E-mail: eigoldma at indiana.edu
Associate Professor and FedEx Faculty Fellow
Kelley School of Business
Finance Department, Room 356A
1309 East 10th Street
Bloomington, IN 47405
Tel: +1 812 856 0749
1. With Steve Slezak, "Delegated Portfolio Management and Rational Prolonged Mispricing", Journal of Finance, 2003, 58(1), 283-311.
Nominated for Smith Breeden Prize as best paper published in the Journal of Finance
This paper examines how information becomes reflected in prices when investment decisions are delegated to fund managers whose tenure may be
shorter than the time it takes for their private information to become public. We consider a sequence of managers, where each subsequent manager inherits
the portfolio of their predecessor. We show that the inherited portfolio distorts the subsequent manager’s incentive to trade on long-term information. This
allows erroneous past information to persist, causing mispricing similar to a bubble. We investigate the magnitude of the mispricing. In addition, we examine
endogenous information quality. In some cases, information quality increases when the manager’s expected tenure decreases.
2. "The Impact of Stock Market Information Production on Internal Resource Allocation", Journal of Financial Economics, 2004, 71,
We analyze the resource allocation decision of a manager inside a multi-division firm whose compensation is based on the firm’s stock price. We find that internal
investments exhibit a positive correlation across the firms divisions. Namely, when two single-division firms merge the optimal investment level in one division
becomes more positively related to the investment level in the other division. In addition, following a spinoff, divisional investments decline (increase) whenever
the separated division has a project with a low (high) Sharpe ratio. Finally, multi-division firms trade at a discount which is larger the more diverse the investment
sets of the divisions.
3. "Organizational Form, Information Collection, and the Value of the Firm", Journal of Business, 2005, 78(3), 817-840.
We analyze the impact of organizational form on the incentive of market participants to collect value relevant information about divisions of the firm. We explore
whether the market collects less information about divisions of a multi division firm relative to the case in which each division trades as a separate firm.
We find that organizational form has a non trivial impact on information collection. In particular, we find that a spinoff may lead to either an increase or a decrease
aggregate information collection. We explore how this result affects firm
value and find the conditions under which a spinoff increases and decreases
Our results provide a novel rationale for why firms may choose to spinoff a division or issue a tracking stock.
4. With Qian Jun, "Optimal Toeholds in Takeover Contests," Journal of Financial Economics, 2005, 77(2), 321-346.
We offer an explanation for why raiders do not acquire the maximum possible toehold prior to announcing a takeover bid. By endogenously modeling
the target firm’s value following an unsuccessful takeover we demonstrate that a raider may optimally acquire a small toehold even if the acquisition
does not drive up the pre-tender target price. This occurs because although a larger toehold increases profits if the takeover succeeds it also conveys a
higher level of managerial entrenchment and hence a lower firm value if the takeover fails. We derive new predictions regarding the optimal toehold and
target value following a failed takeover. We also examine the impact of a rival bidder and dilution.
5. With Steve Slezak, "An Equilibrium Model of Incentive Contracts in the Presence of Information Manipulation", Journal of Financial
Economics, 2006, 80(3), 603-626. (This paper was formerly titled "The Economics of Fraudulent Misreporting")
This paper develops an agency model in which stock-based compensation is a double-edged sword, inducing managers to exert productive effort but
also to divert valuable firm resources to misrepresent performance. We examine how the potential for manipulation affects the equilibrium
level of pay-for-performance sensitivity and derive several new cross-sectional implications that are consistent with recent empirical studies.
In addition, we analyze the impact of recent regulatory changes contained in the Sarbanes-Oxley Act of 2002 and show how policies intended to increase
firm value by reducing misrepresentation can actually reduce firm value or increase the upward bias in manipulated disclosures.
6. With Jorg Rocholl, and Jongil So, "Do Politically Connected Boards Affect Firm Value?",2009, Review of Financial Studies.
