5- Conclusion

References

Abstract

Diverging from recent research that focuses on the effect of community religion on corporate outcomes, we study how top executives’ personal religiosity affects corporate transparency. Using educational experience in church-affiliated colleges as a proxy for CEOs’ religiosity, we show that firms with religious CEOs are associated with significantly less earnings management than firms with non-religious CEOs. Our results are robust to using matched samples and a difference-in-differences analysis based on voluntary CEO turnovers. The effect of CEO religiosity on earnings management is more pronounced when firms use more equity-based CEO compensation or when firms face higher operating cash flows volatility, and the effect is weaker in the post-SOX period. We also find evidence that firms with religious CEOs are less likely to engage in real earnings management. Taken together, our findings suggest an important role of CEOs’ religious beliefs in shaping corporate policies.

Introduction

The role of religion in economic activities is an important issue and has long been the focus of a large body of literature. The seminal work by Weber (1905) suggests that the life style arising from Protestantism plays a decisive role in the creation of modern prosperity. Recent studies show that religion influences personal behavior and economic development.1 However, it remains largely unclear how individuals’ religious beliefs impact corporate behavior. In fact, Lagace (2001) states that how individuals combine personal religious values with business life is “one of the great uncharted areas.” Our study examines how managers’ religious beliefs affect corporate transparency. Anecdotal evidence suggests that executives’ religiosity influences their decision making in the corporate setting. Indra Nooyi, the former chairman and CEO of PepsiCo and a devout Hindu, has drawn upon her religious beliefs to foster a culture of diversity and inclusion at the soft-drink manufacturer (Rossi, 2014). John H. Tyson, the then-CEO of Tyson Foods and now the chairman of the board, is a passionate Christian who revived the company’s Chaplaincy program that employs more than 100 chaplains company-wide to provide compassionate pastoral care to team members and their families. John Tyson once said, “My faith is just an ongoing evolution, trying to understand what faith in the marketplace looks like, giving people permission to live their faith seven days a week.” Despite the anecdotal evidence, there exists little research on how religious beliefs of top management influence firm behavior, perhaps due to a lack of data on individual’s religious adherence.

Many corporate executives embrace social purposes and connect them to a higher-order rationale for something larger than just the success of their company (Ferguson, 2018, April. 30). And in the Age of Twitter, social media makes it relatively easy for highprofile CEOs to not only position themselves as tech-savvy and approachable, but also to take a stand on controversial issues such as climate change, same-sex marriage, immigration, discrimination and gun control (Men & Tsai, 2012, 2016; Brandfog, 2013; Chatterji & Toffel, 2018). CEOs are not only stewards of their companies but also social actors, and it is no longer controversial to suggest that their communication efforts in the political arena may sway public opinion just like those of prominent politicians (Chatterji & Toffel, 2018). Of course the primary objective of such social activism is to inspire public support around a contentious issue or to address a particular social problem (Salmon, 1989; Deegan, 2001; Derville, 2005; Vegh, 2013), but it seems worth considering whether these CEO political tweets are an effective form of activism, providing new information or raising awareness in a new way. While the outspokenness of CEOs has certainly proven effective as far as grabbing headlines is concerned (Chatterji & Toffel, 2016; Gelles, 2018), a number of researchers have scrutinized the extent to which CEO tweets can be said to be politically or financially effective (Reidenbach & Pitts, 1986; Chatterji & Toffel, 2016; Gaines-Ross, 2000, 2017; Park & Berger, 2004; Gelles, 2018). What has not been tested, however, is the perceived authenticity of CEO tweets. Bearing in mind that the instantaneous, reactive nature of tweets may give a more candid, uncensored understanding of a CEO’s thoughts, this study aims to experimentally test perceptions of authenticity around CEO tweets, using expectancy violation (EV) theory as a guide (Burgoon, 2015). Expectations can be constructed from a mix of factors including CEO characteristics, the history of the relationship between an organization and its publics, and the communications context (Burgoon, 2015; Burgoon, Dunbar, & Segrin, 2002). Traditionally, all violations of expectancy are considered to be negative, since expectancy is thought of as what is socially appropriate and predictable (Burgoon, White, & Greene, 1997; Floyd & Burgoon, 1999). Many EV studies have therefore focused on crisis communications, and suggested that a higher degree of expectancy, once breached, triggers a deeper degree of disappointment, which in turn incurs severer penalties in the form of negative public perceptions and uncertainty about a company’s future performance (Kim, 2014; Sohn & Lariscy, 2015).

A number of earlier studies suggest that earnings quality improves when females are in senior management because of gender differences in risk-taking and ethical attitude. We extend this literature by using gender socialization theory and agency theory to examine the earnings management behavior of female Chief Executive Officers (CEOs) conditional on their equity incentives. We show that female CEOs do not necessarily reduce earnings management. At lower levels of equity-based compensation, female CEOs manipulate earnings to a lesser degree than their male counterparts. However, at higher levels of equity-based compensation, female and male CEOs exhibit very similar earnings management behaviors. Thus, given high equity incentives, all CEOs – regardless of gender – undertake a greater degree of earnings management activities. Consequently, there is little evidence that the gender of a CEO mitigates the propensity to increase the value of equity-based compensation by manipulating earnings.

Introduction

The revelation of financial reporting improprieties and the successive conviction of top managers of well-known firms such as Enron, WorldCom (Fazrad, 2005), and Bernard L. Madoff Investment Securities (New York Times, 2009) have fueled ongoing research into corporate misconduct (Harris & Bromiley, 2007; Ndofor, Wesley, & Priem, 2015: Shawver & Clements, 2015). The scale and scope of these, and similar, accounting scandals motivated policymakers to consider more rigorous financial reporting regulations (O’Connor, Priem, Coombs, & Gilley, 2006; Zhang, Bartol, Smith, Pfarrer, & Khanin, 2008) and, in accord, Congress enacted the Sarbanes-Oxley Act (SOX). However, in response to the enhanced regulatory scrutiny imposed on financial reporting by this legislation, managers promptly shifted away from accounting manipulation of earnings to more real activities manipulation (see Cohen, Dey, & Lys, 2008; Cohen & Zarowin, 2010; Farooqi, Harris, & Ngo, 2014; Zang, 2012).