Hostname: page-component-586b7cd67f-t7czq Total loading time: 0 Render date: 2024-11-26T14:23:15.417Z Has data issue: false hasContentIssue false
  • English
  • Français

An Empirical Assessment of Empirical Corporate Finance

Published online by Cambridge University Press:  10 June 2022

Jeffrey L. Coles  and
Zhichuan F. Li Open the ORCID record for Zhichuan F. Li [Opens in a new window]
Jeffrey L. Coles
Affiliation:
University of Utah Eccles School of Business [email protected]
Zhichuan F. Li*
Affiliation:
University of Western Ontario Ivey Business School
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We empirically evaluate 20 prominent contributions across a broad range of areas in the empirical corporate finance literature. We assemble the necessary data and apply a single, simple econometric method, the connected-groups approach of Abowd et al. to appraise the extent to which prevailing empirical specifications explain variation of the dependent variable, differ in composition of fit arising from various classes of independent variables, and exhibit resistance to omitted variable bias and other endogeneity problems. We assess empirical performance across a wide spectrum of areas in corporate finance and indicate varying research opportunities for empiricists and theorists.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 4 , June 2023 , pp. 1391 - 1430
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Ran Duchin (the very constructive referee), Jarrad Harford (the editor), and seminar participants at Arizona State University, the University of Western Ontario, the 2013 Northern Finance Association meetings, 2011 FMA 2011 (Assistant Professors’ Breakfast), 2013 FMA Asia meetings, and the keynote address at the 2019 FMA Europe meeting, as well as Campbell Harvey, for their helpful comments. We thank Yang Jie at the University of Utah for excellent, enabling research assistance.