This paper explores whether political connections are important in the United States. The paper uses an original hand-collected data set on the political
connections of board members of S&P500 companies to sort companies into those connected to the Republican Party and those connected to the Democratic
Party. The analysis shows a positive abnormal stock return following the announcement of the nomination of a politically connected individual to the board.
The paper also analyzes the stock price response to the Republican win of the 2000 Presidential Election and finds that companies connected to the Republican
Party increase in value while companies connected to the Democratic Party decrease in value.
7. With Irina Stefanescu and Urs Peyer, "Fraudulent earnings manipulation and industry rivals", 2012, Financial Management.
Previous work on fraudulent earnings manipulation has focused on the fraud firm. This paper broadens the scope of analysis and studies how
fraud impacts the rivals of the fraud firm. Our starting point is the observation that a rival firm may either suffer or benefit from the revelation
that one of its competitors has committed fraud. On the one hand a rival firm may benefit due to the expectation that the fraud firm will be less
able to compete in the product market. On the other hand the rival firm may suffer to the extent that the revelation of inflated earnings by the fraud
firm results in shareholders revising downward their assessment of future rival firm or industry-wide profits. Based on this observation we develop
several predictions about the impact of the announcement of fraud and find that while rival firms, on average, suffer a loss in value upon the revelation
of fraud this negative effect is not uniform across all rivals. Consistent with our predictions, we find, for example, that announcement returns are higher
for rival firms in more concentrated industries, for rivals of larger fraud firms, and for rivals with lower valuation uncertainty.
8. With Jorg Rocholl and Jongil So, "Political Connections and the Allocation of Procurement Contracts", 2013, Review of Finance.
This paper analyzes whether political connections of public corporations in the United States affect the allocation of
government procurement contracts. The paper classifies the political affiliation of S&P 500 companies using hand collected
data that detail the past political position of each of their board members. Using this classification, the study focuses on the
change in control of both House and Senate following the 1994 midterm election and on the change in the Presidency following
the 2000 election. An analysis of the change in the value of the procurement contracts awarded to these companies before and
after 1994 and 2000, respectively, indicates that companies that are connected to the winning (losing) party are significantly more
likely to experience an increase (decrease) in procurement contracts. The results remain significant after controlling for industry
classifications as well as for several firm characteristics. In total, these findings suggest that the allocation of procurement contracts
is influenced, at least in part, by political connections. Thus, our study provides one of the first pieces of evidence showing a direct
avenue through which political connections add value to U.S. companies.
9. With Gunter Strobl, "Large Shareholder Trading and Investment Complexity", 2013, Journal of Financial Intermediation.
Complex assets are assets that are difficult to value in the short term. In this paper, we analyze the incentives of a manager who is compensated based on short-term stock prices
to invest in complex assets and explore how the manager's investment decision is affected by the presence of a large shareholder. The short-term stock price reflects information
about the profitability of the investment to the extent that a large shareholder collects private information and trades on it. We model the large shareholder as a mutual fund or a hedge
fund manager and show that large ownership stakes by these agents motivates the firm's manager to invest in more complex projects. This, in turn, lowers the large shareholder's incentive
to collect information. The key to our model is the observation that the horizon of the fund manager, who is in effect the large shareholder, may be shorter than the time needed for the
project's true value to become known to the public. This leads to an equilibrium in which the trades of the fund manager bias the short term price upwards and managers increase the complexity
of their investment projects in order to strengthen this upward bias.
10. With Peggy Huang, " Contractual versus actual pay following CEO departure", 2014, Forthcoming Management Science.
Using hand-collected data, we document the actual separation pay given to CEOs upon departing their company and show that, on average, actual separation pay levels are $3 million higher than the amount specified in the CEO’s severance contract. We investigate several potential explanations for this phenomenon and find evidence that in voluntary departures, excess separation pay represents a governance problem. In contrast, we find evidence that in forced departures, excess
separation pay represents a need to facilitate a quick and smooth transition from the failed ex-CEO to a new CEO. These results help to shed light on the dual role
played by severance compensation and on the bargaining game played between the board and the departing executive.
