Does capital market drive corporate investment efficiency? Evidence from equity lending supply

The increased equity lending supply (ELS) in the equity loan market, available for short sellers to borrow, exposes a firm to greater short selling threats. Considering short sellers' strong incentives to uncover firm-specific information and monitor managers, we hypothesize that short selling threats, proxied by ELS, enhance corporate investment efficiency. We find that ELS significantly reduces managerial tendencies to underinvest (overinvest) especially for firms prone to underinvest (overinvest). The effect of ELS on investment efficiency is stronger for firms with higher information asymmetry and weaker corporate governance, confirming short sellers' role in mitigating information and agency costs. However, short selling risk weakens the effect of ELS. Our evidence is robust to endogeneity checks and suggests that corporate investment can be driven by a particular capital market condition: the amount of lendable shares in the equity loan market.     

Does religiosity influence venture capital investment decisions?

Theories on contextual behavior (e.g., social norm, self-identity, and legitimacy theories) suggest that the religiosity of the geographical area in which an organization operates influences its behavior. Using a sample of 91,020 VC investments in the U.S., we study whether religiosity influences VC investment decisions. Based on prior literature that finds a positive relation between religiosity and risk aversion, we posit that VCs located in more religious counties make less risky investments. We find that VCs located in more religious areas are more likely to be involved in staging and syndication and have a greater propensity to invest in later and expansion stages of portfolio companies. Taken together, our results suggest that VCs located in religious counties tend to be more risk averse.     

Does CEO managerial ability matter? Evidence from corporate investment efficiency

Review of Quantitative Finance and Accounting - This study investigates how higher ability CEOs behave differently from lower ability CEOs in making investment decisions and, particularly, whether...     

Does investment banker human capital matter in acquisitions? Evidence from China

Investment banker human capital is valuable in mergers and acquisitions. Exploiting a unique hand-built dataset, this paper studies whether and how investment banker's education and experience impact the merger performance in China. We find that investment bankers' education credentials are positively related to the post-merger performance; however, greater investment banker experience does not. We further explore the channels and show that the education effect is stronger in deals with higher information asymmetry and acquirers with worse corporate governance. On the other hand, experience increases merger performance in deals with high information asymmetry but reduces deal performance in poorly governed firms. Our findings suggest that higher education attainment facilitates both the advisory and monitoring role of investment bankers, while more experience makes investment bankers better advisors yet worse monitors. Our findings also suggest that investment bankers' roles in value creation are highly dependent on different institutional backgrounds, and one cannot generalize the findings in the U.S. across borders.     

Is the venture capital market liquid? Evidence from India

This paper models investment duration in the Indian venture capital (VC) market, by industry and exit route. We examined 3416 investment and exit transactions in India during the period 2000–2017 and found that the probability of staying invested for more than ten years was 70%. Exit probabilities were low in most sectors. Investment duration was not positively associated with the investment valuation; rather, it was impossible to exit from the majority of investments because of the illiquidity of the VC market.     

Does product market competition affect corporate governance? Evidence from corporate takeovers

We examine the extent to which shareholders strategically allow a weak governance structure in response to increasing competition pressures in the product market. We treat acquisitions by rival firms as shocks that increase threats in a competitive product market. We find that firms adopt greater entrenchment provisions when there are greater competition threats. Moreover, firms with high institutional ownership – especially by dedicated investors – and​ board independence within the compensation committee are particularly aggressive, which is consistent with our theory that aggressive behavior represents a strategic decision by shareholders. Finally, we find positive relationship between the adoption of entrenchment provisions and firm’s future performance, but only for the adoption under relatively severe competitive pressures.     

Does social capital foster sustainable investment?

How do country-level societal norms affect financial investments? We provide evidence that mutual funds managed in high social capital countries are inclined to consider environmental, social and governance filters in their portfolios, especially when acquiring new stocks and investing abroad. We argue that social capital nurtures the investment preferences of retail investors, whose demand incentivizes fund managers to respond in kind. Such impact is more pronounced in individualistic and high–power distance societies, suggesting that the social cohesion benefit of social capital complements altruistic inclinations in the former and provides mechanisms to punish unsustainable investment behaviour in the latter.     

Is social capital associated with corporate innovation? Evidence from publicly listed firms in the U.S

We find that social capital in U.S. counties, as captured by strength of social norms and density of social networks, is positively associated with innovation of firms headquartered in the county, as captured by patents and citations. This relation is robust in fixed-effect regressions, instrumental variable regressions with a Bartik instrument, propensity score matching regressions, and a difference-in-differences design that isolates the effects of over time variations in social capital due to corporate headquarter relocations. Strength of social norms plays a more dominant role than density of social networks in producing these empirical regularities. Cross-sectional evidence indicates the prominence of the contracting channel through which social capital relates to innovation. Additionally, we find that social capital is also positively associated with trademarks and effectiveness of corporate R&D expenditures.     