References

Abowd, J. M.; Karmarz, F.; and Margolis, D. N.. “High Wage Workers and High Wage Firms.” Econometrica, 67 (1999), 251–333.CrossRefGoogle Scholar
Acharya, V.; Myers, S.; and Rajan, R.. “The Internal Governance of Firms.” Journal of Finance, 66 (2011), 689–720.CrossRefGoogle Scholar
Ackerberg, D. A., and Botticini, M.. “Endogenous Matching and the Empirical Determinants of Contract Form.” Journal of Political Economy, 110 (2002), 564–591.CrossRefGoogle Scholar
Agrawal, A., and Knoeber, C.. “Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders.” Journal of Financial and Quantitative Analysis, 31 (1996), 377–397.CrossRefGoogle Scholar
Baker, M., and Gompers, P.. “The Determinants of Board Structure at the Initial Public Offering.” Journal of Law and Economics, 46 (2003), 569–598.CrossRefGoogle Scholar
Bertrand, M., and Schoar, A.. “Managing with Style: The Effect of Managers on Firm Policies.” Quarterly Journal of Economics, 118 (2003), 1169–1208.CrossRefGoogle Scholar
Bettis, J. C.; Bizjak, J. M.; Coles, J. L.; and Young, B.. “The Presence, Value, and Incentive Properties of Relative Performance Evaluation in Executive Compensation Contracts.” Working Paper, Arizona State University (2014).CrossRefGoogle Scholar
Bizjak, J. M.; Kalpathy, S. L.; Li, Z. F.; and Young, B.. “The Role of Peer Firm Selection and Award Design in Explicit Relative Performance Awards.” Working Paper, Arizona State University (2020).Google Scholar
Bizjak, J. M.; Lemmon, M. L.; and Naveen, L.. “Does the Use of Peer Groups Contribute to Higher Pay and Less Efficient Compensation?” Journal of Financial Economics, 90 (2008), 152–168.CrossRefGoogle Scholar
Boone, A.; Field, L.; Karpoff, J.; and Raheja, C.. “The Determinants of Corporate Board Size and Composition: An Empirical Analysis.” Journal of Financial Economics, 85 (2007), 66–101.CrossRefGoogle Scholar
Byoun, S. “When Do Firms Adjust Their Capital Structures Toward Targets?” Journal of Finance, 63 (2008), 3069–3096.CrossRefGoogle Scholar
Byrd, J., and Hickman, K.. “Do Outside Directors Monitor Managers? Evidence from Tender Offer Bids.” Journal of Financial Economics, 32 (1992), 195–222.CrossRefGoogle Scholar
Chatterjee, A., and Hambrick, D. C.. “It’s All About Me: Narcissistic CEOs and Their Effects on Company Strategy and Performance.” Administrative Science Quarterly, 52 (2007), 351–386.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N.; and Naveen, L.. “Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431–468.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N.; and Naveen, L.. “Boards: Does One Size Fit All?” Journal of Financial Economics, 87 (2008), 329–356.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N.; and Naveen, L.. “Calculation of Compensation Incentives and Firm-Related Wealth Using Execucomp: Data, Program, and Explanation.” Working Paper, Temple University (2013).Google Scholar
Coles, J. L.; Daniel, N.; and Naveen, L.. “Co-Opted Boards.” Review of Financial Studies, 27 (2014), 1751–1796.CrossRefGoogle Scholar
Coles, J. L.; Lemmon, M.; and Meschke, J.. “Structural Models and Endogeneity in Corporate Finance: the Link between Managerial Ownership and Corporate Performance.” Journal of Financial Economics, 103 (2012), 149–168.CrossRefGoogle Scholar
Coles, J. L., and Li, Z. F.. “Managerial Attributes, Incentives and Performance.” Review of Corporate Finance Studies, 9 (2020), 256–301.Google Scholar
Coles, J. L., and Li, Z. F.. “Online Appendix to Accompany “An Empirical Assessment of Empirical Corporate Finance”.” Working Paper, University of Western Ontario (2022).Google Scholar
Coles, J. L.; Li, Z. F.; and Wang, A. Y.. “Industry Tournament Incentives.” Review of Financial Studies, 31 (2018), 1418–1459.CrossRefGoogle Scholar
Comment, R., and Schwert, G. W. “Poison or Placebo? Evidence on the Deterrence and Wealth Effects of Modern Anti-takeover Measures.” Journal of Financial Economics, 39 (1995), 3–43.CrossRefGoogle Scholar
Core, J., and Guay, W. “Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility.” Journal of Accounting Research, 40 (2002), 613–630.CrossRefGoogle Scholar
