Politically Connected Governments

This paper examines the consequences of powerful political connections for local governments. We find that governments located within the constituencies of, and thus connected to, powerful congressional members reduce their stewardship over public resources. Using plausibly exogenous declines in the power of congressional representation, we show that the effect is causal. To better understand why connected local governments can reduce stewardship, we study electoral characteristics. Our findings suggest that the increased resources that come with powerful congressional representation allow local-government officials to reduce stewardship without material adverse effects on their reelection prospects. In sum, we provide evidence of a cost of political connections: they weaken local governments' incentives to act in a socially optimal manner.     

Do specialized board committees impact the transparency of corporate political disclosure? Evidence from S&P 500 companies

This study examines how the specific attributes of one type of voluntary corporate governance mechanism, a specialized political contribution committee, improves the transparency of corporate political disclosure (CPD). The results demonstrate that the existence of a committee that establishes and reviews key political activities and disclosure policies, particularly one composed entirely of outside directors, significantly enhances the transparency of corporate political disclosure, and reveal that an under-studied board committee, the political contribution committee, effectively improves CPD transparency. The results are consistent with agency theory and further support the more generalizable idea that specialized governance mechanisms (e.g., a political contribution committee) and fully independent committees lead to more transparent disclosure. Finally, the results suggest that the existence of a political contribution committee and committee independence are channels to improve CPD transparency. Public-policy makers and regulators seeking to enhance CPD transparency might consider implementing regulations that mandate or recommend these governance mechanisms as best practice.     

Credit unions and earnings management to mitigate political scrutiny over tax-exempt status

In this paper, we examine whether credit unions manage earnings to mitigate political scrutiny. In particular, we study whether credit unions increased loan loss provisions to decrease earnings around a 2005 congressional hearing on the efficacy of credit unions’ tax-exempt status. On average, we find evidence consistent with credit unions managing earnings downward via the loan loss provision in the quarters leading up to and surrounding the congressional hearing. In addition, we find that credit unions with higher earnings before the loan loss provision engaged in more downward earnings management than credit unions with lower earnings before provision. Our findings contribute to the literature examining the use of downward earnings management to avoid political scrutiny and the banking literature. Likewise, our results inform the continued debate as to whether credit unions should be tax-exempt.     

Birds of a feather: Value implications of political alignment between top management and directors

For 2,695 US corporations from 1996 to 2009, we find that alignment in political orientation between the chief executive officer (CEO) and independent directors is associated with lower firm valuations, lower operating profitability, and increased internal agency conflicts such as a reduced likelihood of dismissing poorly performing CEOs, a lower CEO pay-performance sensitivity, and a greater likelihood of accounting fraud. Importantly, we show that our results are driven neither by the effects associated with various measures of similarity and diversity within the board nor the effects of local director labor market and political conditions on board structure. We provide evidence that our measure of individual political orientation reflects the person?s political beliefs rather than opportunistic attempts to seek political favor. Overall, our results suggest that diversity in political beliefs among corporate board members is valuable.     

Political Influence and Declarations of Bank Insolvency in Japan

This paper investigates how politics affects bank supervision by examining determinants of bank failures in Japan during 1999–2002, a period during which bank regulators were called upon to resolve insolvent banks in preparation for the lifting of a blanket deposit guarantee. The empirical results suggest that Japan's bank regulators had tendency to delay declarations of insolvency in prefectures that supported senior politicians of the ruling Liberal Democratic Party (LDP). This result, which is robust to a host of bank-level and prefecture-level controls, suggests that bank supervision is prone to political influence that delays efficient resolution of insolvency.     

Disclosure Regulation in the Commercial Banking Industry: Lessons from the National Banking Era

I exploit variation in the adoption of disclosure and supervisory regulation across U.S. states to examine their impact on the development and stability of commercial banks. The empirical results suggest that the adoption of state‐level requirements to report financial statements in local newspapers is associated with greater stability and development of commercial banks. I also examine which political constituencies influence the adoption of disclosure and supervisory regulation. I find that powerful landowners and small private banks are associated with late adoption of these regulations. These findings suggest that incumbent groups oppose disclosure rules because the passage of such rules threatens their private interests.     

