Suraj Srinivasan

13 Results

 

Activist Directors: Determinants and Consequences

Hedge fund activism has become a significant phenomenon in recent years. Compared to traditional shareholder activists, for instance, hedge fund activists have been making a broader range of demands and adopting a wider range of tactics to have those demands met. Given the importance that the demand for board positions has in the activist game plan, the authors of this paper examine hedge fund activism through cases where candidates sponsored by the activists become directors of the target companies. Findings show that activist directors appear to be associated with significant strategic and operational changes in target firms. The study also shows evidence of increased divestiture, decreased acquisition activity, higher probability of being acquired, lower cash balances, higher payout, greater leverage, higher CEO turnover, lower CEO compensation, and reduced investment. The estimated effects are generally greater when activists obtain board representation, consistent with board representation being an important mechanism for bringing about the kinds of changes that activists often demand. Read More

Counting Up the Effects of Sarbanes-Oxley

More than a decade after its inception, the effects of Sarbanes-Oxley seem, if anything, beneficial, say Harvard's Suraj Srinivasan and John C. Coates. Why then do so many critics remain? Open for comment; 6 Comments posted.

Consequences to Directors of Shareholder Activism

Activism by hedge fund and other investors to improve governance and performance of companies has become a significant phenomenon in recent years. In this paper the authors examine a number of career consequences for directors when firms are subject to activist shareholder interventions. Examining 1,868 activism events—all publicly disclosed shareholder activism from 2004 to 2012 conducted by hedge funds or other major shareholders—the authors find that directors exit the board at a higher rate when their firms are targeted by activists. Even directors not specifically targeted by dissident shareholders are also likely to leave the board, as are directors at firms targeted by activism with no board-related demands, let alone a formal proxy fight. Overall, whether departure is voluntary, optimal, or otherwise, the evidence suggests that activism is associated with career consequences for directors. Read More

Accountability of Independent Directors-Evidence from Firms Subject to Securities Litigation

Shareholders have two publicly visible means for holding directors accountable: They can sue directors and they can vote against director re-election. This paper examines accountability of independent directors when firms experience litigation for corporate financial fraud. Analyzing a sample of securities class-action lawsuits from 1996 to 2010, the authors present a fuller picture of the mechanisms that shareholders have to hold directors accountable and which directors they hold accountable. Results overall provide an empirical estimate of the extent of accountability that independent directors bear for corporate problems that lead to securities class-action litigation. These findings are useful for independent directors to assess the extent of risk they face from litigation, shareholder voting, and departure from boards of sued firms. While the percentage of named directors is small compared with the overall population of directors, individual directors can weigh their risk differently. From a policy perspective, the findings provide insight on the role that investors play in holding directors accountable for corporate performance. Read More

Securities Litigation Risk for Foreign Companies Listed in the US

In the US, securities class action litigation provides investors with a mechanism to hold companies and managers accountable for violations of securities laws. This study examines the incidence of securities class action litigation against foreign companies listed in the US and the mechanism driving the litigation risk. Looking at more than 2,000 securities class action lawsuits between 1996 and 2010, the authors find that significant litigation risk does exist for foreign issuers, but at rates considerably lower than for US companies. The authors also identify potential factors in lower litigation rates: 1) transaction costs and 2) the lower rate of trigger events such as accounting restatements, missing management forecasts, or sharp drops in stock prices that are needed in a lawsuit context to allege intentional and wrong prior disclosures on the part of managers. This suggests that while the effective enforcement of securities laws is constrained by transaction costs, availability of high quality information (that reveals potential misconduct) can contribute to a well-functioning litigation market for foreign firms listed in the US. Read More

Admitting Mistakes: Home Country Effect on the Reliability of Restatement Reporting

The authors study restatements by foreign firms listed in the US, compare the extent of restatements by the foreign firms to that of domestic US firms, and examine the role of home country characteristics on the likelihood of the foreign firms restating their financials. When foreign firms list in the US, they become subject to the same accounting rules and regulations as US firms. However, results suggest that foreign firms listed in the US restate significantly less than comparable US firms. This difference is not because the foreign firms have superior accounting quality but because of opportunistic avoidance of issuing a restatement. The difference is driven primarily by firms originating from countries with weaker institutions. Overall, findings imply that restatements are a less accurate measure of the extent of reporting problems in an international setting compared to US domestic firms. Read More

Market Competition, Government Efficiency, and Profitability Around the World

Understanding whether and how corporate profitability mean reverts across countries is important for valuation purposes. This research by Paul M. Healy, George Serafeim, Suraj Srinivasan, and Gwen Yu suggests that firm performance persistence varies systematically. Country product, capital, and to a lesser extent labor market competition all affect the rate of mean reversion of corporate profits. Corporate profitability exhibits faster mean reversion in countries with more competitive factor markets. In contrast, government efficiency decreases the speed of mean reversion, but only when the level of market competition is held constant. The findings are useful to practitioners and scholars interested in understanding how country factors affect corporate profitability. Read More

