Knowledge that Transforms

Prior studies document that politically connected independent directors (“political IDs”) bring both benefits (e.g., easier access to long-term debt financing) and costs to firms (e.g., greater minority shareholder expropriations), but the observed relationship may be spurious because board composition is endogenously determined. Moreover, no direct evidence shows how minority shareholders value these political IDs. Using an exogenous shock that forces firms to lose their political IDs, we investigate the value of political IDs for Chinese listed companies. Specifically, using a difference-in-difference methodology, we find that the mandated departures of political IDs lead to reduced long-term debt financing and decreased government subsidies for nonstate-owned listed companies. Nonstate-owned listed companies that experience the sudden loss of political IDs adapt to the shock and improve their minority shareholder protections by engaging in fewer self-dealing activities and by enhancing investment efficiency. Although minority shareholders experience greater levels of expropriation in the presence of political IDs, they react negatively to the forced departure of political IDs. This evidence suggests that minority shareholders weigh the loss of political ties over the potential gain of corporate governance improvement. Our study provides direct evidence on how political IDs affect firms' strategic decisions. The study also sheds light on political IDs' roles in facilitating rent-seeking by controlling shareholders.

Using recent U.S. data, we find that long-horizon abnormal returns following repurchase announcements made after 2001 are much lower than those following earlier announcements. The equity-linked compensation of senior management of buyback firms exceeds that of matching firms, especially for repurchases announced after 2001. Transient institutional investors equity holdings of buyback firms are smaller than their holdings of matching firms following buyback announcements by repeat repurchasers during 2002–2006. The results suggest that many recent buybacks have not been motivated by fundamentals-based factors such as undervaluation, and that non-fundamentals-based factors such as managerial self-interest have become more important.

The green bond market has been growing rapidly worldwide since its debut in 2007. We present the first empirical study on the announcement returns and real effects of green bond issuance by firms in 28 countries during 2007–2017. After compiling a comprehensive international green bond dataset, we document that stock prices positively respond to green bond issuance. However, we do not find a consistently significant premium for green bonds, suggesting that the positive stock returns around green bond announcements are not fully driven by the lower cost of debt. Nevertheless, we show that institutional ownership, especially from domestic institutions, increases after the firm issues green bonds. Moreover, stock liquidity significantly improves upon the issuance of green bonds. Overall, our findings suggest that the firm's issuance of green bonds is beneficial to its existing shareholders.

I provide evidence on the impact of foreign competition on firms' propensities to engage in mergers and acquisitions. Using import tariff reductions as exogenous shocks that increase foreign competition, I find that affected firms are more likely to make acquisitions following tariff reductions. Cross-sectional tests show that this association is more pronounced for single segment firms, capital intensive firms, firms with higher profit margins, and firms with better growth opportunities, which suggests that this association is stronger for firms that are affected by increased competition to a greater extent and firms that stand to gain more from acquisitions when faced with increased competition. Moreover, the positive relation between acquisition propensities and tariff cuts is more pronounced for financially unconstrained firms and during times of high capital liquidity, which implies that it is easier for firms with greater access to capital to respond to increases in foreign competition by making acquisitions. Finally, I find some evidence that the acquisitions made in response to tariff decreases are associated with better firm profitability ratios in the following year, indicating that firms respond to increased competition by making acquisitions to improve their operational efficiency.

Do investors' moods influence their contributions to risky investments in equity crowdfunding? Yes. We use cloud cover as a proxy for mood because besides serving as powerful mood stimulus, changes in weather are plausibly exogenous and orthogonal to attributes of crowdfunding campaigns, yielding an advantageous identification strategy. Our results, based on data from Companisto – one of the largest European equity crowdfunding platforms, indicate that change in sky cloud cover from zero to full reduces each investor's contribution amount by about 10–15% (across different specifications). Our paper highlights the broader role of financiers' moods and emotions in providing valuable financial resources to entrepreneurs.

The existing literature provides extensive evidence that firms intentionally structured lease arrangements to achieve off-balance-sheet accounting treatment prior to ASU 842 (FASB, 2016) and IFRS 16 (IASB, 2016). However, this study finds the opposite for Chinese state-owned enterprises (SOEs): compared to non-SOEs, SOEs in China have a higher tendency to use finance leases rather than operating leases. This result remains significant after we control for the possibility that Chinese capital providers are discriminatively extending credit to SOEs in the form of finance leases. We explain SOEs' preference for finance leases by their executives' empire building incentives. Such incentives are created by the executives' hunger for compensation, promotion and subsidies, which are determined by the government. Consistently, we find that SOEs' engagement in finance leases increases with their incentives to expand the firms' size. And indeed, SOE executives obtain more compensation and subsidies by growing their firms with finance leases. Finally, we find that SOEs with higher borrowing costs structure more finance lease arrangements. Such structuring further increases SOEs' financial leverage and, to some extent, decreases their corporate value. Taken together, these results suggest that the benefit of the ASU 842 (or IFRS 16), which aims to bring leased assets onto the balance sheet, may be impaired in situations where executives have strong incentives to build empires.

In June 2004, the SEC required mutual fund boards to disclose additional information about the inputs and processes involved in advisory contract approvals to help investors make more informed decisions and to encourage independent directors to act more independently when negotiating advisory fees. We find that CEF advisory fees are more likely to decrease after the 2004 SEC amendments, especially for those CEFs with high advisory fees and low investment performances. After the 2004 SEC amendments, CEF advisory rates decrease on average and the magnitudes of their decreases increase. We find that more board meetings and the likelihood of a decrease in advisory fees after the amendments increases with the number of board meetings. Our results are not only supported by textual analysis and type of filing downloads but are also robust to time-series placebo tests, changes in the ratios of independent directors, and funds belonging to “scandal” families. Overall, our results are consistent with the notion that the 2004 SEC amendments successfully encouraged independent fund directors to exert more effort and to act more independently in negotiating advisory fees with fund advisors.

This research investigates the relationship between government economic policy uncertainty (EPU) and trade credit and its value implication for U.S. public firms. We find that firms curtail their receivables periods and face shorter payables periods from suppliers during high EPU. The impact of trade credit policy changes on firm value is nonlinear. Tightening trade credit during periods of high EPU increases shareholder value only to a certain point, beyond which it is value-destroying since overly reducing trade credit can lead to losing customers to competitors.

This paper examines the impact of blockchain and crypto-related name changes on corporate and financial performance of the corporations. We document several pieces of evidence suggesting that companies who partake in such “crypto-exuberant” naming practices become more volatile and offer substantial and persistent stock market premiums as a reward for their corporate identity change. However, the retroactive name changes harm firm's short-term profitability and have a dampening effect on financial leverage of the company. This paper advances the Dotcom effect literature by providing novel results on the changing traditional pathways of price discovery and information flows after the announcement of corporate name changes to blockchain-related names. The identified contagion channels display that crypto-exuberant companies become more susceptible to cryptocurrency markets, which should interest regulators and investors.

This study examines how a firm's corporate legal structure may affect its borrowing costs. Corporate legal structure refers to the legal fragmentation of a firm into multiple, separately incorporated entities. This fragmentation is bound to be a factor when lenders determine the pricing of debt and design of contract terms because they can enter into legally enforceable agreements only with specific legal entities. Using a sample of private loans to parent companies in the United States, I find that a more complex corporate legal structure is associated with higher loan spread. The findings are robust to several firm and loan characteristics and are incremental to the effects of other forms of organizational structure, namely business and geographic diversification. Subsequent evidence suggests that the effect of a corporate legal structure on borrowing costs is, at least partly, explained by recovery risk.