Board Connections and Dividend Policy

We examine the role of firm board connectedness in shaping a firm's dividend policy. We show that firms with well-connected boards not only have a higher likelihood of paying dividends in the pooled sample of both dividend payers and non-payers but also pay more dividends in the sample of dividend payers, compared with those with poorly connected boards. Further analysis reveals that the relation between board connectedness and dividend-paying behaviour tends to be economically stronger in firms pre-identified to have more severe agency conflicts, suggesting that well-connected boards tend to use dividends to mitigate agency problems in these firms. These findings are robust to different measures of board connectedness, different dividend payout measures, alternative estimation methods, and tests that account for endogeneity.     

Ownership and the Value of Political Connections: Evidence from China

Research has found that political connectedness can have both positive and negative effects on firm value. To resolve these mixed findings, we investigate the impact of political ties conditional on ownership for a sample of Chinese firms over the period 1999–2006. We find that private firms with politically connected managers have a higher value and obtain more government subsidies than those without connected managers, whereas local state‐owned enterprises with connected managers have a lower value and employ more surplus labour than those without connected managers. Our results indicate that the effect of political ties is subject to firm ownership.     

“一带一路”倡议与公司债信用利差

本文以中国“一带一路”倡议的出台作为准自然实验,采用双重差分法考察国家倡议对微观企业债券信用利差的影响。研究发现:(1)相对于非支持企业,“一带一路”倡议实施能够显著降低支持企业的公司债二级市场信用利差,该结论在一系列稳健性检验之后仍然成立。(2)通过考察“一带一路”倡议的债券市场反应,我们发现相比于非支持企业,支持企业在倡议提出后有显著更高的债券累计超额回报率。(3)进一步检验后发现,“一带一路”倡议对公司债二级市场信用利差的降低作用主要通过资源效应和信息效应来实现。并且,政策影响范围主要集中在重点对接行业以及重点对接省份的企业。(4)“一带一路”倡议还对公司债一级市场的发行表现产生影响。具体表现为:在倡议实施之后,受倡议支持企业发行的公司债,其一级市场发行利差下降幅度更大,且包含的担保条款以及限制性契约条款显著更少。本研究探讨了“一带一路”倡议对公司债券市场的政策效应,对未来推进“一带一路”建设,提高资金融通效率具有参考意义。     

Political rights and the cost of debt

We examine the impact of country-level political rights on the cost of debt for corporate bonds issued by firms incorporated in 39 countries. Similar to, but separate from, the relation for creditor rights, greater political rights are associated with lower yield spreads. A one standard deviation increase in political rights is associated with an 18.6% decline in bond spreads. We find evidence that political and legal institutions are substitutes; marginal improvements in political rights produce greater reductions in the cost of debt for firms from countries with weaker creditor rights. We examine potential factors through which political rights may affect the cost of debt and find that greater freedom of the press provides an important channel for reducing bond risks. Moreover, debt of firms with cross-listed equity trades at a premium in U.S. markets, but this relation appears to be more consistent with improved visibility than with bonding effects.     

The risk-weights in the New Basel Capital Accord: Lessons from bond spreads based on a simple structural model

The Basel Committee designed a system of risk weights (“standardised approach”) to measure the riskiness of banks' loan portfolios. We investigate its ability to adequately reflect risk through an analysis of the economic capital implied in corporate bond spreads. This is based on a dataset of issuance spreads, ratings and other relevant bond variables including 7232 eurobonds issued by an internationally-diversified sample during 1991–2003. Three main results emerge: the spread/rating relationship is strongly significant; the estimated spreads per rating class indicate a steeper risk/rating relationship than the one approved by the Basel Committee; no significant difference appears in the spread/rating relation of banks and non-financial firms issuers.     