Cornelissen, T. “The Stata Command felsdvreg to Fit a Linear Model with Two High-Dimensional Fixed Effects.” Stata Journal, 8 (2008), 170–189.CrossRefGoogle Scholar
Cronqvist, H.; Makhija, A.; and Yonker, S. “Behavioral Consistency in Corporate Finance: CEO Personal and Corporate Leverage.” Journal of Financial Economics, 103 (2010), 20–40.CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Stulz, R. M.. “Dividend Policy and the Earned/contributed Capital Mix: A Test of the Lifecycle Theory.” Journal of Financial Economics, 81 (2006), 227–254.CrossRefGoogle Scholar
Dey, A.; Engel, E.; and Liu, X.. “CEO and Board Chair Roles: To Split or Not to Split?” Journal of Corporate Finance, 17 (2011), 1595–1618.CrossRefGoogle Scholar
Duchin, R.; Matsusaka, J.; and Ozbas, O.. “When are Outside Directors Effective?” Journal of Financial Economics, 96 (2010), 195–214.CrossRefGoogle Scholar
Faleye, O.; Hoitash, R.; and Hoitash, U.. “The Costs of Intense Board Monitoring.” Journal of Financial Economics, 101 (2011), 160–181.CrossRefGoogle Scholar
Fee, C. E.; Hadlock, C. J.; and Pierce, J. R.. “Managers With and Without Style: Evidence Using Exogenous Variation.” Review of Financial Studies, 26 (2013), 567–601.CrossRefGoogle Scholar
Gao, H.; Harford, J.; and Li, K.. “Determinants of Corporate Cash Policy: Insights from Private Firms.” Journal of Financial Economics, 109 (2013), 623–639.CrossRefGoogle Scholar
Gillan, S. L., and Starks, L. T.. “Corporate Governance Proposals and Shareholder Activism: The Role of Institutional Investors.” Journal of Financial Economics, 57 (2000), 275–305.CrossRefGoogle Scholar
Gompers, P. A.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–155.CrossRefGoogle Scholar
Grable, J. E. “Financial Risk Tolerance and Additional Factors that Affect Risk Taking in Everyday Money Matters.” Journal of Business and Psychology, 14 (2000), 625–630.CrossRefGoogle Scholar
Graham, J.; Harvey, C.; and Puri, M.. “Managerial Attitudes and Corporate Actions.” Journal of Financial Economics, 109 (2009), 103–121.CrossRefGoogle Scholar
Graham, J.; Li, S.; and Qiu, J.. “Managerial Attributes and Executive Compensation.” Review of Financial Studies, 25 (2012), 144–186.CrossRefGoogle Scholar
Grossman, S., and Hart, O.. “Corporate Financial Structure and Managerial Incentives.” In The Economics of Information and Uncertainty, McCall, J. J., ed. Chicago, IL: University of Chicago Press (1982), 107–141.Google Scholar
Guest, P. M. “The Determinants of Board Size and Composition: Evidence from the UK.” Journal of Corporate Finance, 14 (2008), 51–72.CrossRefGoogle Scholar
Hackbarth, D. “Managerial Traits and Capital Structure Decisions.” Journal of Financial and Quantitative Analysis, 43 (2008), 843–882.CrossRefGoogle Scholar
Hambrick, D. “Top Management Groups: A Conceptual Integration and Reconsideration of the Team Label.” In Research in Organizational Behavior, Staw, B. M. and Cummings, L. L., eds. Greenwich, CT: JAI Press (1994), 171–214.Google Scholar
Hambrick, D. “Upper Echelon Theory: An Update.” Academy of Management Review, 32 (2007), 334–343.CrossRefGoogle Scholar
Harford, J. “Corporate Cash Reserves and Acquisitions.” Journal of Finance, 54 (1999), 1969–1997.CrossRefGoogle Scholar
Harford, J., and Li, K. “Decoupling CEO Wealth and Firm Performance: The Case of Acquiring CEOs.” Journal of Finance, 62 (2007), 917–949.CrossRefGoogle Scholar
Harford, J.; Mansi, S.; and Maxwell, W.. “Corporate Governance and Firm Cash Holdings in the US.” Journal of Financial Economics, 87 (2008), 535–555.CrossRefGoogle Scholar
Harris, M., and Raviv, A. “A Theory of Board Control and Size.” Review of Financial Studies, 21 (2008), 1797–1832.CrossRefGoogle Scholar
Hermalin, B., and Weisbach, M.. “Endogenously Chosen Boards of Directors and Their Monitoring of the CEO.” American Economic Review, 88 (1998), 96–118.Google Scholar
Himmelberg, C.; Hubbard, R.; and Palia, D.. “Understanding the Determinants of Managerial Ownership and the Link between Ownership and Performance.” Journal of Financial Economics, 53 (1999), 353–384.CrossRefGoogle Scholar
Hoberg, G.; Phillips, G.; and Prabhala, N.. “Product Market Threats, Payouts, and Financial Flexibility.” Journal of Finance, 69 (2014), 293–324.CrossRefGoogle Scholar
