Knowledge that Transforms

We study the political determinants of the world's largest privatization program by exploiting an age-related discontinuity of politician promotion in China. As a local politician's age exceeds 58, his promotion likelihood quickly diminishes. Consistent with changes in the politician's incentives, we find that Chinese cities whose top officials were older than age 58 were less likely to privatize local state-owned enterprises. Using the promotion discontinuity as an instrument, we report that privatization has significant effects on the firm's efficiency.

Reexamining CEO personality traits from a real options theory perspective, we suggest that the firm's strategic flexibility can be worsened by CEO conscientiousness and neuroticism. We use a measure of strategic flexibility as the firm's ability to take advantage of heightened volatility, which then results in superior stock returns. Our results suggest that strategic adaptability is impeded by rigid planning, resistance to change (conscientiousness) and lack of emotional stability (neuroticism). For firms that experience a decrease in volatility, the opposite holds. In line with trait activation theory, our results imply that the effect of specific CEO personality traits on firm dynamics and performance is contingent and context-specific. Our findings are economically significant and have important implications concerning CEO selection and management.

This paper presents evidence that labor-saving technologies positively impact a firm's financial leverage. The results are robust with two different measures of labor-saving innovations: automation and process innovations. The effects are more pronounced in firms facing greater labor input rigidity, such as firms with higher labor intensity, share of minimum wage workers, and union coverage. Our analysis suggests that labor-saving innovations reduce wage rigidity, allowing firms to increase financial leverage.

We develop a computable general equilibrium model of firm capital structure that predicts countercyclical financing costs and procyclical financing. We extend the standard financial accelerator model by incorporating countercyclical uncertainty shocks and equity financing frictions capturing the moral hazard problem of profit diversion. In this environment, increased uncertainty restricts equity financing, resulting in a lower level of total equity, which in turn influences the debt contract. As a result of less equity utilization in the face of increased uncertainty, the default rate and debt financing costs increase, although firms reduce their investments. The amplified effect of uncertainty shocks on debt financing costs through the equity financing channel enables the model to predict countercyclical external financing costs. Existing financial accelerator models, on the other hand, cannot generate countercyclical financing costs without uncertainty amplification via equity financing, as TFP shocks, another source of business cycle, cause firms to reduce the size of business projects and, in turn, credit demand.

We analyze how the materialization of physical climate risk in the institutional investors’ portfolios spurs a propagation effect on the information content of stock prices. Institutional investors with a relatively high portfolio exposure to natural disasters divest from disaster-hit stocks, decrease the trading intensity in non-hit stocks, and their trading decisions predict low medium-term returns. At the firm-level, institutional investors propagate the effects of disasters to non-hit stocks through reduced incorporation of firm-specific information, especially when the stocks represent a low portfolio weight. Combined, these results suggest that natural disasters trigger a rational reallocation of information-processing resources by institutional investors.

We analyze PIPE (Private Investments in Public Equity) transactions in which the issuer experienced class action lawsuits. We explain the associated information effects measured by the announcement wealth effects and the discounts. Using a comprehensive, hand-gathered dataset, we show that the more severely litigated PIPEs are associated with higher announcement wealth effects and higher levels of discounts. We find that the issuer's voluntary disclosure positively influences PIPE information effects particularly when coupled with auditor changes. We report that certain mitigation actions affect the pricing of PIPEs along with their associated wealth effects while facing ongoing litigation. We posit that confidentiality in privately negotiated securities is the key in litigated transactions as issuers efficiently share the operational details of mitigation efforts. PIPE transactions are not necessarily costlier funding venues even when securities class action lawsuits are ongoing compared to the PIPE transactions that did not experience any prior litigation action.

We study the impact of the staggered adoption of anti-collusion leniency legislations around the world on IPO activity. We document that the passage of leniency legislations prompts IPO activity. The effect is amplified in more concentrated industries , while it is mitigated in countries with more stringent competition laws in place and countries in which investors have a lower ability to diversify risk in the financial market. Collectively, these findings are consistent with the view that, by enhancing product market competition, leniency legislations increase the benefits for firms from going public, resulting in higher IPO activity. The results of supplemental analyses suggest that the passage of leniency legislations leads to less underpriced IPOs and a more efficient use of IPO proceeds, and prompts firms with less proprietary information to go public.

In an environment where concentrated share ownership is the norm, we ask whether Majority-of-the-Minority (MoM) votes curb controlling shareholder overreach and investment inefficiency. We consider MoM votes on controller-based related party transactions in China. Such votes give minority parties potential veto power. We report strong association between shareholder disapprovals on controller-based investment related MoM proposals and the underlying entity's investment plans. This association is robust to a battery of tests, including assessment of pre-vote consultation between minority and controlling shareholders and an exogenous regulatory shock. We also report increased likelihood of informal securities enforcements in the year following MoM shareholder disapproval.

We identify a positive effect of patent pledgeability on corporate patenting. Our tests exploit staggered city-level policy changes that allow firms to use patents as collateral for financing. We find a significant increase in patents and patent citations for firms headquartered in cities that have adopted such policies relative to firms headquartered in cities that have not. We further show that patent pledgeability increases corporate patenting by inducing firms to shift from secrecy-based innovation to patent-based innovation, rather than by mitigating financial constraints.