Knowledge that Transforms

We investigate the impact of cyberattacks on a firm's equity issuance decisions. Our findings indicate that firms targeted by cyberattacks are less likely to pursue seasoned equity offerings (SEOs) afterward. This effect is more pronounced when the target firm has lower external financing needs and operates in a poor information environment. This result remains robust after addressing sample selection bias through propensity score matching and entropy balancing approaches. We attribute this reduction in SEO activities to reputation loss, investors' adverse selection, and the resulting higher equity financing costs. Furthermore, we demonstrate that the negative impact of cyberattacks on SEOs extends to industry peers. This spillover effect is stronger when the target firm suffers significant reputation loss, when the stock prices of peers closely correlate with those of the target firm, when peer firms possess a higher ex-ante cyber risk, and when they are more vulnerable to future cyberattacks.

Narcissism is a multifaceted personality trait that profoundly influences individuals' cognition, emotions, and actions. This study investigates the relationship between narcissistic CEOs and their engagement in opportunistic insider trading. Utilizing a quantitative measure of CEOs' narcissism derived from textual analysis, we find that CEOs with a higher level of narcissism engage in opportunistic insider trading more intensely. To mitigate endogeneity concerns, we employ various rigorous approaches, including matching, instrumental variable, Heckman's two-step sample selection model, and falsification tests. Through cross-sectional analysis, we find that the impact of CEOs' narcissism on opportunistic insider trading is more pronounced among CEOs with limited legal knowledge, facing weaker external and internal monitoring pressure, working at larger firms, and being male. In addition, we demonstrate that the insider trades of narcissistic CEOs are less profitable and less informative than those of non-narcissistic CEOs, as evidenced by subsequent stock performance.

This paper investigates how advances in automation technologies affect firms' information environments. Using an instrumental variable research design that exploits exogenous variation in industrial robot adoption, we present robust evidence that an increase in exposure to robots causes firms to lower financial reporting quality. As automation technology adoption entails adoption costs, we find that the effect is attributable to management's strategic increase of financial reporting discretion. In light of the rapid rise of automation technologies our paper provides important insights how such technologies impact firms' reporting quality.

A fundamental prediction from principal-agent theory is that firms facing greater ex ante exposures to exogenous common shocks should more frequently utilize relative performance evaluation (RPE) in CEO compensation contracts. Recent advances in modeling the economy as a supply network consisting of sectors connected through input-output linkages establish that industries positioned more centrally or upstream face greater ex ante exposures to exogenous common shocks propagating through the network. This paper investigates the impact of firms' network positions on the use of RPE in CEO compensation. We find that firms in industries positioned more centrally or upstream use RPE more frequently and base greater fractions of CEO pay on RPE. We also document that network positions explain variation in firms' RPE-plan implementation via the selection of peers. Our findings are consistent with boards using RPE to filter from CEO pay exogenous shocks to firm performance inherent in firms' supply network positions.

This paper develops a novel methodology to identify peer linkages among cryptocurrencies using natural language processing applied to financial news. We document a distinct pattern of conditional co-movement among peer assets: when a cryptocurrency experiences a large idiosyncratic shock, its peers — identified through news co-mentions — exhibit abnormal returns of the opposite sign. This mis-pricing persists for several weeks and enables profitable trading strategies. Our findings suggest that investor overreaction to news drives these dynamics, highlighting the role of financial media in shaping prices. The proposed methodology extends beyond crypto, offering a generalizable approach to studying peer effects and news-driven pricing distortions.

Using finite mixture models, we find that financial distress is related to realized return negatively (positively) for one (the other) latent group. The negative (positive) relation concentrates in firms with large negative (positive) realized return; the likelihood for a firm to be in the latent group with a positive relation is negatively related to its price-to-value ratio estimate and mispricing score, both of which measure relative mispricing. The mispricing-correction component of realized return is negative (positive) for overvalued (undervalued) firms and decreases (increases) with corrected overvaluation (undervaluation). Overall, our findings are consistent with the view that mispricing—undervaluation and overvaluation—is larger for firms with higher financial distress. Evident in our findings, an overall negative relation between financial distress and realized return is driven by the negative relation between financial distress and the mispricing-correction component for overvalued firms and, therefore, it is not at odds with the risk-reward paradigm. • The relation between distress and realized return is positive (negative) for undervalued (overvalued) firms. • The negative overall relation between distress and realized return does not contradict the risk-reward paradigm. • Zhuo (June) Cheng acknowledges financial support from Hong Kong SAR Research Grants Council, China (#15506018).

We exploit an exogenous shock to dark trading volume to identify the effect of dark trading on market quality. Following a 34% reduction in trading on dark venues, we find no evidence that the cost of trade (e.g., effective spreads, realized spreads, price impact, and quoted spreads) changes in a statistically or economically meaningful manner. While our findings stand in contrast to those of several prior studies, supplemental tests confirm that contradictory inferences cannot be attributed to either low power or different stock samples or time periods. Instead, we argue that identification is a key driver in conflicting results. Our research highlights the benefit of structured experimentation from the Securities and Exchange Commission (SEC) for understanding causal effects in capital markets.

We study the effects of employee welfare policies (EWPs) on labor investments of U.S. firms. We show that EWPs are associated with a significantly weaker pass-through of industry sales shocks to firm employment growth. EWPs’ insulation effect is stronger in states with less generous unemployment insurance, in states with lower wage growth, and in firms relying more on qualified labor. We corroborate our results exploring policy-induced variation in workforce policies from the adoption of Paid Sick Leave laws, and industry-wide shocks to labor ESG incidents. Our findings suggest that EWPs may insure workers against employment fluctuations.

We examine the impact of institutional democracy on firm value through the lens of dividend policies. Using instrumental variables, we find strong evidence that democracy improves dividends in an international sample of 18,410 unique firms across 63 countries over the 1991–2018 period. This effect is more pronounced for firms with high agency costs, or those in countries with weak legal protection for shareholders. Our evidence is robust to alternative measures of democracy and a battery of tests addressing the challenges associated with the instruments. Furthermore, dividends are capitalized at a higher rate in more democratic countries, especially for firms with high growth options. To the extent that investors are willing to pay a premium for firms that distribute more dividends, the democracy-induced dividends add to corporate value beyond the premium associated with shareholder rights-induced dividends. Overall, our results highlight that institutional democracy is an important, yet unexplored, determinant of corporate valuation.

We provide the most comprehensive analysis to date of the relation between ESG ratings and stock returns, using 16,000+ stocks in 48 countries and seven different ESG rating providers. We find very little evidence that ESG ratings are related to global stock returns between 2001 and 2020. This finding obtains across different regions, time periods, ESG (sub)ratings, ESG momentum, ESG downgrades and upgrades, and best-in-class strategies. We further find little empirical support for prominent hypotheses from the literature on the role of ESG uncertainty and of country-level ESG social norms, ESG disclosure standards, and ESG regulations in shaping the relation between ESG and global stock returns. Overall, our results suggest that ESG investing did not systematically affect investment performance during the past two decades.