ESG engagement, Real earnings management, and Short-seller scrutiny

Abstract

This thesis consists of three papers on corporate governance, with a focus on firm’s ESG engagement, real earnings management, and short seller scrutiny. The first paper investigates whether firm ESG policies could be attributed to a CEO’s style. We find that firms led by CEOs with not-for-profit sector experience (socially engaged CEOs) possess better ESG ratings and superior real ESG outcomes. They receive higher employee satisfaction ratings, develop more green innovations, and produce fewer harmful emissions. Mirroring the rise of ESG, the proportion of socially engaged CEOs has increased four-fold over the last 20 years. While corporate boards appear to be increasingly selecting these CEOs to enhance their ESG performance, we show that these effects can, to some extent, be attributed to a causal CEO style. Overall, this study suggests that career experience serving the interests of a broader group of stakeholders in the not-for-profit sector better equips CEOs to achieve corporate ESG objectives. The second paper examines the governance role of short sellers on firms’ real earnings management (REM). Exploiting an exogenous shock to short selling costs brought by the RegSHO, we find that short seller monitoring restrains REM. The effect is concentrated in firms with lower costs of REM. Litigation risk and reduced CEO wealth gain from REM are two plausible channels through which short seller threats deter REM. Lastly, we find that short interests on pilot firms increase after the announcement of the RegSHO relative to non-pilot firms, and the effect is concentrated in the firms with high REM. This third paper explores whether EPS-motivated share repurchases attract scrutiny from short sellers, and how firms’ social capital, built up through CSR activities, plays a role in this process. Exploiting the discontinuity of repurchases around the zero-earnings surprise, we find EPS-motivated repurchases lead to more short interests. The firms under the protection of CSR are more likely to engage in EPS-motivated repurchases but suffer less short selling attack. Moreover, we also show that firms intend to rebuild their reputations through more CSR engagement following EPS-motivated repurchases. However, there is little evidence on real environmental outcomes due to such engagement. Collectively, this study highlights short sellers’ monitoring function and provides insights into the insurance benefits of CSR on REM.