2015-16 IGM Year in Review

Abbie J. Smith Boris and Irene Stern Distinguished Service Professor of Accounting 28 CEO MATERIALISM AND CORPORATE SOCIAL RESPONSIBILITY We (Smith and coauthors Robert Davidson and Aiyesha Dey) study the role of individual CEOs in explaining corporate social responsibility (CSR) scores. We show that CEO fixed-effects explain 63 percent of the variation in CSR scores, a significant portion of which is attributable to a CEO’s “materialism” (relatively high, luxury asset ownership). Specifically, firms led by materialistic CEOs have lower CSR scores, and increases in CEOs’ materialism are associated with declining scores. Finally, CSR scores in firms with non- materialistic CEOs are positively associated with accounting profitability. In contrast, CSR scores in firms with materialistic CEOs are unrelated to profitability on average; however this association is decreasing in CEO power. EXECUTIVES’ LEGAL RECORDS AND INSIDER TRADING ACTIVITIES We (Smith and coauthors Robert Davidson and Aiyesha Dey) examine how and why insider trading varies across senior executives and their firms. As predicted, the profitability of both purchases and sales are higher for “record-holder” executives (those who have a record of legal infractions), than for other “non-record holder” executives at the same firms. The profitability of record-holder executives’ purchases and sales decrease significantly with proxies for strong information and governance environments, suggesting that record holders have a relatively higher propensity to exploit inside information given the opportunity to do so. Finally, our classification of executives (record-holder status) can predict future returns and firm-specific information events.