The politics of government investment

This paper investigates the relation between corporate political connections and government investment. We study various forms of political influence, ranging from passive connections between firms and politicians, such as those based on politicians’ voting districts, to active forms, such as lobbying, campaign contributions, and employment of connected directors. Using hand-collected data on firm applications for capital under the Troubled Asset Relief Program (TARP), we find that politically connected firms are more likely to be funded, controlling for other characteristics. Yet investments in politically connected firms underperform those in unconnected firms. Overall, we show that connections between firms and regulators are associated with distortions in investment efficiency.     

Commonalities in investment strategy and the determinants of performance in mutual fund mergers

This paper examines the determinants of cross-sectional variation in post-merger mutual fund performance. Mergers between funds with similar management objectives, as reflected by average portfolio book-to-market ratio, price–earnings ratio, beta and market capitalization values, outperform mergers between funds with dissimilar strategies. This superior performance transcends lower portfolio rebalancing costs which might be realized between merging funds which hold more assets in common. These results suggest that mutual fund mergers create collaborative benefits between funds with similar strategies. We also examine if fund governance structures influence the fund pairing process, testing if stronger fund oversight mitigates pairing mismatches. We find that less independent boards of trustees and boards with higher compensation are related to greater strategic mismatches between funds. These results suggest that more entrenched boards are more tolerant of fund mismatches which benefit the investment company, yet are not in investor’s best interests.     

Board characteristics and Chinese bank performance

Using a sample of 50 largest Chinese banks during the period of 2003–2010, we explore a comprehensive set of board characteristics (size, composition and functioning of the board) and analyze their impacts on bank performance and bank asset quality in China. We find that the number of board meetings and the proportion of independent directors have significantly positive impacts on both bank performance and asset quality while board size has a significantly negative impact on bank performance. We find new evidence that the degree of bank boards’ political connection is negatively correlated with bank performance and asset quality. The findings suggest that the board of directors plays a significant role in bank governance in China.     

Are Short Sellers Informed? Evidence from the 2007–2008 Subprime Mortgage Crisis

This paper examines the short selling activities around financial firms’ announcements of asset write‐downs during the 2007–2008 subprime mortgage crisis. We find that short sellers accumulate short positions prior to write‐down announcements, and that stocks experience significantly negative returns around such announcements. These results suggest that the return predictability of short interests is due to short sellers’ informational advantage. Furthermore, we show that short sellers increase their positions significantly in the announcement month and keep increasing their positions afterward, suggesting the feedback effect of the disclosed write‐downs on financial firms’ existing exposures. The valuable information contained in the short interest should encourage regulators to mandate stock exchanges disclose short selling activities more frequently.     

Regulatory Transparency and Regulators’ Effort: Evidence from Public Release of the SEC's Review Work

Using the public release of comment letters on EDGAR to capture a regime shift toward regulatory transparency, we examine whether an increase in transparency affects regulators’ effort and work performance. We find that the SEC staff reviews more filings and more documents per filing following the disclosure regime shift. These effects are incrementally stronger for firms with comment letters that are expected to attract greater investor or public monitoring. Furthermore, under the new regime, reviews are more timely. Upon the regime switch, the likelihood of a restatement (receiving a comment letter) decreases (increases) for filings that are reviewed. After receiving a comment letter, a firm with signs of potential fraud is more likely to be investigated, and this effect becomes more pronounced under the new regime. Altogether, our findings suggest that publicly disclosing regulators’ work output can mitigate moral hazard (i.e., increase regulators’ work input), improving their work performance.     

Did going public impair Moody׳s credit ratings?

We investigate a prominent allegation in congressional hearings that Moody?s loosened its rating standards to chase revenue after it went public in 2000. Consistent with this allegation, Moody?s ratings for both corporate bonds and structured finance products are significantly more favorable to issuers, relative to S&P?s, after Moody?s IPO. Moreover, Moody?s ratings are more favorable for clients subject to greater conflict of interest. There is little evidence that Moody?s higher ratings, post-IPO, are more informative, measured as expected default frequencies (EDFs) or as the probability of default. Our findings inform the debate on whether financial gatekeepers should be publicly traded.     

Innovative methods in assessing political risk for business internationalization

Political risk assessment, together with portfolio analysis, has become an important part of international business investment decision making. In this paper, by using different knowledge discovery techniques, we attempt to assess the relevance and actionability of ‘good governance’ indicators in political risk assessment. For that purpose, we have integrated good governance indicators data with political instability classification from the Political Instability Task Force (PITF) research. From this study, two models that capture the intuitive reasoning of investors have been developed. The usefulness of the models has been evaluated by comparison with factual investment data. Our findings suggest that quantitative indicators of good governance may provide the basis for accurate and meaningful models for the assessment and prediction of political risk.     

