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so my research basically looks at why
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managers may not always act in the best
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interest of
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shareholders uh and what are things that
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investors can do to sort of discourage
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bad behavior by managers now generally
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speaking we think of there as being sort
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of three main ways in which managers
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behave poorly one is that they may not
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exert enough effort right because ex
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effort's costly if we don't monitor them
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as an investor they won't exert it the
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second is that they may actually take
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actions that benefit themselves but not
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the shareholders Okay the third is where
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my research is focused and that is that
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managers may do what my co-author and I
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call play it safe and that they may not
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take the risk that are necessary to
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create value for the shareholders now
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managers may not do that because they
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have a lot tied up into these companies
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if it goes uh South their career could
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be adversely affected their personal
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wealth could be affected much more so
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than a diversified shareholder so
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they're going to want to take less risk
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so my co-author are trying to determine
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whether this plan it safe is sort of a
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Salient problem for investors and the
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way which we did that is we looked at
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well what are firms do when they become
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protected from a hostile takeover okay
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so what happened is that in the US a
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bunch of different states pass these
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laws which made it difficult to do a
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takeover of a company located in those
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States uh now that's interesting because
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we and finance think of a takeover as
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sort of a a disciplining device on a
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manager and that if that manager is
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performing poorly uh doing things that
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destroy shareholder value it's going to
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push down their share price and it's
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going to basically make it easier for
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another group of investors to come in
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buy out the company fire the manager and
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improve value so now if I'm a manager
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and I'm not worried about that anymore
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because my state just passed a law that
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kind of protects me from a takeover I
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can now act more on my own interest
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rather than that of shareholders so the
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question is is well what do managers do
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when they become protected and so what
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my co-author and I found is that when
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they became protected by these state
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level laws they took less risk uh we
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observe stock volatility go down we
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observe cash Holdings go up we also
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observed them begin doing more
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diversifying Acquisitions which prior
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research is shown as one way in which
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managers try to reduce their risk and it
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doesn't look like this behavior is in
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the interest of shareholders a we can
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see that these Acquisitions have
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negative announcement returns uh and we
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can also see that they're concentrated
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among the companies where we would think
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that this planet safe is more important
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firms that at greater risk of distress
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and firms where the managers have more
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personal exposure to the company's
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risk I would say one of the key
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takeaways of our research is that this
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plane at Behavior by managers this
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incentive to not take on risk that may
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create value can have implications for a
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company's overall value investment and
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growth right if you think about it in
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order to create value for shareholders
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at some level you have to take risk
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products that have turned out to be
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great in the past someone took a risk to
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create that product if managers aren't
00:02:49
doing that then they're not necessarily
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creating value uh another sort of
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takeaway is that this planet safe in
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general is probably going to be very
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hard to detect for a shareholder right
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we don't observe what are the the
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Investments that the managers choose in
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between and we don't observe what the
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expected returns are what the risk are
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we don't know if that managers may be
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sort of avoiding certain projects that
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could create a lot of value but they're
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worried about the risk and the personal
00:03:10
exposure to that risk or you know we see
00:03:12
these companies holding more cash now
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these companies say they're holding cash
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because they're trying to make sure they
