Optimal regulation of network expansion

We model the regulation of irreversible capacity expansion by a firm with private information about capacity costs, where investments are financed from the firm's cash flows and demand is stochastic. The optimal mechanism is implemented by a revenue tax that increases with the price cap. If the asymmetric information has large support, then the optimal mechanism consists of a laissez‐faire regime for low‐cost firms. That is, the firm's price cap corresponds to that of an unregulated monopolist, and it is not taxed. This “maximal distortion at the top” is necessary to provide information rents, as direct subsidies are not feasible.     

Capital Structure Swaps and Shareholder Wealth

We show how capital structure swaps can increase the wealth of a firm's long‐term shareholders when a firm's debt or equity is misvalued. We review the conventional rule that a firm should issue equity and use the proceeds to retire outstanding debt (an equity‐for‐debt swap) when equity is overvalued, or repurchase equity with proceeds of new debt (a debt‐for‐equity swap) when equity is undervalued. We also analyse the more complex case where a firm's debt and equity are both undervalued, showing the optimal swap may be to issue undervalued equity, contrary to the conventional rule.     

融资约束、企业规模与成长动态

利用2001～2010年中国制造业上市公司数据,采用面板数据VAR模型分析融资约束、企业规模与成长动态之间的关系。实证分析表明:削减融资约束可以推动企业的规模扩张与企业的成长,同时企业自身的成长可以降低企业的融资约束、促使企业规模扩大;而企业规模扩张会带来企业成长率的下降,初期受到融资约束较大而后会减缓企业的融资约束。这一研究可以为发展金融市场,削减融资约束、促进企业成长进而为推动中国经济增长提供经验证据。     

Underinvestment,capital structure and strategic debt restructuring

This paper shows that shareholders' option to renegotiate debt in a period of financial distress exacerbates Myers' (1977) underinvestment problem at the time of the firm's expansion. This result is a consequence of a higher wealth transfer from shareholders to creditors occurring upon investment in the presence of the option to renegotiate. This additional underinvestment is eliminated by granting creditors the entire bargaining power. In such a case, renegotiation commences at shareholders' bankruptcy trigger so no additional wealth transfer occurs. In addition to deriving the firm's policies, we provide results on the values of corporate claims, the agency cost of debt, and the optimal capital structure. Empirically, we predict, among others, a lower sensitivity of capital investment to shocks to Tobin's q and cash flow for firms financed with renegotiable debt, and a negative effect of debt renegotiability on the relationship between growth opportunities and systematic risk as well as leverage.     

Capital Structure and Debt Priority

We study a defaultable firm's debt priority structure in a simple structural model where the firm issues senior and junior bonds and is subject to both liquidity and solvency risks. Assuming that the absolute priority rule prevails and that liquidation is immediate upon default, we determine the firm's interior optimal priority structure along with its optimal capital structure. We also obtain closed‐form solutions for the market values of the firm's debt and equity. We find that the magnitude of the spread differential between junior and senior bond yields is positively, but not linearly related to the total debt level and the riskiness of assets. Finally, we provide an in‐depth analysis of probabilities of default and the term structure of credit spreads.     

Capacity overhang and corporate disinvestment decisions

We use a stochastic frontier model to estimate a firm's capacity overhang. We find that excess capacity is positively related to a drop in new capital expenditures, an accumulation of depleted long-term assets, and outright sales of investment assets. However, the sale of long-term assets (property, plant, and equipment [PP&E]) peaks for intermediate levels of excess capacity and then declines. We attribute this to growth options. We test for evidence of a preference ordering in the firm's choice of responding to excess capacity and find evidence for a pecking order in firm disinvestment, where sales of long-term assets are a measure of last resort.     

A Theory of Corporate Scope and Financial Structure

We simultaneously address three basic issues regarding the corporation: the optimal scope of operation, the optimal financial structure, and the relationship between these two. The starting point is that financial structure serves as a bonding device on the managers' self-interest behavior. The effectiveness of this bonding depends on the distribution of the firm's future cash flow, which in turn depends on the firm's scope. Our theory also links the firm's investment decisions to its operation scope. As empirical implications, the theory reconciles the failure of the 1960s U.S. conglomerates with the success of the Japanese Keiretsu.     

The Effect of Banking Relationships on the Firm's IPO Underpricing

This paper investigates the effects of pre‐IPO banking relationships on a firm's IPO. Using a new and unique data set, which compares the firm's pre‐IPO banking relationships to the underwriters managing the firm's new issue, I test whether banking relationships established before the firm's IPO ameliorate asymmetric informa tion problems behind high IPO underpricing. The results show that firms with a pre‐IPO banking relationship with a prospective underwriter face about 17% lower underpricing than firms without such banking relationships. These results are robust to controlling for the firm's endogenous selection of the pre‐IPO banking institution.     

