Knowledge that Transforms

I document the time-varying investment efficiency of conglomerates compared with single-segment firms. I find that, during recessions, conglomerates have higher Q-sensitivity of investment than do stand-alone firms, in contrast to the relationship during expansion periods. I also find that conglomerates, with the benefits from internal capital markets, exhibit increased dependence of investment on internal capital during recessionary periods, while stand-alone firms significantly increase cash retention and deviate their investment from its optimal level more severely. I examine the effect of the degree of diversification and find consistent evidence on investment efficiency and deployment of internal capital. I also provide evidence that conglomerates with stronger governance do not improve investment efficiency during recession, which suggests that agency costs cannot fully explain the changes in investment of conglomerates. Yolanda Yulong Wang

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.

This study uses sudden deaths of CEOs to provide causal evidence on the relation between CEO age and firm risk. I find that CEO age negatively influences firm risk, measured by stock return volatility, but has no effect on policy choices related to risk taking. These findings contrast prior studies, and suggest that the higher volatility is caused by uncertainty about the younger replacement CEOs' contribution to firm value, rather than changes to risk-related corporate policies.

We examine the effect of sovereign credit impairments on the pricing of syndicated loans following rating downgrades in the borrowing firms' countries of domicile. We find that the sovereign ceiling policies used by credit rating agencies create a disproportionately adverse impact on the bounded firms' borrowing costs relative to other domestic firms following their sovereign's rating downgrade. Rating-based regulatory frictions partially explain our results. On the supply-side, loans carry a higher spread when granted from low-capital banks, non-bank lenders, and banks with high market power. We further document an operating demand-side channel, contingent on borrowers' size, financial constraints, and global diversification. Our results can be attributed to the relative bargaining power between lenders and borrowers: relationship borrowers and non-bank dependent borrowers with alternative financing sources are much less affected.

We propose the Volume Coefficient of Variation (VCV), the ratio of the standard deviation to the mean of trading volume, as a new and simple measure of information asymmetry in security markets. We use a microstructure model to demonstrate that VCV is strictly increasing in the proportion of informed trade. Empirically, we obtain VCV from daily observations of trading volume and provide extensive evidence supporting the hypothesis that VCV indicates information asymmetry, by studying return reversals, institutional ownership, and extant firm-level measures of asymmetric information in the cross-section of US stocks. Moreover, VCV increases following exogenous reductions in analyst coverage induced by brokerage closures, and steeply decreases around earnings announcements and other information disclosures.

Using confidential credit-registry data on the universe of bank loans, we characterize the monthly behavior of relationship lending in Chile between 2012 and 2019. We focus on two aspects of relationships between firms and banks: their closeness, and their concentration. We uncover four stylized facts about relationships lending: their behavior through time, cyclical properties, properties of credit contracts in relationships, and the effect of relationships on monetary policy transmission. Our results show that relationship lending plays an important role in credit allocation and in the implementation of financial policies.

Global Systemically Important Banks (GSIBs) face additional capital requirements and closer supervision. We study how closer supervision affects corporate credit supply and investigate consequences for firms. GSIB designations reduce lending on average by 5.9% but to risky firms by 7.2%. The consequences are lower asset, sales, and investment growth, especially among high-risk borrowers, and reduced R&D expenditures among all GSIB-dependent firms. Closer supervision therefore reduces banks' risk-taking but has potentially unintended implications for firms' ability to finance innovation, which seems to crucially depend on bank credit. The supervision-induced effects are larger than those attributed to GSIB-specific capital surcharges.

Patent attorneys are responsible for obtaining patents that bring the highest expected profits for their corporate clients. We investigate the role of patent attorney capability in determining the value of corporate patents. We find that a one standard deviation increase in legal expertise leads to a 0.04% rise in patents' market valuation and a 3% increase in citations. This finding holds irrespective of the number of patents obtained by patent attorneys to date (process experience). To establish causality, we exploit a novel shock: the opening of new regional patent offices in the US; and changes in a firm's patent attorney. Overall, we find that capable patent attorneys matter as they increase both the economic and technological value of corporate patents.

Recent research shows that a high wage-gap between managers and workers identifies better-performing firms, but the stock market does not seem to price this information. In this paper, we show that not all investors neglect pay inequality. Using a unique data set on German firms' employee compensation, we find that the mispricing of the wage gap is driven by limits to arbitrage. Specifically, some investors seem to bid up low-wage-gap stocks for non-monetary reasons, thus exhibiting a preference for low pay-inequality. The results suggest that firms with equitable pay schemes are rewarded with a lower cost of capital.