Does FinTech development facilitate firms' innovation? Evidence from China

This study examines the impact of financial technology (FinTech) development on firms' innovation. Using Chinese listed firms' panel data from 2011 to 2021 and the FinTech indicators we constructed, we find that FinTech development significantly facilitates firms' innovation by alleviating their information asymmetry and financing constraints. This finding continues to hold after a series of robustness tests and endogeneity discussions. Moreover, we find that the effect of FinTech development on innovation is more pronounced for non-state-owned firms, firms in the central region, and high-tech firms. These results offer important policy implications as they demonstrate the crucial role of FinTech in the high-quality development of the real economy.     

Does insiders share pledging stifle innovation? Evidence from China

We examine the relation between insiders share pledging activities for personal loans and firm innovation. Firstly, we find a negative effect of both the existence of pledging and the intensity of pledging activities on firm innovation, measured by R&D and patent application. Pledging by insiders with decision rights is associated with a 4.6% decline in R&D activities and 0.5% decline in patent applications, respectively, which accounts for 4.0% and 10.6% of the mean of each variable. This result holds using a propensity-score matched sample. In addition, we instrument pledging activities by financing constraints faced by other firms controlled by the same controlling insiders who pledge shares. IV estimation yield similar results. Secondly, we find share pledge activities have more pronounced effect on firm innovations when firms are located in areas with strong property rights protection, when firms are non-SOEs, or when pledging insiders serve on corporate boards. Lastly, we also find a negative effect of share pledging of other firms with common shareholders on firm innovations of interest. Overall, our findings suggest that pledging shares by insiders stifle firm innovation because share pledging reduce insiders' preference for risk taking.     

Has persistence persisted in private equity? Evidence from buyout and venture capital funds

This paper presents new evidence on performance persistence for U.S. private equity (buyout and venture capital) funds. We use high quality cash-flow data from Burgiss's large sample of institutional investors (as of December 2020) which allows us to examine how persistence has changed over more than three decades of fundraising. Venture capital (VC) performance remains remarkably persistent across funds raised by the same general partner (GP). In contrast, buyout funds' performance persistence becomes noticeably weaker over time. The patterns are different when we restrict the analysis to information that would have been available to investors – interim performance on the previous fund at the time a new fund is raised – rather than using final, or latest, performance. We find little evidence of persistence for buyouts, especially post-2000. We continue to find persistence for VC funds though it declines post-2000. The differences are driven by interim performance reported at the time of fundraising being only moderately correlated to final performance and GPs avoiding fundraising when interim performance is poor. Finally, we look at GPs who introduce new fund styles and find that performance is noticeably lower for buyouts (but not VC). Exploring the reasons for these divergent trends in persistence between buyout and VC is a promising area for future research.     

Does geopolitical uncertainty affect corporate financing? Evidence from MIDAS regression

This paper investigates the effect of geopolitical uncertainty on (market) leverage ratio, debt maturity, and choice of debt source. Using a new monthly index of geopolitical uncertainty and annual data for corporate financing variables, we find that under geopolitical uncertainty firms tend to reduce debt and increase market leverage. We argue that this increase is driven by asymmetrical reductions in the numerator (total debt) and the denominator (total debt and equity) of the leverage ratio. Under geopolitical uncertainty, firms tend to shorten their debt maturity structure and—especially those firms with lower credit quality—to substitute bank debt for public debt.     

Does venture capital syndication affect mergers and acquisitions?

We find that venture capital (VC) syndicate-backed targets receive higher acquisition premiums and spend more time negotiating transaction terms. The acquirers of syndicate-backed targets receive lower cumulative abnormal returns surrounding the acquisition announcement, but they outperform the individual-backed targets in the long-term. We show that VC syndication creates value for entrepreneurial firms by leading to larger and more independent boards of directors prior to acquisition. It also leads to better incentive alignment between the CEO and the shareholders of the acquiring firm. In addition, syndicate-backed targets prefer stock as the method of payment in mergers and acquisitions. Collectively, we show that VC syndication creates value for both entrepreneurial firms and their acquirers in the long-term.     

Does supply network location affect corporate investment efficiency?

Using social network analysis, we compute a firm's network position characteristics and then examine their effects on firm investment efficiency. The results show that both supply network centrality and structural holes have no significant impact on corporate overinvestment but can ease corporate underinvestment by alleviating financial constraints. The specific paths are as follows: a firm that has a high level of centrality or rich structural holes in the supply network is more likely to obtain commercial credit and bank loans; however, supply network position has no significant impact on equity financing.     

