Wednesday, January 22, 2014
Robert C. Bird, Paul Borochin, and John D. Knopf have posted The Value of the Chief Legal Officer to the Firm on SSRN with the following abstract:
We examine the value of the CLO to the firm in varying internal environments. Using the shock of a securities class action lawsuit, we measure the value of the CLO through changes in firm value through the metrics of relative total and incentive compensation of the CLO and other C-suite members. We find that BHARs increase by 1% when the CLO is one of the top five highest compensated executives, and increase by nearly 4% when the CLO is similarly high-paid and a securities class action lawsuit has been filed.
We consider two possible hypotheses to explain why the CLO increases firm value: legal expertise and internal monitoring. We test these alternative hypotheses by examining how CLO compensation is affected by inside versus outside board control, the presence of CEO with a law degree, firm opacity, Tobin’s Q, and executive turnover. We conclude that it is the monitoring function of the CLO, rather than her legal expertise, that is the source of the CLO’s greatest contribution to the firm.