Capital and Labor Reallocation within Firms

We document how a positive shock to investment opportunities at one plant (“treated plant”) spills over to other plants within the same firm, but only if the firm is financially constrained. To provide the treated plant with resources, the firm's headquarters withdraws capital and labor from other plants, especially plants that are relatively less productive, not part of the firm's core industries, and located far away from headquarters. As a result of the resource reallocation, aggregate firm‐wide productivity increases. We do not find evidence of capital or labor spillovers among plants of financially unconstrained firms.     

The Effect of Corporate Multinationalism on Shareholders' Wealth: Evidence from International Acquisitions

This study presents direct evidence on the effect of international acquisitions on stock prices of U.S. bidding firms. Shareholders of MNCs not operating in the target firm's country experience significant positive abnormal returns at the announcement of international acquisitions. Shareholders of U.S. firms expanding internationally for the first time experience insignificant positive abnormal returns, while shareholders of MNCs operating already in the target firm's country experience insignificant negative abnormal returns. The abnormal returns are larger when firms expand into new industry and geographic markets—especially those less developed than the U.S. economy. The evidence is consistent with the theory of corporate multinationalism, predicting an increase in the firm's market value from the expansion of its existing multinational network.     

Are real options a missing piece in the diversification-value puzzle?

This paper examines the impact of corporate diversification on a firm's market value in terms of changes in its mix of value sources between growth options and assets-in-place. We argue that the traditionally assumed replicability of corporate diversification benefits by individual investors might not be as feasible when diversification implies acquiring new growth options as when it only involves assets-in-place investments. We further explain why a different effect of diversification on a firm's mix of value sources can occur, therefore leading to a mediating role of growth options between diversification and market value. Using a panel sample of U.S. firms from 1998 to 2010, we find that a firm's growth options portfolio helps explain the effect of diversification strategy on its market value.     

A theory of equity carve-outs and negative stub values under heterogeneous beliefs

We develop a theory of new-project financing and equity carve-outs under heterogeneous beliefs. In our model, an employee of a firm generates an idea for a new project that can be financed either by issuing equity against the cash flows of the entire firm (“integration”), or by undertaking an equity carve-out of the new project alone (“non-integration”). While the patent underlying the new project is owned by the firm, the employee generating the idea needs to be motivated to exert optimal effort for the project to be successful. The firm's choice between integration and non-integration is driven primarily by heterogeneity in beliefs among outside investors (each of whom has limited wealth to invest in the equity market) and between firm insiders and outsiders: if the marginal outsider financing the new project is more optimistic about the prospects of the project than firm insiders, and this incremental optimism of the marginal outsider over firm insiders is greater regarding new-project cash flows than that about assets-in-place cash flows, then the firm will implement the project under non-integration rather than integration. Two other ingredients driving the firm's financing choice are the cost of motivating the employee to exert optimal effort, and the potential synergies between the new project and assets in place. We derive a number of testable predictions regarding a firm's equilibrium choice between integration and non-integration. We also provide a rationale for the “negative stub values” documented in the equity carve-outs of certain firms (e.g., the carve-out of Palm from 3Com) and develop predictions for the magnitude of these stub values.     

Optimal state‐contingent regulation under limited liability

We consider an optimal regulation model in which the regulated firm's production cost is subject to random, publicly observable shocks. The distribution of these shocks is correlated with the firm's cost type, which is private information. The regulator designs an incentive‐compatible regulatory scheme, which adjusts itself automatically ex post given the realization of the cost shock. We derive the optimal scheme, assuming that there is an upper bound on the financial losses that the firm can sustain in any given state. We first consider a two‐type, two‐state case, and then extend the results to the case of a continuum of firm types and an arbitrary finite number of states. We show that the first‐best allocation can be implemented if the state of nature conveys enough information about the firm's type and/or the maximal loss that the firm can sustain is sufficiently large. Otherwise, the solution is characterized by classical second‐best features.     

Imprecision in Accounting Measurement: Can It Be Value Enhancing?

Accounting measurements of firms' investments are usually imprecise. We study the economic consequences of such imprecision when it interacts with information asymmetry regarding an investment project's ex ante profitability, known only by the firm's managers. Absent agency and risk‐sharing considerations, we find that some degree of accounting imprecision could actually be value enhancing. We characterize the optimal degree of imprecision and identify its key determinants. The greater the information asymmetry regarding the project's profitability, the greater is the imprecision that should be tolerated in the measurement of the firm's investment.     

