with Busra Agcayazi and Ahmet Tuncez, forthcoming at British Accounting Review
Abstract: This study examines the nexus between firm hedging strategies and corporate social responsibility (CSR). Utilizing textual analysis of 10-K filings to measure corporate hedging, we find that firms with higher levels of CSR are more inclined to engage in hedging practices and with greater intensity. This tendency is further amplified in the presence of strong corporate governance frameworks. We posit that this is primarily driven by the mitigation of cash flow volatility, the cost of equity, and the cost of debt. Our analysis encompasses various endogeneity tests, including entropy balancing and an instrumental variables approach that considers political and geographic factors. The robustness of the results is further validated through alternative CSR and hedging metrics. This study contributes to the growing body of literature on the strategic financial implications of CSR, highlighting the complementary role of CSR in corporate risk management.
solo authored, Journal of Business Finance & Accounting, 2024
Abstract: Recent studies show that the tax-induced lock-in effect discourages CEOs from unwinding their unrestricted equity and subsequently exacerbates their risk-aversion. I investigate how CEOs’ unrealized capital gains tax liabilities (tax burdens) influence financial reporting conservatism. I find that the demand for accounting conservatism decreases with CEO tax burdens. Further analyses show that the negative relation between CEO tax burden and conservatism is stronger when the firm has high leverage and high default risk and when the CEO's incentives are more aligned with equity holders. This highlights the shareholder–creditor agency conflicts mitigation role of CEO tax burdens in reducing creditors’ demand for conservatism. I exploit the Federal Taxpayer Reform Act of 1997 and staggered state-level tax cuts that significantly decreased personal capital gains tax rates as identification strategies.
with Sangyong Han, Chia-Ling Ho and Gene Lai, Risk Management and Insurance Review, 2024
Abstract: We investigate the relationship between CEOs' past distress experience and risk-taking in US property–liability insurance companies. Our evidence shows that CEOs' past distress experience is negatively associated with insurers' risk-taking behavior, suggesting that CEOs with distress experiences tend to take lower levels of risk in making financial decisions for their firms. The results are robust to using alternative measures of risk-taking, including value at risk, expected shortfall, volatility of stock return, idiosyncratic volatility, systematic volatility, underwriting risk, and investment risk. Additionally, our results pass a placebo test, and we mitigate endogeneity concerns with the propensity score matching method.
with Ahmet Nart and Ahmet Tuncez, Financial Management, 2022
Abstract: This paper examines how a tournament among CEOs to progress within the CEO labor market influences their corporate hedging policies. We employ a textual analysis of 10-Ks to generate corporate hedging proxies, finding that the likelihood and intensity of hedging grow as the CEO labor market tournament prizes increase. We also explore the mitigating impact of corporate hedging on the adverse effects of risk-inducing industry tournament incentives (ITIs) on the cost of debt and stock price crash risk, noting that these could be possible reasons behind the relation. Additionally, we observe that the relationship between ITIs and corporate hedging is less pronounced for firms that demonstrate more financial distress and for firms whose CEOs are the founders of the company or are of retirement age. We identify a causal relation between ITIs and corporate hedging using an instrumental variable approach and an exogenous shock sourced from changes in the enforceability of noncompetition agreements across states.
with Ahmet Nart and Lingfei Kong, Journal of Financial Research, 2022
Abstract: In this article we examine how the tournament-like progression in the CEO labor market influences corporate innovation strategies. By exploiting a text-based proxy for product innovation based on product descriptions from 10-Ks, we find a positive and significant relation between industry tournament incentives (ITIs) and product innovation. We then explore the trade-off effects of ITIs on product innovation created through long-term patenting technologies and short-term product development. We discover that ITIs strengthen short-term innovation but decrease patent-based innovation. Further analyses show that the effect of ITIs on product innovation is stronger when the product market is more competitive and when CEO characteristics indicate a higher probability of winning the tournament prize.
