Hostname: page-component-78c5997874-g7gxr Total loading time: 0 Render date: 2024-11-15T06:17:26.422Z Has data issue: false hasContentIssue false
  • English
  • Français

Management Quality, Financial and Investment Policies, and Asymmetric Information

Published online by Cambridge University Press:  01 October 2009

Thomas J. Chemmanur ,
Imants Paeglis  and
Karen Simonyan
Thomas J. Chemmanur
Affiliation:
Boston College, Carroll School of Management, 440 Fulton Hall, Chestnut Hill, MA 02467. chemmanu@bc.edu
Imants Paeglis
Affiliation:
Concordia University, John Molson School of Business, 1455 de Maisonneuve Boulevard West, Montreal, Quebec H3G 1M8, Canada. ipaeglis@jmsb.concordia.ca
Karen Simonyan
Affiliation:
Suffolk University, Sawyer Business School, 8 Ashburton Place, Boston, MA 02108. ksimonya@suffolk.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

We develop measures of the management quality of firms and make use of a unique sample of hand-collected data to examine the relationship between the reputation and quality of a firm’s management and its financial and investment policies, a relationship that has so far received little attention in the literature. We hypothesize that better and more reputable managers are able to convey the intrinsic value of their firm more credibly to outsiders, thus reducing the information asymmetry facing their firm in the equity market. Given this, firms with better and more reputable managers will have more access to the equity market, so that we expect lower leverage ratios for these firms. In addition, they will have less need to signal using dividends, so that they will have lower dividend payout ratios. Further, since better managers are likely to select better projects (having a larger net present value (NPV) for any given scale) and to implement them more ably, higher management quality will also be associated with higher levels of investment. We present evidence consistent with the above hypotheses. Our direct tests of the relationship between management quality and asymmetric information also indicate that higher management quality leads to a reduction in the extent of information asymmetry facing a firm in the equity market.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 5 , October 2009 , pp. 1045 - 1079
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

