Individual political contributions and firm performance

We present evidence that individuals make political contributions strategically by targeting politicians with power to affect their economic well-being. Individuals in Congressional districts with greater industry clustering choose to support politicians with jurisdiction over the industry. Importantly, individual political contributions are associated with improvements in operating performance of firms in industry clusters. The relation between contributions and firm performance is strongest for poorly performing firms, firms closer to financial distress, and for contributions in close elections. The results imply that individual political contributions are valuable to firms, especially during bad economic times.     

Mutual funds’ ownership and firm performance: Evidence from China

Mutual funds have emerged and rapidly developed since 2000 in China. This study tests empirically the impact of mutual funds’ ownership on firm performance in China, using a large sample for the period of 2001–2005. We find that equity ownership by mutual funds has a positive effect on firm performance. The result is robust to several measures of firm performance and various estimations. Our finding supports recent regulatory efforts in China to promote mutual funds as a corporate governance mechanism and suggests that pooling diffuse minority interests of individual shareholders who are prone to free-rider problems via mutual funds is beneficial.     

What do boards really do? Evidence from minutes of board meetings

We analyze a unique database from a sample of real-world boardrooms — minutes of board meetings and board-committee meetings of eleven business companies for which the Israeli government holds a substantial equity interest. We use these data to evaluate the underlying assumptions and predictions of models of boards of directors. These models generally fall into two categories: “managerial models” that assume boards play a direct role in managing the firm, and “supervisory models” that assume that boards monitor top management but do not make business decisions themselves. Consistent with the supervisory models, our minutes-based data suggest that boards spend most of their time monitoring management: approximately two-thirds of the issues boards discussed were of a supervisory nature, they were presented with only a single option in 99% of the issues discussed, and they disagreed with the CEO only 2.5% of the time. Nevertheless, at times boards do play a managerial role: Boards requested to receive further information or an update for 8% of the issues discussed, and they took an initiative with respect to 8.1% of them. In 63% of the meetings, boards took at least one of these actions or did not vote in line with the CEO. Taken together our results suggest that boards can be characterized as active monitors.     

Managerial ownership dynamics and firm value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well and more likely to increase their ownership when their firms become financially constrained. When controlling for past stock returns, we find that large increases in managerial ownership increase Tobin's q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We rely on the dynamics of the managerial ownership/firm value relation to mitigate concerns in the literature about the endogeneity of managerial ownership.     

Access to financing and firm growth

Why do some firms grow faster than others? Although various observed and unobserved aspects of firms have been suggested as potential drivers of firm heterogeneity, economists disagree sharply on the role of financial structure in influencing firm growth. In this paper, I use a sample of quoted and unquoted firms to show that the effect of financial structure on firm growth is statistically significant and quantitatively important. In the presence of external financing constraints, firms rely more on internal funds to finance growth, but the effect of internal financing on firm growth decreases with an increase in the firm’s access to an external bank credit facility. As the external financing constraint is alleviated, the firm relies less on internal funds and switches to external financing as the primary source of financing for its growth. This pattern of transition between internal and external financing is particularly pronounced in small unquoted firms (conditional on their survival). These results suggest a real effect of financial structure on growth via the channel of an external financing constraint.     

Mapping global money laundering trends: Lessons from the pace setters

This paper uses an exploratory data analysis tool to map countries according to key factors—internet penetration rates, brain drain, efficiency of legal system, and effective tax and financial systems on the incidence of money laundering. Pace setters and laggards in the pervasiveness of money laundering for 88 countries will be identified. The results indicate that pace setters have high development of internet adoption, low incidence of brain drain, sound legal, tax and financial systems, and low incidence of money laundering. From the study, key policy initiatives adopted by pace-setter countries to reduce money laundering activities were examined.     