with Bharat Patil and Nilesh Raut, SoftwareX, 2021
Abstract: This paper introduces the R package edgar to download and analyze the Securities and Exchange Commission’s (SEC) mandatory public disclosures in the United States. Corporations in the U.S. submit their periodic reports, registration statements, and financial reports electronically to the SEC. The SEC makes these reports publicly accessible to everyone through the Electronic Data Gathering, Analysis, and Retrieval System (EDGAR). As financial reporting is one of the most crucial aspects of the financial system, efficient retrieval of EDGAR filings becomes imperative for analysts and researchers. We summarize the implementation of edgar package that facilitates downloading, parsing, searching, and sentiment analysis of corporate reports.
with Busra Agcayazi and Tim Trombley
Abstract: This paper explores the impact of CEOs’ unrealized capital gains tax liability on the likelihood of a stock price crash. We find that stock price crash risk increases significantly with the CEO’s tax burden. This risk increases when the CEO concurrently holds the position of chairman, the CEO’s personal wealth is more exposed to the firm, transient institutional ownership is high, or dedicated institutional ownership is low. We find evidence that one potential underlying mechanism is the CEO concealing negative news during earnings calls. The main results remain robust to various endogeneity checks, including a change analysis, the Tax Relief Act of 1997 as an exogenous shock, instrumental variables, and entropy balancing.
with with Gene Lai and Zifen Zeng
Abstract: This paper investigates the relation between CEO conscientiousness and reserve management in U.S. property-liability insurers. The psychology literature claims that conscientiousness is one of the strongest predictors of work-related behavior. We find that CEO conscientiousness is negatively associated with reserve errors in the upper tail of the conditional distribution (at 75th percentile and higher), indicating insurers with more conscientious CEOs reserve less than insurers with less conscientious CEOs at a higher level of reserve errors to lower the cost of excess reserve rather than conservatism when reserve errors are extremely conservative. The evidence also shows that the negative relation is mitigated when insurers face high financial risk. Furthermore, more conscientious CEOs reserve less than less conscientious CEOs after SOX (compared with before SOX) when insurers face higher financial risk, possibly because they are more responsible for financial statements. The evidence is consistent with one feature of conscientiousness: following the rules and norms. Finally, more conscientious CEOs are better rewarded than less conscientious CEOs.
with Busra Agcayazi and Ahmet Tuncez
Abstract: This study examines the impact of generalist CEOs on corporate hedging strategies. We find that firms led by generalist CEOs are more likely to engage in hedging practices compared to those with CEOs who have specialized backgrounds. This effect is particularly pronounced in the presence of robust governance mechanisms and powerful CEOs. Key drivers for the adoption of extensive hedging instruments include increased cash flow volatility, higher R&D expenditures, and intensified product market competition. The results demonstrate that generalist CEOs enhance firm value by improving performance, reducing financial distress, and increasing credit ratings through the effective utilization of hedging tools. To address potential endogeneity issues, we employ the entropy balancing method and high-dimensional fixed effects. Our findings remain robust across various alternative measures of hedging.
with Chia-Ling Ho, Gene Lai, and Ahmet Nart
Abstract: This paper examines the relation between tournament incentives and reserve management. We find a positive relation between internal tournament incentives and reserve errors, implying that a larger pay gap as a tournament prize induces vice presidents (VPs) to overestimate loss reserves. In other words, a higher tournament prize is associated with conservative loss reserve management. Unlike the literature, we do not find a positive relation between tournament incentive and profits (risk taking behavior). Taken together, the evidence indicates that VPs focus on strong financial health of the firm instead of its profitability. In addition, we find the impact of internal tournament incentives on the reserve error is more pronounced for larger, financially weak and more geographically focused firms, and is mitigated for the firms with higher percentage of claim loss reserve over total liability and paying relatively higher tax rates. Our results also suggest that SOX mitigates the conservative reserve behavior. Finally, we also find that as board independence enhances, VPs induced by promotion-based tournaments become more likely to have conservative reserve behavior.