CEO ability heterogeneity,board’s recruiting ability and credit risk

This study investigates the effects of the CEO (Chief Executive Officer) ability heterogeneity of an industry and the board’s recruiting capability on firm credit risk by using 26,235 America bond data from the year 2001 to 2014. We find that both CEO ability heterogeneity and board’s recruiting ability enhance a firm’s credit quality when controlling for other well-known determinants of bond yield spreads, implying that high CEO ability heterogeneity and good board’s recruiting ability both encourage a firm to replace the underperformed CEO earlier and improve the firm’s subsequent performance, which enhances firm value and credit quality (Merton in J Finance 29(2):449–470, 1974). We also find that good macroeconomic conditions weaken the effect of CEO ability heterogeneity on bond yield spreads while enhance that of board’s recruiting ability. Moreover, board’s recruiting ability weakens the effect of CEO ability heterogeneity on bond yield spreads, indicating that there may exist a trade-off relationship between the CEO ability heterogeneity effect and the board’s recruiting ability effect. Finally, the results are robust when considering endogeneity issues and other measures of CEO ability heterogeneity.     

Acquirer-target social ties and merger outcomes

This article investigates the effect of social ties between acquirers and targets on merger performance. We find that the extent of cross-firm social connection between directors and senior executives at the acquiring and the target firms has a significantly negative effect on the abnormal returns to the acquirer and to the combined entity upon merger announcement. Moreover, acquirer-target social ties significantly increase the likelihood that the target firm?s chief executive officer (CEO) and a larger fraction of the target firm?s pre-acquisition board of directors remain on the board of the combined firm after the merger. In addition, we find that acquirer CEOs are more likely to receive bonuses and are more richly compensated for completing mergers with targets that are highly connected to the acquiring firms, that acquisitions are more likely to take place between two firms that are well connected to each other through social ties, and that such acquisitions are more likely to subsequently be divested for performance-related reasons. Taken together, our results suggest that social ties between the acquirer and the target lead to poorer decision making and lower value creation for shareholders overall.     

The economic benefits of FASB's recommended disclosures: Evidence from the pharmaceutical industry

Prior research has documented an association between disclosure quality and various economic benefits, most notably between the cost of equity capital and market liquidity. We extend this literature by investigating whether pharmaceutical firms that comply with recommended voluntary disclosures of the Financial Accounting Standards Board (FASB) exhibit lower bid-ask spreads, greater market depth, and lower cost of equity capital. Cross-sectional analysis using pharmaceutical firms reveals a negative association between disclosure quality and bid-ask spreads (both the total spread and its adverse-selection component), but no association between disclosure quality and either market depth or the ex ante cost of equity capital. Overall, our findings provide some evidence of benefits accruing to pharmaceutical firms that comply with the FASB's recommended voluntary disclosures under the assumption that lower bid-ask spreads reduce the cost of capital and strong evidence that complying with FASB's recommended disclosures provide a direct benefit to small investors, those who bear the entire weight of bid-ask spreads.     

Liquidity Provision and the Organizational Form of NYSE Specialist Firms

We examine the influence of NYSE specialist firm organizational form on the nature of liquidity provision. We compare closely held firms whose specialists provide liquidity with their own capital to widely held firms whose specialists provide liquidity with diffusely owned capital. We argue that specialists using their own capital have a greater incentive and ability to reduce adverse selection costs, but face a greater cost of capital. Differences in the proportion of spreads due to adverse selection costs, large trade frequency, the sensitivity between depth and spreads, and price stabilization support this argument.     

Political connections and the cost of equity capital

Motivated by recent research on the costs and benefits of political connection, we examine the cost of equity capital of politically connected firms. Using propensity score matching models, we find that politically connected firms enjoy a lower cost of equity capital than their non-connected peers. We find further that political connections are more valuable for firms with stronger ties to political power. In additional analyses, we find that the effect of political connection on firms' equity financing costs is influenced by the prevailing country-level institutional and political environment, and by firm characteristics. Taken together, our findings provide strong evidence that investors require a lower cost of capital for politically connected firms, which suggests that politically connected firms are generally considered less risky than non-connected firms.     