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
Bhattacharya, S. “Imperfect Information, Dividend Policy, and ‘the Bird in the Hand’ Fallacy.” Bell Journal of Economics, 10 (1979), 259–270.CrossRefGoogle Scholar
Borokhovich, K. A.; Parrino, R.; and Trapani, T.. “Outside Directors and CEO Selection.” Journal of Financial and Quantitative Analysis, 31 (1996), 337–355.CrossRefGoogle Scholar
Chemmanur, T. J., and Fulghieri, P.. “Investment Bank Reputation, Information Production, and Financial Intermediation.” Journal of Finance, 49 (1994), 57–79.CrossRefGoogle Scholar
Chemmanur, T. J., and Jiao, Y.. “Seasoned Equity Issues with ‘Soft’ Information: Theory and Empirical Evidence.” Working Paper, Boston College (2005).Google Scholar
Chemmanur, T. J., and Paeglis, I.. “Management Quality, Certification, and Initial Public Offerings.” Journal of Financial Economics, 76 (2005), 331–368.CrossRefGoogle Scholar
Chevalier, J., and Ellison, G.. “Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance.” Journal of Finance, 54 (1999), 875–899.CrossRefGoogle Scholar
Christie, A. A. “On Cross-Sectional Analysis in Accounting Research.” Journal of Accounting and Economics, 9 (1987), 231–258.CrossRefGoogle Scholar
Clarke, J., and Shastri, K.. “On Information Asymmetry Metrics.” Working Paper, University of Pittsburgh (2001).CrossRefGoogle Scholar
Cotter, J. F.; Shivdasani, A.; and Zenner, M.. “Do Independent Directors Enhance Target Shareholder Wealth during Tender Offers? ” Journal of Financial Economics, 43 (1997), 195–218.CrossRefGoogle Scholar
Crémer, J. “Corporate Culture and Shared Knowledge.” Industrial and Corporate Change, 2 (1993), 351–386.Google Scholar
D’Aveni, R. A. “Top Managerial Prestige and Organizational Bankruptcy.” Organization Science, 1 (1990), 121–142.CrossRefGoogle Scholar
Easterbrook, F. H. “Two Agency-Cost Explanations of Dividends.” American Economic Review, 74 (1984), 650–659.Google Scholar
Eckbo, B. E., and Norli, Ø.. “Liquidity Risk, Leverage, and Long-Run IPO Returns.” Journal of Corporate Finance, 11 (2005), 1–35.CrossRefGoogle Scholar
Gaver, J. J., and Gaver, K. M.. “Additional Evidence on the Association between the Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Accounting and Economics, 16 (1993), 125–160.CrossRefGoogle Scholar
Giammarino, R. M., and Lewis, T.. “A Theory of Negotiated Equity Financing.” Review of Financial Studies, 1 (1988), 265–288.CrossRefGoogle Scholar
Gompers, P. A.; Ishii, J. L.; and Metrick, A.. “Incentives vs. Control: An Analysis of U.S. Dual-Class Companies.” Working Paper, University of Pennsylvania (2004).CrossRefGoogle Scholar
Grossman, S. J., and Hart, O. D.. “Corporate Financial Structure and Managerial Incentives.” In The Economics of Information and Uncertainty, McCall, J. J., ed. Chicago, IL: University of Chicago Press (1982).Google Scholar
Guay, W. R. “The Sensitivity of CEO Wealth to Equity Risk: An Analysis of the Magnitude and Determinants.” Journal of Financial Economics, 53 (1999), 43–71.CrossRefGoogle Scholar
Hambrick, D. C., and D’Aveni, R. A.. “Top Team Deterioration as Part of the Downward Spiral of Large Corporate Bankruptcies.” Management Science, 38 (1992), 1445–1466.CrossRefGoogle Scholar
Harman, H. H. Modern Factor Analysis, 3rd ed.Chicago, IL: University of Chicago Press (1976).Google Scholar
Hermalin, B. E. “Economics and Corporate Culture.” In The International Handbook of Organizational Culture and Climate, Cooper, C. L., Cartwright, S., and Earley, P. C., eds. Chichester, UK: John Wiley & Sons, Ltd. (2001).Google Scholar
Hodgson, G. M. “Corporate Culture and the Nature of the Firm.” In Transaction Cost Economics and Beyond, Groenewegen, J., ed. Boston, MA: Kluwer Academic Press (1996).Google Scholar
Holmström, B. “Managerial Incentive Problems: A Dynamic Perspective.” Review of Economic Studies, 66 (1999), 169–182.CrossRefGoogle Scholar
Jensen, M. C. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
John, K., and Williams, J.. “Dividends, Dilution, and Taxes: A Signaling Equilibrium.” Journal of Finance, 40 (1985), 1053–1070.CrossRefGoogle Scholar
Kreps, D. M. “Corporate Culture and Economic Theory.” In Perspectives on Positive Political Economy, Alt, J. E. and Shepsle, K. A., eds. Cambridge, UK: Cambridge University Press (1990).Google Scholar
Kreps, D. M., and Wilson, R.. “Reputation and Imperfect Information.” Journal of Economic Theory, 27 (1982), 253–279.CrossRefGoogle Scholar
Krishnaswami, S., and Subramaniam, V.. “Information Asymmetry, Valuation, and the Corporate Spin-Off Decision.” Journal of Financial Economics, 53 (1999), 73–112.CrossRefGoogle Scholar
Kyle, A. S. “Continuous Auctions and Insider Trading.” Econometrica, 53 (1985), 1315–1335.CrossRefGoogle Scholar
Lazear, E. P. “Corporate Culture and the Diffusion of Values.” In Trends in Business Organization, Siebert, H., ed. Tubingen, Germany: J. C. B. Mohr (1995).Google Scholar
Loughran, T., and Ritter, J. R.. “Why Has IPO Underpricing Changed Over Time? ” Financial Management, 33 (2004), 5–37.Google Scholar
Michaely, R., and Shaw, W. H.. “The Pricing of Initial Public Offerings: Tests of Adverse-Selection and Signaling Theories.” Review of Financial Studies, 7 (1994), 279–319.CrossRefGoogle Scholar
Miller, M. H., and Modigliani, F.. “Dividend Policy, Growth, and the Valuation of Shares.” Journal of Business, 34 (1961), 411–433.CrossRefGoogle Scholar
Miller, M. H., and Rock, K.. “Dividend Policy under Asymmetric Information.” Journal of Finance, 40 (1985), 1031–1051.CrossRefGoogle Scholar
Modigliani, F., and Miller, M. H.. “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review, 48 (1958), 261–297.Google Scholar
Myers, S. C., and Majluf, N. S.. “Corporate Financing and Investment Decisions When Firms Have Information that Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.CrossRefGoogle Scholar
Noe, T. H. “Capital Structure and Signaling Game Equilibria.” Review of Financial Studies, 1 (1989), 331–355.CrossRefGoogle Scholar
Ritter, J. R. “The ‘Hot Issue’ Market of 1980.” Journal of Business, 57 (1984), 215–240.CrossRefGoogle Scholar
Welch, I. “Capital Structure and Stock Returns.” Journal of Political Economy, 112 (2004), 106–131.CrossRefGoogle Scholar