Non-Audit Services and Financial Reporting Quality: Evidence from 1978-1980

What are the costs and benefits of auditors providing non-audit services? In this paper, the authors investigate whether high non-audit services (NAS) fees relative to audit fees are associated with poor quality financial reporting. Associate Professor Suraj Srinivasan and colleagues look specifically at a sample of S&P 500 firms during the years 1978-80. The authors thus provide an early history analysis of a long-standing regulatory concern that NAS fees create an economic dependence that causes the auditor to acquiesce to the client's wishes in financial reporting, reducing the quality of the audit. This concern led the Sarbanes-Oxley Act to prohibit auditors from providing most consulting services. The authors find that, contrary to regulatory concerns, NAS are associated with better quality financial reporting: lower earnings management and higher earnings informativeness. Conclusions rely on the specific institutional features of the years 1978-80. Read More

Do US Market Interactions Affect CEO Pay? Evidence from UK Companies

CEOs of UK firms receive higher total compensation if their companies have interactions with US product, capital, and labor markets. Moreover, the compensation package is often adopted from American-style arrangements, such as the use of incentive-based pay. Researchers Joseph J. Gerakos (University of Chicago), Joseph D. Piotroski (Stanford), and Suraj Srinivasan (Harvard Business School) analyzed data on the compensation practices of 416 publicly traded UK firms over the period 2002 to 2007. Read More

Audit Quality and Auditor Reputation: Evidence from Japan

High-quality external auditing is a central component of sound corporate governance, yet what determines audit quality? Douglas J. Skinner, of the University of Chicago Booth School of Business, and Suraj Srinivasan, of Harvard Business School, study the Japanese audit market, where recent events provide a powerful setting for investigating the effect of auditor reputation on audit quality absent litigation effects. Specifically, Skinner and Srinivasan analyze events surrounding the collapse of ChuoAoyama, the PricewaterhouseCoopers affiliate in Japan that was implicated in a massive accounting fraud at Kanebo, a large Japanese cosmetics company. Taken as a whole, the researchers' evidence provides support for the view that auditor reputation is important in an economy where the legal system does not provide incentives for auditors to deliver quality. Read More

Perspectives from the Boardroom--2009

Chief executives and regulators have been blamed for the current economic crisis, but in some ways what is surprising is that boards have generally escaped notice. Clearly the experience of corporate boards in the downturn has not been explored. To understand what transpired in the boardrooms of complex companies, and to offer a prescription to improve board effectiveness, eight senior faculty members of the HBS Corporate Governance Initiative talked with 45 prominent directors about what has happened to their companies and why. These directors, who serve on the boards of financial institutions and other complex companies, were asked two broad questions: How well did their boards function before the recession? And, what do they believe should be improved as they look to the future?

This white paper [PDF] first explains how the interviewees characterize the strengths of their boards, then examines in depth six areas in which they identified shortcomings or needs for improvement: 1) clarifying the board's role; 2) acquiring better information and deeper knowledge of the company; 3) maintaining a sound relationship with management; 4) providing oversight of company strategy; 5) assuring management development and succession; 6) improving risk management. Finally, the paper discusses two issues that appeared not to trouble the interviewees but that the public feels are important: executive compensation and the relationship between the board and shareholders. This paper was written by Jay Lorsch with the assistance of Joseph Bower, Clayton Rose, and Suraj Srinivasan. The interviews were conducted by Joseph Bower, Srikant Datar, Raymond Gilmartin, Stephen Kaufman, Rakesh Khurana, Jay Lorsch, and Clayton Rose. Read More

Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items

Do managers' presentation decisions within their financial statements reflect informational motivations (that is, revealing the underlying economics of the firm) or opportunistic motivations (that is, attempts to bias perceptions of firm performance)? The authors examine managers' choices to present special items (such as write-offs and restructuring charges) separately on the income statement rather than aggregated in other line items with disclosure only in the footnotes. Prior research suggests that managers engage in opportunistic reporting in other presentation decisions, and that managers' presentation decisions on the financial statement affects users' judgments. The distinction also matters because current changes in reporting standards are likely to increase the occurrence of "nonrecurring" type charges similar to special items, such as fair value changes. Read More

CEO and CFO Career Penalties to Missing Quarterly Analysts Forecasts

(Previous title: "CEO and CFO Career Consequences to Missing Quarterly Earnings Benchmarks.") This paper investigates whether the failure to meet quarterly earnings benchmarks such as the analysts' consensus forecast matters to CEO and CFO careers, after controlling for both operating and stock return performance and the magnitude of the earnings "surprise" revealed at the earnings announcement. In particular, it evaluates a comprehensive set of career consequences such as the impact on compensation, in the form of bonus and equity grants, and the dismissal of both the CEO and the CFO, conditioned on the failure to meet quarterly earnings benchmarks. Read More