Recognition versus disclosure of finance leases: Evidence from Japan

This study examines whether credit market participants—bond investors and credit rating agencies—treat recognized and disclosed finance leases differently when assessing firms’ credit risk in Japan. I use firms’ credit risk, measured by bond spreads and credit ratings, to investigate the relations between recognized versus disclosed finance lease obligations and firms’ credit risk following the adoption of Statement No. 13, Accounting Standard for Lease Transactions. For a sample of firms issuing new bonds, I find that, unlike recognized finance leases, disclosed finance leases are not associated with bond spreads. Moreover, the associations between recognized versus disclosed finance leases and bond spreads are substantially different. Conversely, recognized and disclosed finance leases are associated with credit ratings and are processed similarly when credit ratings are determined. Taken together, my results suggest that the sophistication of capital market participants influences their credit risk assessments of recognized versus disclosed finance leases.     

Exploitation of the internal capital market and the avoidance of outside monitoring

Internal capital markets (ICMs) provide firms an alternative to costly external financing; however, they also provide an avenue to avoid the monitoring associated with issuing external capital. We argue that firms operating inefficient internal capital markets will avoid outside financing. Consistent with this view, conglomerates that cross-subsidize divisions or engage in value-destroying investment avoid external capital market oversight by refraining from issuing both debt and equity. We further show that firms issuing bonds while engaging in value-destroying investment experience yield spreads that are, on average, 46 basis points higher than those of other diversified firms. They similarly experience yield spreads that are 18 basis points higher when they issue syndicated loans. Value-destroying conglomerates also witness SEO announcement returns that are, on average, 1% more negative than firms operating more efficient internal capital markets.     

Political Connections and the Efficiency of Capital Allocation Through Bond Financing in Chinese Listed Companies

Using a database of firms issuing short-term financing bonds and mid-term notes in China from 2007 to 2011, we uncover whether and how political connections influence the companies' capital allocation efficiency. The authors show that politically connected firms have significantly lower capital allocation efficiency, especially in the case of overinvestment subsamples. In addition, different types of political connections have different effects on firms' inefficient investments. Compared with firms connected to members of the people's congresses and the Chinese People's Political Consultative Conference (MPCP firms), firms connected to government officials (GOF) overinvest more and underinvest less. One year after bond financing, GOF politically connected firms decreased overinvestment, while underinvestment undergoes an upward trend in the MPCP firms.     

Overlapping board connections with banker directors and corporate loan terms: Evidence from syndicated loans

I look at the relationship between corporate loan terms and board members' connections to bankers through employment on other boards, a connection relatively unaffected by confounding factors. Using syndicated loan data, I find that firms connected to bankers via other boards are more likely to borrow, and they receive cheaper pricing. However, loan maturity does not differ between connected and unconnected firms. During the 2007–2008 financial crisis loan availability declined for all firms, but connected firms continued to borrow and to receive lower spreads. Generally, my results support the importance of social connections in decreasing information asymmetry and reducing transaction costs.     

Stock Recommendations for Politically Connected Firms

Social network connections of corporations can significantly affect operating performance and firm valuation. Political connections are one form of social networking which often manifests into improved firm profitability as a result of political favors granted by politicians. However, analysts often have greater difficulty forecasting the earnings of politically connected firms than those of non‐connected firms. This is because politicians often grant political favors to firms in an unpredictable manner making it difficult for market participants to time precisely when political benefits will translate into higher firm profitability. I examine how political connections affect analysts’ stock recommendations using a unique dataset of political contributions in the US over the period 1993–2012. I show that analysts’ recommendations are less profitable for firms with high connectedness than for firms with low (or no) connectedness. I also find that analysts are less effective in translating earnings forecasts into profitable recommendations for highly connected firms. Overall, the findings suggest that analysts do not impound all of the information concerning corporate political connections efficiently into their primary research outputs.     

