In the paper, Governance in Executive Suites, which was recently made publicly available on SSRN, my co-author (Yao Lu) and I analyze the interplay between governance in executive suites and board monitoring. We find an exogenous shock increasing board independence weakens governance in executive suites. The empirical proxy for the strength of governance in executive suites is based on the governance mechanism identified by Landier et al. (2009), wherein dissenting executives steer CEOs towards more shareholder friendly decisions through “an efficient implementation constraint that disciplines the decision-making process.”

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In the paper, Cherry Picking in Cross-Border Acquisitions, my co-author (Yao Lu of Tsinghua University) and I investigate how investor protection (IP) affects the allocation of foreign capital inflows at the firm level. A simple model provides an explanation for a well documented but little understood phenomenon on international capital flows—the tendency of foreign investors to target better-performing firms in emerging markets.

When a foreign acquirer’s country has stronger IP than a target country, the acquirer’s controlling shareholder values private benefits of control less than controlling shareholders of local firms because stronger IP imposes greater constraints on diversion of corporate resources for private benefits. Within the target country, controlling shareholders of firms with more profitable investments take fewer private benefits and, hence, demand lower control premiums. Foreign acquirers, which value control premiums less, will target firms with more profitable investments. The tendency to cherry pick will intensify (moderate) as the IP gap between the acquirer and target countries increases (decreases).

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In our paper, The Independent Board Requirement and CEO Connectedness, which was recently made publicly available on SSRN, we investigate unintended consequences of the independent board requirement.  Following highly publicized corporate scandals in 2001 and 2002, firms listed on the NYSE and NASDAQ are required to have a majority of independent directors. The intent is to better protect shareholders by making boards more independent from managerial influence and thereby more effective monitors. However, the majority requirement represents a ceiling on the percentage of dependent directors a firm may have.

If board composition is endogenous, the quota may trigger reactions by firms affected by the regulation. Board composition is but one of many facets of governance. Imposition of a quota on one governance mechanism may spillover to other governing bodies as firms find ways to counteract it. This paper attempts to identify the spillover effects, analyze their consequences, and answer several questions: How do CEOs react to a regulation that may reduce their influence over the board? How do the reactions, if any, manifest in the softer side of governance, namely, CEO connectedness with other key players in governing the firm? How do the spillover effects impact the regulatory intent?

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In our paper, Corporate Governance Reforms and Cross-Border Acquisitions, which was recently made publicly available on SSRN, we investigate how investor protection affects the allocation of foreign capital inflows at the firm level. A simple model provides an explanation for a well-documented but little understood phenomenon on international capital flows—the tendency of foreign investors to target better-performing firms in emerging markets.

When a foreign acquirer‘s country has stronger IP than a target country, the acquirer‘s controlling shareholder values control premiums less than controlling shareholders of local firms because stronger IP imposes greater constraints on diversion for private benefits. Within the target country, controlling shareholders of firms with more profitable investments take fewer private benefits and, hence, demand lower control premiums. Foreign acquirers, which value control premiums less, will target firms with more profitable investments. This cherry picking tendency will intensify (moderate) as the IP gap between the acquirer and target countries increases (decreases).

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In our paper, Employee Stock Ownership Plans: Employee Compensation and Firm Value, which was recently made publicly available on SSRN, we investigate whether adopting a broad-based employee stock ownership plan enhances productivity by improving team incentives and co-monitoring. That is, does employee capitalism work? If so, how are gains divided between shareholders and employees?

We find that small ESOPs increase productivity. Unlike Jones and Kato (1995) on Japanese ESOPs, our evidence of productivity gains is based on the effects on two main beneficiaries of such gains: employees and shareholders. Because our evidence indicates both stakeholders gain from adopting small ESOPs, we infer employee share ownership increases the size of the economic pie by improving worker productivity.

This causal interpretation is substantiated by our evidence on how the division of productivity gains is related to employee mobility within an establishment’s industry and location of work place. We find that when labor mobility increases, increasing workers’ bargaining power vis-à-vis shareholders’, employees’ share of gains increases and stockholders’ share decreases.

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In the paper, CEO Ownership and External Governance, which was recently made publicly available on SSRN, my co-author, Yao Lu, and I demonstrate that studying only one part of the governance system, in isolation from other governance mechanisms in place, may lead to inaccurate conclusions. Because there are multiple governance mechanisms at work, both internally and externally, understanding of corporate governance requires analysis on how various governance mechanisms interact in affecting agency problems and firm performance, and the channels through which the interactive effects take place. In this paper, we make that attempt by examining how CEO share ownership and the strength of external governance (EG) interactively affect firm value and R&D investments.

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My paper, co-authored with Julian Atanassov of the University of Oregon, was recently accepted for publication in the Journal of Finance. This paper investigates how labor and investors’ relative influence and firm level variables interact to affect corporate governance. A key conclusion is that weak investor protection combined with strong union laws are conducive to worker-management collusion harmful to investors.

Specifically, we analyze restructuring decisions when firms suffer a sudden, sharp deterioration in operating performance. We proxy for stakeholders’ relative influence at the country level by the strength of legal protection of investors and labor. We consider three types of restructuring measures: large scale employee layoffs, top management turnover, and major asset sales. Our sample consists of 9,923 firms (10,947 firm-years) at the onset of sharply declining operating performance in 41 developed and emerging economies over the period 1993 to 2004.

We find that poorly performing firms in stronger investor protection countries are more likely to undertake large-scale worker layoffs and replace top management than those in weaker investor protection countries. These restructuring actions are followed by superior operating performance in all legal environments. Major asset sales are different, however. We observe more asset sales when investor protection is either very strong or very weak. Asset sales in strong investor protection countries are followed by superior operating performance, whereas asset sales in weak investor protection countries are followed by inferior subsequent operating performance.

The likelihood of value-reducing asset sales increases as collective bargaining and labor relations laws grant more power to labor unions, suggesting that these asset sales are countenanced by workers. In addition, underperforming top managers in low investor protection countries are more likely to retain their jobs as union power increases. These results point toward management-worker alliances motivated by a mutual desire to retain jobs. For such an alliance to work, management needs funds to minimize layoffs and wage cuts. Lacking other means to raise the necessary funds, poorly performing firms sell assets to forestall layoffs even when doing so hurts subsequent operating performance. Indeed, asset sales in weak investor protection countries do not lead to layoffs, whereas in strong investor protection countries asset sales predict layoffs.

We also find that strong union laws are less effective in preventing layoffs when financial leverage is high, indicating that financial leverage is an effective instrument with which investors counter the power of workers.

Overall, our results highlight the importance of interaction among management, labor, and investors in shaping corporate governance.

The full paper is available for download here.