The consequences of managerial indiscretions: Sex, lies, and firm value

Cline, Brandon N.; Walkling, Ralph A.; Yore, Adam S.

doi:10.1016/j.jfineco.2017.11.008

Cited by 101 publications

(42 citation statements)

References 53 publications

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“…Our finding is consistent with the finding ofHazarika, Karpoff, and Nahata (2012) that shows that boards are more likely to dismiss their CEOs for unethical behavior.20 See Panel E ofTable 2inCline, Walkling, and Yore (2018). 21 See Weisbach (1988).…”

supporting

confidence: 82%

The Market Price of Managerial Indiscretions

Cline¹,

Walkling

Yore

2018

J Applied Corp Finance

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To what extent should investors be concerned about the personal behavior of the top managers of the companies they invest in? In a study published recently in the Journal of Financial Economics, the authors shed light on this question by examining the market responses to revelations of over 300 cases of personal misconduct by senior executives and directors, including episodes of domestic violence, DUIs, extramarital affairs, and public dishonesty. In so doing, they provide suggestive evidence of how “tone at the top” can affect corporate policy by way of its culture and how a manager's reputation spills over to that of the firm.The authors' findings show that the companies employing these executives experienced meaningful financial and product market penalties following the disclosure of their unethical behavior. Following the revelation of an indiscretion, investors suffered immediate losses in shareholder wealth—on the order of 4% in cases involving CEOs—and the company's stock continued to underperform during the ensuing year, with total losses amounting to 12 %–14% of firm value. Such companies also tended to lose joint venture partnerships and major customers following these scandals, thereby forcing them into lower‐margin lines of business. The authors also find that such companies were more likely later to commit fraud and be targeted in shareholder class‐action lawsuits.The offending managers themselves were disciplined by the labor market for their missteps in that they faced a higher likelihood of dismissal, and those who were retained earned around $400,000 less pay following the indiscretion. Nevertheless, it is notable that a majority of these executives were not fired, implying that their supervising boards felt they contributed more value to the firm than the damage they caused through their off‐the‐job behavior. Interestingly, the board members supervising these executives were also held accountable for managerial indiscretions in that they received less shareholder support in director elections following the scandals.

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supporting

confidence: 82%

The Market Price of Managerial Indiscretions

Cline¹,

Walkling

Yore

2018

J Applied Corp Finance

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“…The total market value of all 222 affected firms is more than 4 trillion euro. 10 We estimate the firm-specific change in abnormal market value as the product of a firm's market value and its abnormal return in our two-day event window (Cline et al, 2018;Malatesta, 1983;Peterson, 1989). 11 The overall abnormal market value change is the sum of all affected firms' abnormal market value changes.…”

Section: Economic Magnitudementioning

confidence: 99%

“…Next, we translate the cumulative average abnormal return drop into absolute terms. In line with Cline et al (2018), we calculate the change in market value based on firm-specific abnormal returns. The total abnormal market value change is estimated to be economically meaningful by at least minus 52 billion euro over the two-day event window.…”

mentioning

confidence: 99%

Ring-Fencing Digital Corporations: Investor Reaction to the European Commission’s Digital Tax Proposals

2019

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We study the effect of digital tax measures on firm value. By employing an event study methodology, we analyze investor reaction to the European Commission's proposals on the taxation of digital corporations. Examining the stock returns of potentially affected corporations surrounding the draft directives' release, we find a significant abnormal capital market reaction of-0.692 percentage points. The investor reaction is more pronounced for firms that engage more actively in tax avoidance, have a higher profit shifting potential, and for those with higher exposure to the EU. The market value of digital and innovative corporations decreased by at least 52 billion euro in excess of the regular market movement during the event window. Overall, our study reveals that expectations about ringfencing digital tax measures impact firm values.

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“…For example, Karpoff, Lee, and Martin (2008) show that about 90% of CEOs lose their job when they are the target of enforcement actions from the U.S. Securities and Exchange Commission and U.S. Department of Justice for financial misrepresentation. Cline, Walking, and Yore (2018) find that indiscretions by a CEO significantly increase the likelihood that he is replaced, and Gupta, Misra, and Shi (2018) find that backdating option scandals increase CEO turnovers. Fredrickson, Hambrick, and Baumrin (1988) note that not meeting the expectations of the board can lead to a CEO's dismissal.…”

Section: Introductionmentioning

confidence: 99%

Economic Policy Uncertainty and Board Monitoring: Evidence From Ceo Turnovers

Frye

Pham

2020

J of Financial Research

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We examine whether economic policy uncertainty (EPU) affects a board's chief executive officer (CEO) replacement decision. We find that high EPU reduces the likelihood of forced CEO turnover. Our results support the idea that performance assessment may be more difficult when uncertainty is high. We provide evidence that succession planning may be important to firms in reducing the effects of EPU, as firms with an identifiable heir apparent are not influenced by high EPU. Likewise, voluntary CEO turnovers are not affected by EPU. Overall, our results provide evidence that boards make personnel decisions in response to external macroeconomic pressures.

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The consequences of managerial indiscretions: Sex, lies, and firm value

Cited by 101 publications

References 53 publications

The Market Price of Managerial Indiscretions

The Market Price of Managerial Indiscretions

Ring-Fencing Digital Corporations: Investor Reaction to the European Commission’s Digital Tax Proposals

Economic Policy Uncertainty and Board Monitoring: Evidence From Ceo Turnovers

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