The effect of bank relationships on bond spreads: Additional evidence from Japan

This study investigates the impact of bank relationships on bond spreads using data on Japanese bond-issuing firms. In doing so, it extends the existing literature, which found that bank relationships decrease bond spreads, consistent with the view that bond investors benefit from bank monitoring, but this is not the case for investment-grade bonds in the US. This study provides evidence that the influence on the yields of investment-grade bonds varies with the type of bank relationship. In this research, a main bank is defined as a bank that is not merely the top lender to a firm but also one of the ten largest shareholders, while firms that borrow money from banks but have no ties with main banks are considered to have support bank relationships. The regression results show that although main bank relationships are not systematically associated with the yields of investment-grade bonds, support bank relationships are positively associated with them. It is suggested that, even for a sample of investment-grade bonds, a specific type of bank relationship affects bond spreads and the association between them is consistent with the view that bond investors are concerned about the hold-up problem posed by banks.     

Labor unions, bargaining power and corporate bond yield spreads: Structural credit model perspectives

This study investigates labor union effects on bond yield spreads from perspectives of structural credit models by employing American bond observations from 2001 to 2007. This research finds that union strength significantly and positively relates to bond yield spreads (this effect is roughly equal to that of issuer rating for one standard deviation change when controlling for well-known variables). The empirical results also show that the positive effects become weaker when management has higher bargaining power. Additionally, union strength volatility significantly and negatively relates to bond yield spreads and capital structure (leverage). The above results are robust when controlling for credit ratings, collinearity concerns, industry effect and tax effect.     

Analyst forecast characteristics and the cost of debt

We examine the relation between analyst forecast characteristics and the cost of debt financing. Consistent with the view that the information contained in analysts’ forecasts is economically significant across asset classes, we find that analyst activity reduces bond yield spreads. We also find that the economic impact of analysts is most pronounced when uncertainty about firm value is highest (that is, when firms have high idiosyncratic risk). Our findings are robust to controls for private information in equity prices and level of corporate disclosures. Overall, the results indicate that the information contained in analyst forecasts is valued outside the equity market and provide an additional channel in which better information is associated with a lower cost of capital.     

Structural Models of Corporate Bond Pricing: An Empirical Analysis

This article empirically tests five structural models of corporatebond pricing: those of Merton (1974), Geske (1977), Longstaffand Schwartz (1995), Leland and Toft (1996), and Collin-Dufresneand Goldstein (2001). We implement the models using a sampleof 182 bond prices from firms with simple capital structuresduring the period 1986–1997. The conventional wisdom isthat structural models do not generate spreads as high as thoseseen in the bond market, and true to expectations, we find thatthe predicted spreads in our implementation of the Merton modelare too low. However, most of the other structural models predictspreads that are too high on average. Nevertheless, accuracyis a problem, as the newer models tend to severely overstatethe credit risk of firms with high leverage or volatility andyet suffer from a spread underprediction problem with saferbonds. The Leland and Toft model is an exception in that itoverpredicts spreads on most bonds, particularly those withhigh coupons. More accurate structural models must avoid featuresthat increase the credit risk on the riskier bonds while scarcelyaffecting the spreads of the safest bonds.     

Depoliticization and corporate cash holdings: Evidence from the mandated resignation of directors in China

The 2013 depoliticization regulation (Rule 18) in China mandates government officials to resign from board positions in public firms, terminating firms' political connections established through these directors. Exploiting this regulation as a quasi-experiment, we document that politically connected firms increase their cash holdings 12.7% more than non-connected firms because of these resignations. This pattern is more pronounced among firms that rely more heavily on the government for external resources. Among state-owned firms, the pattern is more evident in firms that are more deeply privatized. In addition, firms that lose political ties experience a significant decline in obtaining bank loans and government subsidies, and they are also slower to adjust their cash holdings toward the optimal level. These findings underscore the role of corporate political linkages in facilitating firms' access to resources that “soften” firms' budget constraints.