Do board interlocks increase innovation? Evidence from a corporate governance reform in India

We examine the effect of board interlocks on patenting and R&D spending for publicly traded companies in India. We exploit a corporate governance reform to address the endogeneity of board interlocks through exogenous changes mandated by the reform requiring a subset of firms to adjust their board structure. We rely on two difference-in-differences frameworks, comparing firms affected by the reform to unaffected firms as well as comparing within the set of firms that did not have to adjust their board structure those that still experienced an exogenous increase of their network size as a result of the reform to those that did not experience a change in their network size. We find that board interlocks have significant positive effects on both R&D and patenting. The evidence suggests that the impact on R&D is induced by information transmission through interlocks. The effect on patenting is driven by firms extending patent protection by patenting inventions abroad that they have already patented in India.     

Does cross-border syndication affect venture capital risk and return?

Venture capital (VC) cross-border syndication has increased significantly in recent years. This study examines the risk and returns of investments of US–European cross-border syndicates in US portfolio companies. We use a large sample of investments across four financing stages, and highlight several noteworthy differences between cross-border syndicates and previous US-only evidence. By comparison, US–European syndicates are larger than US-only syndicates, involve younger VCs, and focus more on later financing stages. Controlling for sample selection bias caused by the endogenous choices of exit route and exit timing, we examine the risk and returns of investments backed by cross-border syndicates. Consistent with evidence from US-only syndicates, alpha and beta decrease monotonically from the earliest (start-up) stage to the later stages of financing.     

Does national culture affect corporate innovation? International evidence

We examine whether and how national culture influences corporate innovation using a newly available comprehensive database on innovation around the world. After controlling for the impacts of formal institutions, and firm-level and country-level variables, we find that culture has relevance for innovation: The probability of a firm innovating is higher in individualistic, indulgent, and long-term oriented societies, as well as in cultures with less power distance, less uncertainty avoidance, and less masculine cultures. In the innovative firms subsample, we continue to find the same significant impact of culture on firms' innovation performance/quality. Our results are robust to endogeneity concerns, different model specifications, alternative measures of innovation and culture, and different subsample analyses.     

Does oil price uncertainty matter in firm innovation? Evidence from China

Inspired by the prevalence of firm innovation and substantial influence of international oil price uncertainty (OPU) on firm operation and decision-making, we investigate the influence of OPU on firm innovation. Using a sample of Chinese listed firms over the 2007–2019 period, our study reveals that OPU decreases firm innovation. This finding is consistent with the real options theory and the prospect theory. Mediation analysis shows that OPU could decrease firm innovation by increasing firms' financing constraints degree. Moreover, high-tech firms and those in highly competitive industries have fewer options to delay their innovation investments, we find that the adverse effects of OPU on their innovation are weaker. Finally, further analysis shows that government subsidies can help mitigate adverse effects of OPU on firm innovation. This paper reveals that OPU goes beyond the commonly known and understood regular indicator that shapes a firm's innovation activity and enriches firm-level evidence for the effects of OPU by highlighting the effects on long-term investment in intangible assets.     

Does corporate sexual orientation equality affect labor investment efficiency?

We investigate the effect of corporate sexual orientation equality (CSOE) on labor investment efficiency (LIE). We find strong evidence that this effect is negative. The relationship intensifies for firms with weaker monitoring and those requiring more highly skilled labor, and is incremental to the effects of corporate social responsibility (CSR) performance. This study adds to an emerging literature on corporate sexual orientation equality and to the literature on labor economics, as it establishes corporate sexual orientation equality as a determinant of labor investment efficiency.     

Does foreign competition affect corporate debt maturity structure? Evidence from import penetration

This paper examines an unexplored issue of how a firm's competitive environment, proxied by import penetration, affects its debt maturity structure. We document a significant, positive relationship between foreign product competition and the proportion of short-term debt. Our results are robust to a series of sensitivity tests and endogeneity concerns. Utilising large, unexpected reductions in import tariffs as exogenous shocks to foreign competition, we validate the positive effect of import penetration on short-term debt. Our results hold more strongly for firms with high information asymmetry and weak external monitoring. These findings indicate that lenders offer short-term debt to prospective borrowers when they exhibit higher information asymmetry in response to increased foreign competition. Additional tests reveal that short-term debt in a firm's financial structure, contingent upon foreign competition, encourages managers to engage in tax avoidance as an alternative funding source. Our study provides novel evidence of the consequential impact of foreign product competition in debt contracting, giving us insights into its practical implications for corporate strategies and the ramifications of trade liberalisation for policymakers.