Holmstrom, B. “Moral Hazard and Observability.” Bell Journal of Economics, 10 (1979), 74–91.CrossRefGoogle Scholar
Jayaraman, S., and Milbourn, T.. “The Role of Stock Liquidity in Executive Compensation.” Accounting Review, 87 (2012), 537–563.CrossRefGoogle Scholar
Jensen, M. C., and Murphy, K. J.. “Performance Pay and Top-Management Incentives.” Journal of Political Economy, 98 (1990), 225–264.CrossRefGoogle Scholar
Kaplan, S.; Klebanov, M. M.; and Sorensen, M.. “Which CEO Characteristics and Abilities Matter?” Journal of Finance, 67 (2008), 973–1007.CrossRefGoogle Scholar
Kayhan, A., and Titman, S.. “Firms’ Histories and Their Capital Structures.” Journal of Financial Economics, 83 (2007), 1–32.CrossRefGoogle Scholar
Kennedy, P. A Guide to Econometrics. 5th ed. Cambridge, MA: The MIT Press (2003).Google Scholar
Knyazeva, A.; Knyazeva, D.; and Masulis, R. W.. “The Supply of Corporate Directors and Board Independence.” Review of Financial Studies, 26 (2013), 1561–1605.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R.. “Investor Protection and Corporate Governance.” Journal of Financial Economics, 58 (2000), 3–27.CrossRefGoogle Scholar
Lehn, K. M.; Patro, S.; and Zhao, M.. “Determinants of the Size and Composition of US Corporate Boards: 1935–2000.” Financial Management, 38 (2009), 747–780.CrossRefGoogle Scholar
Lemmon, M. L.; Roberts, M. R.; and Zender, J. F.. “Back to the Beginning: Persistence and the Cross-section of Corporate Capital Structure.” Journal of Finance, 63 (2008), 1575–1608.CrossRefGoogle Scholar
Li, Z. F. “Mutual Monitoring and Corporate Governance.” Journal of Banking & Finance, 45 (2014), 255–269.Google Scholar
Li, Z. F. “Number Two Executives: Bottom-up Monitoring.” Working Paper, University of Western Ontario (2022).Google Scholar
Linck, J. S.; Netter, J. M.; and Yang, T.. “The Determinants of Board Structure.” Journal of Financial Economics, 87 (2008), 308–328.CrossRefGoogle Scholar
Low, A. “Managerial Risk-taking Behavior and Equity-based Compensation.” Journal of Financial Economics, 92 (2009), 470–490.CrossRefGoogle Scholar
Malmendier, U., and Tate, G.. “CEO Overconfidence and Corporate Investment.” Journal of Finance, 60 (2005), 2661–2700.CrossRefGoogle Scholar
Malmendier, U., and Tate, G.. “Who Makes Acquisitions? CEO Overconfidence and the Market’s Reaction.” Journal of Financial Economics, 89 (2008), 20–43.CrossRefGoogle Scholar
Mehran, H. “Executive Compensation Structure, Ownership, and Firm Performance.” Journal of Financial Economics, 38 (1995), 163–184.CrossRefGoogle Scholar
Meneghetti, C., and Williams, R. “Fortune Favors the Bold.” Journal of Financial and Quantitative Analysis, 52 (2017), 895–925.CrossRefGoogle Scholar
Mirrlees, J. “The Optimal Structure of Incentives and Authority Within an Organization.” Bell Journal of Economics, 7 (1976), 105–131.CrossRefGoogle Scholar
Modigliani, F., and Miller, M. “The Cost of Capital, Corporate Finance and Theory of Investment.” American Economic Review, 48 (1958), 261–297.Google Scholar
Murphy, K. J. “Executive Compensation.” In Handbook of Labor Economics, Ashenfelter, O. and Card, D., eds. Amsterdam, Netherlands: Elsevier/North Holland (1999), 2485–2563.Google Scholar
Raheja, C. “Determinants of Board Size and Composition: A Theory of Corporate Boards.” Journal of Financial and Quantitative Analysis, 40 (2005), 283–306.CrossRefGoogle Scholar
Shane, S. Born Entrepreneurs, Born Leaders: How Your Genes Affect Your Work Life. New York, NY: Oxford University Press (2010).Google Scholar
Shivdasani, A., and Yermack, D.. “CEO Involvement in the Selection of New Board Members: An Empirical Analysis.” Journal of Finance, 54 (1999), 1829–1853.CrossRefGoogle Scholar
Weisbach, M. “Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 421–460.CrossRefGoogle Scholar
Yermack, D. “Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185–212.CrossRefGoogle Scholar
Yu, F. “Analyst Coverage and Earnings Management.” Journal of Financial Economics, 88 (2008), 245–271.CrossRefGoogle Scholar
Supplementary material: PDF

Coles and Li supplementary material

Coles and Li supplementary material

Download Coles and Li supplementary material(PDF)
PDF 82.4 KB