The collective behavior of corporate leaders is often critical in corporate wrongdoing, and the CEO often plays the central role. Yet there is no comprehensive study exploring how CEOs and their influence within executive suites and the boardroom impact corporate wrongdoing. In our paper, CEO Connectedness and Corporate Frauds, which was recently made publicly available on SSRN, we focus on the effects of CEOs’ social influence accumulated during the CEO’s tenure through top executive and director appointment decisions.
Posts Tagged ‘Social networks’
In our paper, Director Networks and Takeovers, which was recently made publicly available on SSRN, we study the impact of corporate networks on the takeover process. In recent years, some scholars have applied graph theoretical methods in the research on the impact of director networks on managerial decision-making. They found relations between networks and remuneration contracting, the managerial labor market (hiring and firing of top management, attracting non-executive directors), corporate restructuring, and firm and fund performance.
In this paper, we examine the effect of the connections between the acquirer and target firms on the takeover process, more specifically on M&A frequency, the M&A negotiation success and duration, the means of payment in the offer, the M&A expected performance (as reflected in the short term wealth effects of the bidder), the bidder’s CEO compensation subsequent to the M&A, and target director retention rate in the merged company. The idea is that direct connections enable both parties to gather information more easily on the counter party which establishes trust, and that the overall network (which includes the indirect connections) enable firms to scout for suitable takeover targets and collect relevant information on the whole takeover market.
Regulation FD, adopted by the SEC in 2000, prohibits “selective disclosure” by requiring public companies to disclose material information through broadly accessible channels. Thirteen years ago, this meant EDGAR filings, press releases and quarterly earnings calls.
The SEC recently issued a report of investigation under Section 21(a) of the Securities Exchange Act of 1934 regarding its inquiry into a post by Netflix’s CEO on his personal Facebook page. In the report, the SEC affirmed that a company may use social media to communicate with investors without violating Regulation FD – as long as the company had adequately informed the market that material information would be disclosed in this manner. The report states that whether a company’s social media disclosure satisfies Regulation FD will depend upon the principles outlined in the SEC’s 2008 guidance, Commission Guidance on the Use of Company Web Sites, while recapping that guidance in a way that should make these principles more workable for companies that want to use websites, social media and other evolving communication methods to disclose important information to the market.
The Staff of the Securities and Exchange Commission has announced its intention to recommend to the Commission that enforcement proceedings alleging a violation of Regulation FD be instituted against Netflix, Inc. and its CEO, Reed Hastings, because of a posting on Mr. Hastings’ personal Facebook page. Mr. Hastings’ webpage had more than 200,000 followers, including reporters who covered the posting in the traditional press. The posting was also the subject of a tweet by TechCrunch, which has approximately 2.5 million followers on Twitter.
This article, Regulation FD in the Age of Facebook and Twitter: Should the SEC Sue Netflix?, is in the form of an amicus Wells Submission suggesting that the Commission would, for nine distinct reasons, be prudent not to initiate an action on the facts of the Netflix posting. In particular, the public record suggests that the posting did not contain material information, was not a selective disclosure, and because of its spread through social media constituted a “broad non-exclusionary distribution” that did not violate Regulation FD. A prosecution would also diverge dramatically from all prior Regulation FD enforcement proceedings, and would violate the Commission’s prior representations not to “second guess” good faith efforts to comply with Regulation FD. In addition, the posting is not inconsistent with the Commission’s 2008 Guidance on the Use of Company Webpages — guidance that is seriously outdated because of the emergence of social media.
This month marked an important milestone in the development of securities law at its newest frontier: social media. For the first time, the Enforcement Division of the U.S. Securities and Exchange Commission (“SEC”) issued a Wells Notice based on a social media communication. This Wells Notice, which notified Netflix, Inc. and its CEO of the Enforcement Division’s intent to recommend an enforcement case to the Commission, demonstrates the potential for liability arising from disclosures by corporate officers through social media. Although the SEC itself uses social media to disclose important information, the agency has yet to offer formal guidance concerning the use of social media to communicate with the investing public. For this reason, the outcome of the SEC’s investigation into Netflix and its CEO’s social media usage will prove instructive to issuers, directors, corporate officers, investors, and members of the securities and white collar bars.
In the paper, Who Killed the Inner Circle? The End of the Era of the Corporate Interlock Network, which was recently made publicly available on SSRN, I show that the American board interlock network has changed in fundamental ways.
Throughout the 20th century, the American board interlock network—in which companies are linked by shared board directors—exhibited a stable cohesiveness, characterized by short path lengths between companies and the existence of an “inner circle” of well-connected directors. This enduring cohesiveness of the interlock network was both the result of elite social cohesion and a key mechanism for maintaining this elite cohesion (e.g., Mills, 1956; Useem, 1984). The characteristics of the interlock network were so stable that Davis, Yoo, and Baker (2003) asserted that short path lengths and an inner circle were inevitable properties of “networks qua networks”.
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?
It is well-known in finance and economics that firms possess private information about their own fundamental values. In our paper, Director Histories and the Pattern of Acquisitions, which was recently made publicly available on SSRN, we contribute to this literature by examining, in the context of the market for corporate control, how the transmission of non-public information about potential targets influences mergers and acquisitions. This is interesting because, despite extensive research on the determinants of acquisitions, we can still only imperfectly predict which firms will choose to initiate acquisitions and, for those that do, how they choose among potential targets.
We capture a potential acquirer’s exposure to target-specific non-public information by tracking the service histories of its directors over time. If a current director was formerly on the board of another firm, we say that the two firms have an historical interlock. We treat these directed firm-pair interlocks as containing information about the firm where the current director once served, and estimate the impact of this information on the decision to initiate an acquisition of that firm. Our main results indicate that a given firm is about five times more likely to initiate an acquisition of a historically-interlocked target than some other unlinked firm.
In our paper, External Networking and Internal Firm Governance, forthcoming in the Journal of Finance, we use panel data on S&P 1500 companies to identify external network connections between directors and CEOs. We observe network connections stemming from shared external board seats, prior employment in other firms, education, or charitable and leisure activities. We test whether these ties affect firm policies and performance.
A well-functioning board of directors provides both valuable advice to management and a check on its policies. An effective director should not just rubber stamp management’s actions, but should take a contrarian opinion when management’s proposals are not in the interest of the firm’s shareholders. Thus, it is important to identify director characteristics which affect their ability or willingness to bring valuable new information into the firm and to properly perform their monitoring role. Our results suggest that having directors with external network ties to the CEO may undermine the effectiveness of corporate governance.
In the paper, Board Interlocks and Earnings Management Contagion, which was recently made publicly available on SSRN, we test whether earnings management (like a virus) spreads from firm to firm via board connections of shared directors (virus carriers).
We use earnings restatements to identify firms that managed earnings and to identify the period when these firms manipulated earnings. We consider firms as infectious in the period when they manipulated earnings. We test whether the directors of the infected firms carry these earnings management behaviors to susceptible firms on whose boards they also sit on.