美欧银行业并购中的反垄断比较研究及对我国的借鉴

美欧国家经历了多次银行并购的浪潮后,在银行业反垄断实践中形成了较为完善的立法和司法体系。这些法律法规在允许银行通过并购实现其战略目标的同时,最大限度地避免了并购对自由竞争的损害,对我国银行业的反垄断立法和司法以及银行海外并购具有指导意义。本文对美欧银行业并购中的反垄断立法特点、审查要点、审批流程等进行详细的分析和介绍,并列举美欧银行业并购中的反垄断审查典型案例。最后,本文提出对我国银行业反垄断的建议。     

Media attention and regulatory efficiency of corporate violations: Evidence from China

We examine the influence of media attention on the regulatory efficiency of corporate violations in a restrictive media environment. Using a hand-collected sample of corporate violations in China during 1998–2018, we find that fraudulent firms accompanied by more negative media attention are associated with a higher hazard rate of the violation being investigated and enforced. The effect is not diminished by the political connections of the fraudulent firms and is robust after controlling for potential confounding factors. Our findings suggest that by influencing regulatory efficiency, the media serve as an effective governance mechanism even in markets with strict media control.     

Family control and dilution in mergers

We analyze the influence of the level as well as the change in family ownership on value creation in mergers involving newly public firms. Our findings suggest that acquirers with low levels of family ownership earn lower abnormal returns than do those with high levels of ownership. In addition, families with low ownership in their firm are more likely to use cash as the medium of exchange, thus avoiding dilution and maintaining their control. Further, acquisitions of targets with low levels of family ownership are associated with greater value creation. Our results are consistent with the entrenchment of families at low levels of ownership and a better alignment of their interests with those of minority shareholders at high levels of ownership. Finally, we find that dilution of the family’s ownership, due to the use of stock as the medium of exchange, alters the family’s incentives and thus influences firm value.     

US presidential elections and implied volatility: The role of political uncertainty

This paper focuses on the effects of political uncertainty and the political process on implied stock market volatility during US presidential election cycles. Using monthly Iowa Electronic Markets data over five elections, we document that stock market uncertainty, as measured by the VIX volatility index, increases along with positive changes in the probability of success of the eventual winner. The association between implied volatility and the election probability of the eventual winner is positive even after controlling for changes in overall election uncertainty. These findings indicate that the presidential election process engenders market anxiety as investors form and revise their expectations regarding future macroeconomic policy.     

Determinants of the floating-to-fixed rate debt structure of firms

We analyze the effects of managerial incentive, firm characteristics and market timing on floating-to-fixed rate debt structure of firms. We find that chief financial officer's (CFO's), not chief executive officer's (CEO's), incentive has a strong influence on firm's debt structure. When CFOs have incentives to increase (decrease) firm risk, firms obtain volatility-increasing (-decreasing) debt structure. These effects are present only for CFOs who are not subject to high monitoring by board members, CEOs, or corporate control market. Our findings suggest that agency problems at the level of non-CEO executives could be an important driver of various corporate decisions.     

论经济全球化背景下的反托拉斯政策国际协调

经济全球化给国际反托拉斯政策协调提出了挑战。目前,反托拉斯问题上各种形式的双边及多边合作迄今为止并没有为国际反托拉斯政策协调提供出一个满意的解决方案。特别是由于反托拉斯政策的不同影响而导致的利益分歧问题至今还没能很好地解决。     

The pernicious effects of contaminated data in risk management

Banks hold capital to guard against unexpected surges in losses and long freezes in financial markets. The minimum level of capital is set by banking regulators as a function of the banks’ own estimates of their risk exposures. As a result, a great challenge for both banks and regulators is to validate internal risk models. We show that a large fraction of US and international banks uses contaminated data when testing their models. In particular, most banks validate their market risk model using profit-and-loss (P/L) data that include fees and commissions and intraday trading revenues. This practice is inconsistent with the definition of the employed market risk measure. Using both bank data and simulations, we find that data contamination has dramatic implications for model validation and can lead to the acceptance of misspecified risk models. Moreover, our estimates suggest that the use of contaminated data can significantly reduce (market-risk induced) regulatory capital.