土地财政抑制了企业创新吗?——基于信贷错配视角的分析

基于一般均衡框架,考量房价、土地财政与企业创新之间的关系。研究发现：金融市场存在摩擦时,土地作为重要的抵押资产,房价波动和土地财政会扭曲创新资源的配置,在短期和长期对创新产生不同的影响。短期房价上升通过土地财政推动政府支出增加和总产出扩张,同时带动了企业的研发投入。当面临新的投资机会时,企业可以通过出售房产,缓解流动性约束。但在长期,土地财政引致的政府债务挤出了企业信贷,部门间信贷错配抑制了企业研发投入,同时高房价会导致企业转移部分资源投资房产,部门内资源错配进一步抑制了企业创新,从而降低了长期经济增长率,政府增加土地供给,则会弱化政府债务对企业创新要素的挤出效应。     

Screening,Market Signalling,and Capital Structure Theory

This paper develops an equilibrium model in which informational asymmetries about the qualities of products offered for sale are resolved through a mechanism which combines the signalling and costly screening approaches. The model is developed in the context of a capital market setting in which bondholders produce costly information about a firm's a priori imperfectly known earnings distribution and use this information in specifying a bond valuation schedule to the firm. Given this schedule, the firm's optimal choices of debt-equity ratio and debt maturity structure subsequently signal to prospective shareholders the relevant parameters of the firm's earnings distribution.     

Firm strategy and market reaction to earnings

We examine whether a firm's strategy affects the information content of the firm's earnings announcement. A cost leadership strategy is characterized by low sales margins coupled with large sales volumes, economies of scale and major investments in plant and physical assets, whereas a differentiation strategy involves high sales margins achieved through product quality and branding realized by investments in intangibles such as R&D and advertising. These characteristics of the strategies result in differential impact on investor reactions to new information that is revealed about firms. Our results show that firms pursuing a cost leadership strategy have earnings announcements that are more commonly interpreted and result in a greater change in the average belief about stock price. On the other hand, earnings announcements of firms pursuing a differentiation strategy result in more heterogeneous interpretation accompanied by a smaller change in the average belief about stock price. This paper advances our understanding of the cross-sectional variation in the market's reaction to earnings announcements. In addition, the paper demonstrates a predictable instance of divergence in the price reaction and trading volume reaction to an earnings announcement.     

Audit firm's Confucianism and stock price crash risk: Evidence from China

This study examines the association between audit firm's Confucianism and stock price crash risk. We postulate that Confucian moral standards predict a mixed relationship between audit firm's Confucianism and stock price crash risk. Using a large sample of listed firms in China during 2006–2018, we find that audit firm's Confucianism is positively related with client's future stock price crash risk, implying that Confucianism of audit firm aggravates client's bad news hoarding behavior. The effect is more pronounced for client without female auditors and/or with closer personal relationship with auditors. Mechanism analysis shows that audit firm's Confucianism exacerbates crash risk by worsening audit quality and information transparency. Political discipline and external monitoring help to alleviate the negative influence of audit firm's Confucianism on stock price crash risk.     

Firm Investment and Stakeholder Choices: A Top‐Down Theory of Capital Budgeting

This paper develops a top‐down model of capital budgeting in which privately informed executives make investment choices that convey information to the firm's stakeholders (e.g., employees). Favorable information in this setting encourages stakeholders to take actions that positively contribute to the firm's success (e.g., employees work harder). Within this framework we examine how firms may distort their investment choices to influence the information conveyed to stakeholders and show that investment rigidities and overinvestment can arise as optimal investment distortions. We also examine investment distortions in multi‐divisional firms and compare such distortions to those in single‐division firms.     

Market opportunities and owner identity: Are family firms different?

We test the hypothesis that ownership of a firm does not affect the firm's ability to seize market opportunities once decisions about productive structure are taken into account. By grouping firms in size clusters having a similar distance between the actual and the optimal size, we assess how the sensitivity of a firm's sales to market demand changes in response to differences in the owner's identity. We use data from a panel of 4696 continental western European firms over the period 1995–2010 and Eurostat 3-digit sectoral data on firm size distribution. Empirical evidence rejects the hypothesis of ownership irrelevance: family firms are less sensitive to market demand than other firms, in particular when the actual size of the firm is larger than optimal and in the case of both founder- and heir-run family firms.