11. With Alex Borisov, and Nandini Gupta, "The value and (Corrupt) Lobbying" 2013
Does corporate lobbying add value to shareholders and if it does is it simply because lobbying allows firms to communicate expert information to policy makers, or because lobbying facilitates potentially illegal quid pro quo arrangements, where lawmakers receive private benefits in exchange for favorable policy decisions? Using the corruption scandal involving the top Washington D.C. lobbyist Jack Abramoff as an exogenous negative shock to the ability of firms to lobby, we examine whether lobbying affects the market value of firms and whether some of this added market value can be attributed to illegal lobbying practices.
The results suggest that firms that lobby more experience a significant decrease in market value following the guilty plea by Mr. Abramoff to bribery and corruption. A firm that spent $100,000 more on lobbying prior to the event year experiences an average decrease of $1.4 million in value in a 3-day event window around the guilty plea, suggesting that lobbying activity increases shareholder value. To examine whether lobbying adds value by helping to corrupt politicians, we use corporate social responsibility rankings to capture a firm’s propensity to engage in corrupt practices, and find that lobbying firms with a poor reputation experience a greater decrease in value following the scandal. We also find that legislation aimed at curbing corrupt lobbying practices significantly reduces firm value. A firm that spent $100,000 more on lobbying prior to the event year, experiences an average decrease of $0.84 million in value in a 3-day event window around the passage of the anti-corruption law. Finally, we examine whether opaque firms, who may have a greater need to inform politicians, benefit more from lobbying and find no evidence that these firms benefit more. Our results indicate that lobbying creates shareholder value, which can partly be attributed to corrupt lobbying practices.
12. "Board Power, Board Information, and CEO Talents" 2013
This paper develops a theory of board power when managers can be more talented and skilled than the board members who monitor them.
The paper shows that board power can be helpful in eliminating overinvestment by low talent managers but that this comes at a cost of value destroying
board intervention when the manager is highly talented. The paper highlights the importance of the interaction between board control and the board's incentive to become informed.
Using the model we derive several implications on how board power impacts managerial turnover, managerial investment, and overall firm value.
For example, we show that better governance as measured by board control can result in lower sensitivity of turnover to negative market signals, in boards that
discourage innovative investments, and in lower firm value. The paper thus analyzes some of the costs associated with awarding the board with too much power.
13. With Merih Sevilier, "Large shareholders and the value of takeover defenses" 2008
Takeover defenses are generally viewed as a tool used by entrench managers
to prevent raiders from taking over the firm. As a consequence, activist
groups interested in governance reform have recently been arguing for the elimination of such defenses. In this paper we analyze the value impact of
takeover defenses when looking at the takeover market as one component of the overall governance system of the firm. We demonstrate that governance
reform that attempts to eliminate takeover defenses is not necessarily optimal for shareholders. The key insight of the model is that a company may
be monitored by two distinct entities: an active outside raider and a passive large (institutional) shareholder. The paper finds that an ex-ante
commitment to a more aggressive takeover defense strategy will result in
both a decrease in the incentive of potential raiders to search
for a value-increasing takeover as well as an increase in the incentive of the large institutional shareholder to monitor current management. Thus, the
model offers a motivation as to why takeover defenses may increase the ex-ante value of the firm. An analysis of the resulting equilibrium offers
several empirical predictions with respect to the conditions under which this is the case. While takeover defenses always decrease firm value if the
takeover market generates sufficiently high synergy values we also find that when these synergies are not too high takeover defenses can actually
increase firm value. For example, whenever the large shareholder is a sufficiently good monitor and/or whenever she has a large enough equity
stake we find that the adoption of a takeover defense increases the value of the firm. In addition, when takeover defenses are chosen endogenously we
find that the level of defense is negatively correlated with the quality of the incumbent's investment opportunity set (i.e., a proxy for Tobins q), and
positively related to the expected size of the raider's toehold.
Work in progress:
14. With Leonce Bargeron, Ron Kaniel, and Laura Starks, "Decomposing Firm Volatility: Changing Estimates of Systematic Risk” 2007.