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have investment you know the cash they
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to do an investment if it comes along is
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that true or is it they're holding the
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cash because they're worried about
00:03:24
distress and they're just trying to make
00:03:25
sure the company doesn't run into
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problems in the future and it's not
00:03:28
really creating value for shareholder
00:03:29
that's hard for a shareholder to know
00:03:31
but sort of what our research is trying
00:03:33
to point out is that managers May in
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general be trying to take on less risk
00:03:36
than what we' prefer them to do and
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therefore it might be important to
00:03:39
actually encourage more
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risk-taking I wouldn't say it surprised
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me but I suspect it would surprise
00:03:48
others and that conclusion was is that
00:03:51
we observed that this sort of plan at
00:03:53
safe Behavior by managers was
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concentrated among those that had the
00:03:56
largest ownership stakes in their
00:03:57
companies now typically we would teach
00:03:59
our students here at Wharton that if you
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want to encourage managers to work hard
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and not waste cash you give more stock
00:04:05
in the company more of an ownership
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stake uh now it's true that that will
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make them work hard and not waste cash
00:04:11
but what is often overlooked in practice
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is that it can actually make some
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problems worse particularly the planet
00:04:15
safe by giving them more ownership
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you've just exposed them to more of the
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company's risk you've given them
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incentive more to play it safe and
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that's what we picked up in the data is
00:04:23
that when they had more ownership Stakes
00:04:25
this conflict appeared to be uh
00:04:27
prevalent in the data
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so I would say one of the Practical
00:04:34
implications of our findings is that as
00:04:36
an investor as a shareholder if you
00:04:38
don't think the manager is taking on
00:04:40
actions that are going to create shold
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of value it's important to understand
00:04:45
why they may not be doing that if you're
00:04:46
going to try to solve it right I'll give
00:04:48
you an example so the Wall Street
00:04:50
Journal ran a really nice article last
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summer where basically the uh author of
00:04:54
the article was bemoaning in their view
00:04:56
that uh firms in the US and Entre in the
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US have become soft and risk and because
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these companies aren't taking risk in
00:05:03
the US this is why the US growth and
00:05:05
investment has been weak over the last 5
00:05:07
10 years but the question is is why
00:05:09
aren't they taking these risk right if
00:05:11
we as shareholders think it's because it
00:05:12
just requires a lot of effort the
00:05:14
managers don't want to exert that effort
00:05:16
well then one solution is give more
00:05:17
ownership in the company okay on the
00:05:19
other hand if they're not taking that uh
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risk because they want to play it safe
00:05:23
they're worried about their careers then
00:05:24
the solution becomes quite different and
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that you don't necessarily want to give
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more ownership because that it just
00:05:28
exposes them more of the firm's risk
00:05:30
instead you might want to think about
00:05:31
other things like granting them options
00:05:33
which past research including my own has
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shown encourages
00:05:40
risk-taking in terms of playing it safe
00:05:43
in our research we looked at large US
00:05:45
companies that are mostly public but my
00:05:48
guess is that this planet safe is also
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Salient for entrepreneurs right so think
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of like a student that graduates from
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here at whorton right all of them are
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going to have an opportunity to go get a
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great job at a company that has a a nice
00:06:00
salary good benefits and good health
00:06:02
insurance now some of these students may
00:06:04
also have a great idea for a new company
00:06:06
or a new product that they could go do
00:06:08
it instead but obviously going and
00:06:10
starting your own company is risky and I
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would guess that many of these
00:06:13
individuals don't go and do that uh and
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instead they just going to go take the
00:06:17
safe job that has the salary and the
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fixed health benefits rather than go
00:06:21
start a new company and I would term
00:06:22
that as potentially playing it safe and
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I think it could be quite important
00:06:30
uh I think probably the biggest
00:06:32
misperception that our study might
00:06:33
dispel is this idea that giving managers
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greater ownership stakes in their
00:06:39
companies necessarily ensures that they
00:06:42
behave in the best way right and that
00:06:44
there's a lot of attention paid recently
00:06:46
because of the financial crisis and that
00:06:47
you want to give managers more ownership
00:06:49
stake you want to give them these
00:06:49
restricted stocks that tie them to the
00:06:51
long-term risk of the company uh now
00:06:53
that's probably going to get rid of some
00:06:55
problems but it could actually make
00:06:56
other problems worse and in particular
00:06:57
playing it safe now if they're tied to
00:06:59
the the long run risk of the company
00:07:01
they have a lot more to worry about they
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may actually take on less risk than what
00:07:04
we as shareholders want them to they may
00:07:05
for go doing these projects that would
00:07:07
create a lot of value just because
00:07:08
they're
00:07:12
risky I think one thing that's different
00:07:15
about my research relative to other
00:07:16
research on why managers might B
00:07:19
misbehave is that most past researchers
00:07:21
focused on the idea that managers don't
00:07:23
exert enough effort uh and that they
00:07:26
want to live what we call the quiet life
00:07:27
they don't want to work hard uh whereas
00:07:30
my research is showing that in fact
00:07:31
managers may be exerting a lot of effort
00:07:33
but this effort is not directed in ways
00:07:35
that are necessarily trying to create
00:07:37
shareholder value rather it's effort
00:07:39
directed at maybe reducing the company's
00:07:40
risk uh for the manager's personal
00:07:43
benefit but not that of
00:07:48
shareholders one thing that I've been
00:07:50
thinking about looking at next which I
00:07:52
haven't started yet was whether maybe
00:07:55
the recent healthc care law has an
00:07:57
effect on individual's choice to being
00:07:59
entreprene rur right so if you think
00:08:01
about it prior to the healthcare Lobby
00:08:02
in pass if you're an individual and you
00:08:04
start a company uh it's really hard to
00:08:06
get health insurance as an individual
00:08:08
and so your alternative was to go get
00:08:10
that 9-to-5 job where you can at least
00:08:12
have the health insurance uh now that
00:08:13
the Law's passed and we have the
00:08:15
marketplace and these it's much easier
00:08:16
for individuals and my guess is that
00:08:18
you're probably going to see a lot more
00:08:20
people choosing to go and start their
00:08:21
own companies knowing that they can get
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this health insurance without having to
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go get that steady 95 job
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[Music]
