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Session Overview
CFGE-7: Corporate Governance
Friday, 23/Aug/2019:
13:30 - 15:00

Session Chair: Vyacheslav Fos, Boston College
Location: D -107

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Media and Shareholder Activism

Abhishek {Abhi} Ganguly

Indiana University, Bloomington, United States of America

Discussant: Mathias Kronlund (University of Illinois at Urbana-Champaign)

Using more than twenty-five million firm-level articles published in the media, I examine the role of media in shareholder activism events during the years 2002-2014. I find that conditioning on numerous observable firm-specific characteristics and unobservables, broader and negative ex-ante media coverage is positively associated with the probability of a firm being a shareholder activist’s target. The positive correlation between media coverage and the propensity for targeting by activists is robust to the use of instrumental variable (IV) approach indicating that the documented relation is plausibly causal. The association between negative media tone and activism is stronger during the times of greater divergence of opinion about the firm amongst analysts. However, during times of overall low sentiments, the shareholder activists become less sensitive to media tone. I further document that media coverage also plays a crucial role in determining the outcomes of activism events. Target firms with ex-ante positive media coverage not only have significantly lower announcement returns but also have a higher likelihood of management winning. Overall, the results provide empirical evidence for the linkage between shareholder activism and limited investor attention and investor opinion, as suggested by theories.

efa2019-CFGE-7-493-Media and Shareholder Activism.pdf

Punish One, Teach A Hundred: The Sobering Effect of Punishment on the Unpunished

Francesco D'Acunto2, Michael Weber1, Jin Xie3

1University of Chicago, United States of America; 2Boston College, United States of America; 3Chinese University Hong Kong

Discussant: Shan Zhao (City University of Hong Kong)

Direct experience of a peer's punishment might make salient the probability and consequences of facing punishment and hence induce a change in the behavior of non-punished peers. We test this mechanism in a setting, China, in which we observe the reactions to the same peer's punishment by listed firms with different incentives to react -- state-owned enterprises (SOEs) and non-SOEs. After observing peers punished for wrongdoing in loan guarantees to related parties, SOEs -- which are less disciplined by traditional governance mechanisms than non-SOEs -- cut their loan guarantees. SOEs whose CEOs have stronger career concerns react more than other SOEs to the same punishment events, a result that systematic differences between SOEs and non-SOEs cannot drive. SOEs react more to more salient events even if information about all events is publicly available. After peers' punishments, SOEs also increase their board independence, reduce inefficient investment, increase total factor productivity, and experience positive cumulative abnormal returns around peers' punishments. We detect no shifting to more opaque forms of tunneling. Strategic punishments could be a cost-effective governance mechanism when other forms of governance are ineffective.

efa2019-CFGE-7-771-Punish One, Teach A Hundred.pdf

Peer Effects in Corporate Governance Practices: Evidence from Universal Demand Laws

Pouyan Foroughi1, Alan Marcus2, Vinh Nguyen3, Hassan Tehranian2

1University of New South Wales (UNSW), Australia; 2Boston College; 3University of Hong Kong

Discussant: Nickolay Gantchev (Southern Methodist University)

Firms in the same networks tend to have similar corporate governance practices. However, it is difficult to disentangle peer effects, where governance practices propagate from one firm to another, from selection effects, where firms with similar governance preferences self-select into linked groups. Studying board-interlocked firms, we utilize a novel instrument based on the staggered adoption of universal demand laws across states to identify causal peer effects in firms’ decisions concerning CEO compensation, CEO duality, and anti-takeover provisions. Our results provide support for the existence of peer effect in the adoption of anti-takeover provisions. We find that the entrenchment index (E-Index) of a firm increases by 0.33 points for every point increase in the E-Index of firms in the same board interlock network. The impact of universal demand laws on the interlocking directors’ prior experience in passing these provisions is a likely mechanism explaining these effects.

efa2019-CFGE-7-407-Peer Effects in Corporate Governance Practices.pdf

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