Knowledge that Transforms

Does state ownership hinder or help firms access credit? We use data on almost 4 million firms in 89 countries to study the relationship between state ownership and corporate leverage. Controlling for country-sector-year fixed effects and conventional firm-level determinants of leverage, we show that state ownership is robustly and negatively related to corporate leverage. This relationship holds across most of the firm-size distribution – with the important exception of the largest companies – and is stronger in countries with weak political and legal institutions. A panel data analysis of privatized firms and a comparison of privatized with matched control firms yield similar qualitative and quantitative effects of state ownership on leverage.

We examine the effect of voluntary climate risk disclosure on Credit Default Swap (CDS) premiums. We develop a structural model, in which climate-related disclosures serve as an information source reducing climate change uncertainty. The model predicts a negative relation between the informativeness of climate risk disclosure and the CDS premium, and asymmetric effects of positive and negative disclosure tone on the CDS premium. Using climate risk measures quantified from earnings call transcripts, we provide evidence supporting these predictions with causal inference. Our study suggests that climate risk is priced in the CDS market, where investors pay attention to climate risk disclosures.

This paper investigates the interplay between government subsidies, production technology, and learning through imprecise signals in shaping a firm’s investment strategy. Utilizing a real options framework with complementary investments, we address uncertainty in different investment stages and the limited informativeness of signals. Our findings reveal that optimal subsidization aligns a firm’s incentives with the evolving knowledge gained during the investment process. Specifically, the interaction between production technology elasticity and signal quality is crucial. Subsidies prove most effective when signals are highly informative, particularly when the technology’s returns are dependent on later-stage investments. This analysis highlights the need to manage uncertainty at each stage to maximize social net benefits, offering insights for policymakers on structuring subsidies under uncertainty.

This study examines the long-term impact of social disaster experiences on household finance. Using the Cultural Revolution in China, the country’s most pronounced sociopolitical turmoil that completely disrupted millions of people’s lives, we show that households are more likely to participate in the stock market if their eldest member was more exposed to the turmoil. The results remain robust to alternative historical events, socioeconomic factors, and household characteristics. Survey results suggest that the more exposed individuals invest in the stock market because they perceive stocks as low risk rather than have altered risk preferences or trust in stock markets.

Exploiting the mandatory implementation of the economic value added (EVA) appraisal reform among central state-owned enterprises (CSOEs) in China in 2010 as a quasi-natural experiment, this study investigates the effect of managerial incentives on firms' use of trade credit financing. Using a sample of CSOEs and non-state-owned enterprises (non-SOEs) listed on China's A-share market, we find that CSOEs use more trade credit than non-SOEs after the adoption of the EVA appraisal reform. This effect is more pronounced for CSOEs in non-strategic industries or in industries with intense competition; for CSOEs with underperforming EVA, with a lower actual cost of debt, or without political connections; and for CSOEs whose managers are in the last year of their assessment tenure. Furthermore, after the mandatory reform, the increased use of trade credit financing significantly improves the EVA performance of CSOEs, thereby further increasing executive compensation. These results suggest that CSOE managers with strong incentives use nominal interest-free trade credit financing to enhance EVA performance. Our study provides a new explanation for the differences in trade credit financing among firms with different property rights and has implications for investigating the role of managerial incentives in informal financing decisions.

We investigate how firm managers’ learning from share prices is influenced by two different types of algorithmic trading (AT) activities in their shares. We find that liquidity-supplying AT enhances managers’ ability to learn from share prices by encouraging information acquisition in markets, leading to increased investment sensitivity to share prices. However, liquidity-demanding AT impairs this learning process by discouraging information acquisition. Firm operating performance correspondingly improves with liquidity-supplying AT and deteriorates with liquidity-demanding AT. To establish causality, we use NYSE’s Autoquote implementation as a source of exogenous variation in AT. Our findings demonstrate AT’s significant impact on real economic outcomes.

We develop a framework for screening and validating empirical designs in natural experiments. As an illustration of the framework, we establish a common testing ground for three popular research designs – instrumental variables (IV), fuzzy regression discontinuity (FRD), and difference-in-differences (DiD) – that exploit the annual Russell 1000/2000 Indexes reconstitution. Of the three designs, we find that only the IV approach spuriously detects large and statistically significant “effects” that by construction should be immaterial and statistically indistinguishable from zero. We advocate the use of simulation evidence to support key identifying assumptions for future research designs based on natural experiments.

In a sample of U.S. firms, we find strong evidence that firms' implied cost of equity is decreasing in a novel proxy of firm-level climate change sentiments of earnings call participants, supporting prior literature that shows investors demand higher returns from their investments in brown firms and lower returns from that in green firms. This effect, however, is particularly pronounced for the firm-years headquartered in the states experiencing higher than median per-capita energy related CO2 emissions, those headquartered in climate related disaster intensive counties and those headquartered in RED and SWING states, supporting “boomerang hypothesis” that green firms are hedged against potential changes in local climate standards and thus enjoy considerably cheaper financing in the localities marred with greenhouse gas emission concerns, climate related physical disasters, and climate unfriendly political environment. We utilize the variation in regionwide and statewide public beliefs about scientists' beliefs regarding the occurrence of global warming as an instrument to address endogeneity issues, among other tests.

We study the impact of inside debt holdings on the likelihood of product market recalls. Consistent with inside debt better aligning incentives, we find it is negatively associated with subsequent recalls. This relation is pronounced for industries where managers have greater control over the supply chain and when examining severe recalls. Our results hold irrespective of the firm's financial constraints or cash flow risk. Inside debt has the greatest influence on older and longer tenured executives, indicating that managerial risk aversion plays an important role. Overall, our results indicate that compensation policies can have a positive effect by decreasing the likelihood of costly recalls.

We show a positive relation between insider horizon and a firm's corporate social responsibility (CSR) performance. This positive relation is likely driven by good internal governance rather than agency problems. To support a causal interpretation, we adopt managerial career horizon reductions and the rejection of inevitable disclosure doctrine as exogenous shocks to insider horizon. We find that the observed positive effects are stronger when firms have higher ownership of long-term and socially responsible institutional investors, when insiders sign long-term compensation contracts, and when firms face less takeover pressure. We document the real effects of long-horizon insiders using various raw CSR metrics. Overall, our results indicate that insiders' long-term orientation can promote CSR.