Person:

Cohen, Alma

When organizational structures and contractual arrangements face agents with a significant risk of termination in the short term, such agents may under-invest in projects whose results would be realized only in the long term. We use NBA data to study how risk of termination in the short term affects the decision of coaches. Because letting a rookie play produces long-term benefits on which coaches with a shorter investment horizon might place lower weight, we hypothesize that higher termination risk might lead to lower rookie participation. Consistent with this hypothesis, we find that, during the period of the NBA’s 1999 collective bargaining agreement (CBA) and controlling for the characteristics of rookies and their teams, higher termination risk was associated with lower rookie participation and that this association was driven by important games. We also find that the association does not exist for second-year players and that the identified association disappeared when the 2005 CBA gave team owners stronger incentives to monitor the performance of rookies and preclude their underuse.

The standard narrative of the meltdown of Bear Stearns and Lehman Brothers assumes that the wealth of the top executives of these firms was largely wiped out along with their firms. In the ongoing debate about regulatory responses to the financial crisis, commentators have used this assumed fact as a basis for dismissing both the role of compensation structures in inducing risk-taking and the potential value of reforming such structures. This paper provides a case study of compensation at Bear Stearns and Lehman during 2000-2008 and concludes that this assumed fact is incorrect.

We find that the top-five executive teams of these firms cashed out large amounts of performance-based compensation during the 2000-2008 period. During this period, they were able to cash out large amounts of bonus compensation that was not clawed back when the firms collapsed, as well as to pocket large amounts from selling shares. Overall, we estimate that the top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses and equity sales during 2000-2008. These cash flows substantially exceeded the value of the executives’ initial holdings in the beginning of the period, and the executives’ net payoffs for the period were thus decidedly positive. The divergence between how the top executives and their shareholders fared implies that it is not possible to rule out, as standard narratives suggest, that the executives’ pay arrangements provided them with excessive risk-taking incentives. We discuss the implications of our analysis for understanding the possible role that pay arrangements have played in the run-up to the financial crisis and how they should be reformed going forward.

This paper investigates empirically how the value of publicly traded firms is affected by arrangements that protect management from removal. Staggered boards, which a majority of U.S. public companies have, substantially insulate boards from removal in either a hostile takeover or a proxy contest. We find that staggered boards are associated with an economically meaningful reduction in firm value (as measured by Tobin's Q). We also provide suggestive evidence that staggered boards bring about, and not merely reflect, an economically significant reduction in firm value. Finally, the correlation with reduced firm value is stronger for staggered boards that are established in the corporate charter (which shareholders cannot amend) than for staggered boards established in the company's bylaws (which shareholders can amend).

We investigate the relative importance of the twenty-four provisions followed by the Investor Responsibility Research Center (IRRC) and included in the Gompers, Ishii, and Metrick governance index (Gompers, Ishii, and Metrick 2003). We put forward an entrenchment index based on six provisions: staggered boards, limits to shareholder bylaw amendments, poison pills, golden parachutes, and supermajority requirements for mergers and charter amendments. We find that increases in the index level are monotonically associated with economically significant reductions in firm valuation as well as large negative abnormal returns during the 1990–2003 period. The other eighteen IRRC provisions not in our entrenchment index were uncorrelated with either reduced firm valuation or negative abnormal returns.

During the period 1991-1999, stock returns were correlated with the G-Index based on twenty-four governance provisions (Gompers, Ishii, and Metrick (2003)) and the E-Index based on the six provisions that matter most (Bebchuk, Cohen, and Ferrell (2009)). This correlation, however, did not persist during the subsequent period 2000-2008. We provide evidence that both the identified correlation and its subsequent disappearance were due to market participants’ gradually learning to appreciate the difference between firms scoring well and poorly on the governance indices. Consistent with the learning hypothesis, we find that:

(i) The disappearance of the governance-return correlation was associated with an increase in the attention to governance by a wide range of market participants; (ii) Until the beginning of the 2000s, but not subsequently, stock market reactions to earning announcements reflected the market’s being more positively surprised by the earning announcements of good-governance firms than by those of poor-governance firms; (iii) Stock analysts were also more positively surprised by the earning announcements of good-governance firms than by those of poor-governance firms until the beginning of the 2000s but not afterwards; (iv) While the G-Index and E-Index could no longer generate abnormal returns in the 2000s, their negative association with Tobin’s Q and operating performance persisted; and (v) The existence and subsequent disappearance of the governance-return correlation cannot be fully explained by additional common risk factors suggested in the literature for augmenting the Fame-French-Carhart four-factor model.

We seek to contribute to an understanding of how judicial elections affect the incentives and decisions of judges. We develop a theoretical model suggesting that judges who are concerned about their reputation would tend to "decide against their prior" as they approach elections. That is, judges who imposed a large number of severe sentences in the past, and are thus perceived to be strict, would tend to impose less severe sentences prior to elections, and judges who imposed a large number of light sentences in the past, and are perceived to be lenient, would tend to impose more severe sentences prior to elections. Using data from the Pennsylvania Commission on Sentencing (PCS), we test, and find evidence consistent with, the predictions of our model.

This paper provides experimental evidence on the effect of affirmative action (AA). In particular, we investigate whether affirmative action has a ”stereotype threat effect” – that is, whether AA cues a negative stereotype that leads individuals to conform to the stereotype and adversely affects their performance. Stereotype threat has been shown in the literature to be potentially significant for individuals who identify strongly with the domain of the stereotype and who engage in complex stereotype-relevant tasks. We therefore explore this question in the context of gender-based AA for a complex math task. In this context, the stereotype is most relevant for women with high math ability, and the stereotype threat effects can be expected to work in the opposite direction to AA’s competition effect that encourages women to compete. We find that, consistent with the presence of a stereotype threat, AA has an overall negative effect on the performance of high-ability women performing complex math tasks.

The well-established negative correlation between staggered boards (SBs) and firm value could be due to SBs leading to lower value or a reflection of low-value firms' greater propensity to maintain SBs. We analyze the causal question using a natural experiment involving two Delaware court rulings―separated by several weeks and going in opposite directions―that affected the antitakeover force of SBs. We contribute to the long-standing debate on staggered boards by documenting empirical evidence consistent with the market viewing SBs as leading to lower firm value for the affected firms.

Cohen and Wang (2013) (CW2013) provide evidence consistent with market participants perceiving staggered boards to be value reducing. Amihud and Stoyanov (2016) (AS2016) contests these findings, reporting some specifications under which the results are not statistically significant. We show that the results retain their significance under a wide array of robustness tests that address the concerns expressed by AS2016. Our empirical findings reinforce the conclusions of CW2013.