Stock market liberalization and operating performance at the firm level

I use firm-specific measures of openness to foreign investors to study the impact of stock market liberalization on firm-level operating performance. In a sample of over 1,100 firms from 28 countries, firms with stocks that are open to foreign investors experience higher growth, greater investment, greater profitability, greater efficiency, and lower leverage. Strategies to address potential endogeneity suggest that the observed relation reflects, at least in part, a causal effect of openness on operating performance.     

Debt financing: Does it boost or hurt firm performance in product markets?

Previous research seeks to establish whether debt boosts or hurts a firm's product market performance. This paper proposes that both of these outcomes can be observed: debt can boost and hurt performance. I first model a nonmonotonic relation between debt-like finance and competitive conduct. I then empirically examine the within-industry relation between leverage and sales performance using data from 115 industries over 30 years. My tests deal with the endogeneity of debt in a novel fashion: I use creditors’ valuation of assets in liquidation to identify financial leverage. I find that moderate debt taking is associated with relative-to-rival sales gains; high indebtedness, however, leads to product market underperformance.     

Deviations from optimal CEO ownership and firm value

The transaction cost theory of managerial ownership and firm value predicts that deviations from optimal managerial ownership reduce firm value. This paper empirically tests the transaction cost theory by studying the relation between deviations on either side of optimal CEO ownership and firm value. We find that both above-optimal and below-optimal deviations reduce firm value. We find that a change in CEO ownership is associated with a higher (lower) abnormal return if it moves the ownership towards (away from) the optimal level. These findings are consistent with the transaction cost theory of managerial ownership and firm value.     

CEO risk incentives and firm performance following R&D increases

In this study we analyze how CEO risk incentives affect the efficiency of research and development (R&D) investments. We examine a sample of 843 cases in which firms increase their R&D investments by an economically significant amount over the period of 1995–2006. We find that firms with higher sensitivity of CEO compensation portfolio value to stock volatility (vega) are more likely to have large increases in R&D investments. More importantly, we find that high-vega firms experience lower abnormal stock returns and lower operating performance compared to their low-vega counterparts following the R&D increases. Our main results hold in a variety of robustness tests. The results are consistent with the conjecture that high-vega compensation portfolios may induce managers to overinvest in inefficient R&D projects and therefore hurt firm performance.     

Are perks purely managerial excess?

A widespread view is that executive perks exemplify agency problems—they are a route through which managers misappropriate a firm's surplus. Accordingly, firms with high free cash flow, operating in industries with limited investment prospects, should offer more perks, and firms subject to more external monitoring should offer fewer perks. The evidence for agency as an explanation of perks is, at best, mixed. Perks are, however, offered in situations in which they enhance managerial productivity. While we cannot rule out the occasional aberration, and while we have little to say on the overall level of perks, our findings suggest that treating perks purely as managerial excess is incorrect.     

Inside the black box: Bank credit allocation in China’s private sector

This study examines how the Chinese state-owned banks allocate loans to private firms. We find that the banks extend loans to financially healthier and better-governed firms, which implies that the banks use commercial judgments in this segment of the market. We also find that having the state as a minority owner helps firms obtain bank loans and this suggests that political connections play a role in gaining access to bank finance. In addition, we find that commercial judgments are important determinants of the lending decisions for manufacturing firms, large firms, and firms located in regions with a more developed banking sector; political connections are important for firms in service industries, large firms, and firms located in areas with a less developed banking sector.     

Understanding merger incentives and outcomes in the US mutual fund industry

This paper examines the incentives of acquirers and targets in the merger market. Using data on acquisitions among mutual fund management companies from 1991 to 2004, I estimate a two-sided matching model of the merger market jointly with equations representing merger outcomes. According to the empirical investigation, although the desire to achieve a sufficient scale to attract investors is a key driver for mergers, some mergers seem to be driven by objectives other than shareholder value maximization. I find that companies that are potentially prone to misaligned incentives between owners and managers are more acquisitive than others, yet have significantly worse post-merger operating performance. I also find that these acquirers, despite their higher willingness to pay for targets, are not any more likely to match with high-quality targets, potentially due to targets’ incentive to avoid bad organizations.     

