Knowledge that Transforms

The large increase in common institutional ownership has raised legitimate antitrust concerns. While the exact channel by which common institutional shareholders might influence firm policy remains unclear, a prominent potential mechanism is corporate board representation. Using hand-collected data on shareholders' board representation, we show that instances of institutional investors simultaneously holding board positions in rival companies are exceedingly rare and do not account for the positive correlation between common institutional ownership and firm-pair profitability. Our findings suggest that board representation by institutional investors is unlikely to represent an empirically potent channel of influence on corporate policy.

We use microeconomic theory to describe the inner workings of Constant Function Market Makers (CFMMs). We show that standard results from consumer theory apply in this new context, endowing us with powerful tools to characterize the optimal design of CFMMs. We employ them to analyze the externalities that traders and liquidity providers exert on each other when interacting through a CFMM. Liquidity providers reduce the execution costs by flattening the bonding curve on which trades are executed. Arbitrageurs impose an adverse selection cost on liquidity providers by unfavorably rebalancing their portfolio. We show that the strengths of these two externalities are pinned down by the curvature of the bonding curve and are inversely related to each other, thereby identifying the fundamental economic tradeoff that market designers have to address.

Blockholding multiple firms within an industry generates an information advantage for institutional investors, who can better differentiate between the industry-wide and firm-specific nature of bad news released by peer firms and avoid selling on false spillover signals (i.e., “smart exit”). Empirically, we document that industry common ownership reduces future firm-level stock price crash risk. Our results can be explained by the attenuated spillover from industry peers' firm-specific bad news, as a complement to the monitoring effect that reduces the focal firm's hoarding of bad news. Our results suggest that the presence of industry common owners provides a stabilizing effect against stock price contagion.

This study examines whether the implementation of a mature enterprise risk management (ERM) framework by property and liability insurers improved their resilience in the face of the COVID-19 pandemic. To address the potential problem of endogeneity, we analyze a panel dataset of listed property and liability insurers from around the world using the propensity score matching method. Subsequently, a two-step “doubly robust” estimation method is employed. The results reveal that the performance of insurers with less mature ERM frameworks was adversely affected by the pandemic but that of insurers with more mature ERM frameworks was not. These findings remain consistent after conducting various robustness checks. Separate consideration of each ERM component reveals that no component independently enhanced insurers' resilience; rather, the components collectively enhanced their resilience. Overall, this study provides valuable insights for insurers and regulators aiming to enhance the industry's ability to withstand future challenges.

Using a news-based index of geopolitical risk (GPR) and over 62 years of data, we find that GPR has a long-lasting negative impact on leverage. Our result is robust to different model specifications, different proxies for leverage, a battery of robustness tests, and survives after addressing endogeneity concerns. Further, we provide evidence that the effect is channeled through declining shifts in both the demand and supply of credit. Cross-sectional tests indicate that the effect is stronger for firms with higher existing leverage, those with more irreversible investment, and those whose stock returns are more sensitive to GPR. Overall, our analysis indicates that GPR is more important than other macro-level determinants of capital structure such as inflation, GDP growth, interest rate variables and other widely used measures of uncertainty.

We examine the impact of CEO social connections on the value of real options. Consistent with the benefits of information transmission, reputation, and trust embedded in social connections, we find that CEO social connections act as real option facilitator through improved financial flexibility, alleviating financial constraints. The effect of CEO social connections is stronger for firms with high growth opportunities and when the CEO has a longer-term career horizon and greater ability. CEO social connections have an increasingly stronger impact on the value of real options. Overall, social connections influence the value of real options, a novel finding in the literature.

This paper provides evidence of a new cost of fire sales: zombie lending by banks. Banks with high market share are more likely to internalize the negative spillovers of falling collateral prices during a fire sale. To prevent prices from falling further during a fire sale, these banks do not liquidate defaulted firms and instead give zombie loans to keep them alive. Using structural breaks in real estate prices to identify periods of fire sales in different MSAs, we provide evidence that banks with high market share give zombie loans to firms with relatively higher real estate assets during a fire sale. Further, congestion due to zombie firms in an industry reduces the investment and profitability of healthier firms. Overall, we highlight a new mechanism for zombie lending resulting from reduced collateral liquidation in markets prone to fire sales.

Exploiting staggered changes in state-level corporate income taxes, we document that corporate social responsibility (CSR) performance improves substantially following tax cuts, reflecting firms' reliance on internal funds for CSR investments. However, tax increases do not significantly weaken CSR performance, implying that CSR commitments are sticky on the upside. Tax cuts enhance CSR performance more for firms with greater tax exposure, tighter financial constraints, better corporate governance, stronger prosocial preferences, or higher risk. Additional analysis of the 2017 federal tax reform substantiates the CSR effect of tax cuts. Overall, our findings highlight essential CSR features and illustrate how corporate tax policy drives corporate sustainability.

The market reaction to nonroutine trades by executives and directors is conventionally viewed as increasing in the market’s assessment of insider informativeness about firm value. Using the market reaction as our instrument, we test the proposition that female directors appointed after Norway’s pioneering board gender-balancing quota law exhibit a degree of informativeness similar to that of male directors. Consistent with this proposition, we first show that the average market reaction to female director purchases jumps from a prequota value of zero to a level similar to that of male directors. Second, the market reaction is increasing in the board’s director network connectivity (but not in director busyness). Third, regardless of gender, the positive post-quota market reaction to insider purchases does not translate into holding-period adjusted abnormal performance. Fourth, insider purchase activity by both male and female directors increases significantly during the year following the 2008 financial crisis (when boards were already gender-balanced). This gender-neutral increase in insider purchases caused by the exogenous market-wide stock price drop further suggests that female directors are as informed as their male counterparts about firm value.

This paper examines the influence of stakeholder orientation on the shareholder-employee conflict characterized by the propensity of firms to engage in share purchases and leave employee pensions underfunded. Utilizing the enactment of US state-level constituency statutes, we find that firms in states that have adopted constituency statutes exhibit a weaker share repurchase-pension underfunding propensity, especially those with high default risk. The mechanism is through union intervention and labor representatives on boards. The effect is moderated for firms headquartered in high-social-capital regions, operating with higher human capital, possessing a history of employee litigation, and maintaining lower and short-horizon institutional ownership. After implementing constituency statutes, share repurchase announcements are associated with lower returns for firms with higher pension deficits. Our findings suggest that stakeholder orientation can discipline the shareholder-employee conflict.