Firm age and the evolution of borrowing costs: Evidence from Japanese small firms

This paper investigates how firms’ borrowing costs evolve as they age. Using a new panel data set of about 100,000 bank-dependent small firms for 1997–2002 and focusing on the channel of “adaptation” (i.e., surviving firms’ borrowing costs decline as they age) and that of “selection” (i.e., total borrowing costs decline as defaulting firms exit), we find that the reputation hypothesis suggested by Diamond (1989) provides a more plausible explanation of the downward sloping age profile of borrowing costs than the firm dynamics (Cooley and Quadrini, 2001) or the relationship banking (Boot and Thakor, 1994) hypothesis. In addition, we examine whether the firm selection process in Japan has been natural or unnatural. Our findings suggest that it has been natural in that firms with lower quality are separated, face higher borrowing costs, and are eventually forced to exit, which contrasts with the results of previous studies on credit allocations in Japan, including Peek and Rosengren (2005). Further, we find that the evolution of borrowing costs is partially due to selection but is mainly attributable to adaptation.     

The political economy of corporate governance in developing economies: The case of Bangladesh

The paper investigates the influence of concentrated shareholding, boardroom politics and interest group politics in the quality of corporate governance in listed firms. It finds that the controlling shareholders exert influence in boardroom politics through family-aligned board and executive management. The evidence shows that concentrated ownership, family-aligned board and management, and political connection(s) of the controlling shareholder(s) tend to be inversely associated with the quality of corporate governance in a firm. The findings of the study suggest that the broad-based interest group politics which influence both political preference and corporate control politics contribute significantly to the current state of corporate governance in developing economies.     

Short-term wholesale funding and systemic risk: A global CoVaR approach

We use the CoVaR approach to identify the main factors behind systemic risk in a set of large international banks. We find that short-term wholesale funding is a key determinant in triggering systemic risk episodes. In contrast, we find weaker evidence that either size or leverage contributes to systemic risk within the class of large international banks. We also show that asymmetries based on the sign of bank returns play an important role in capturing the sensitivity of system-wide risk to individual bank returns. Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee’s proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk.     

Institutional tax clienteles and payout policy

This paper employs heterogeneity in institutional shareholder tax characteristics to identify the relation between firm payout policy and tax incentives. Analysis of a panel of firms matched with the tax characteristics of the clients of their institutional shareholders indicates that “dividend-averse” institutions are significantly less likely to hold shares in firms with larger dividend payouts. This relation between the tax preferences of institutional shareholders and firm payout policy may reflect dividend-averse institutions gravitating towards low dividend paying firms or managers adapting their payout policies to the interests of their institutional shareholders. Evidence is provided that both effects are operative. Plausibly exogenous changes in payout policy result in shifting institutional ownership patterns. Similarly, exogenous changes in the tax cost of institutional investors receiving dividends results in changes in firm dividend policy.     

IPO underwriting and subsequent lending

This study investigates the relation between IPO underwriting and subsequent lending. We find that when a bank underwrites a firm’s IPO, the bank is more likely to provide the issuer with future loans at a lower cost, compared to banks without an IPO underwriting relationship. The evidence also suggests that the underwriting banks share information surplus with the IPO firms in the post-IPO loans, supporting the cost-saving hypothesis. Overall, the evidence for the relation between prior IPO underwriting and subsequent lending supports the notion that firms can derive value from investment bank relationships.     

Post-merger restructuring and the boundaries of the firm

We examine how firms redraw their boundaries after acquisitions using plant-level data. We find that there is extensive restructuring in a short period following mergers and full-firm acquisitions. Acquirers of full firms sell 27% and close 19% of the plants of target firms within three years of the acquisition. Acquirers with skill in running their peripheral divisions tend to retain more acquired plants. Retained plants increase in productivity whereas sold plants do not. These results suggest that acquirers restructure targets in ways that exploit their comparative advantage.