Knowledge that Transforms

We expand on prior evidence that national-level policy uncertainty affects corporate cash policies and hypothesize that political geography has a significant effect on corporate cash holdings as bi-annual shifts in firms' location on the political map give rise to both time- and spatially-varying levels of exposure to policy risk. We use a state-level index of political alignment with the President as a proxy for political geography and empirically confirm that companies headquartered in states closely aligned with the President tend to increase their cash holdings. Moreover, and in line with the notion that policy uncertainty associated with proximity to political power provides a precautionary motive for holding more cash, the cash flow sensitivity of cash is more pronounced among firms that are financially constrained and politically unconnected. Finally, our tests suggest that such corporate cash management policy in the face of exposure to policy risk can have value implications.

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.

Using the natural experiment created by France's 2011 board gender quota law, we find that the presence of women on boards increases firms' environmental and social (E&S) performance. After the quota law, firms are more likely to create an E&S committee, and women directors are increasingly serving as members of the main board committees and as chairs of E&S committees. We find that prior to being recruited to boards, women directors have more environmental and social experience than men. Combined with their increased authority after the introduction of quotas, their E&S skills allow them to steer companies toward more E&S-oriented policies.

As board gender diversity rises, it is important to understand the motivations of female independent directors. Focusing on the primary profession of female directors, we distinguish between promotion incentives of those who are senior executives of other firms (CorpFemales) and service/fee incentives of non-executive directors (OtherFemales). We find that OtherFemales hold more directorships and are more likely to miss board meetings. CorpFemales are more likely to serve on audit committees, which likely improves the reporting quality. CorpFemales, as opposed to OtherFemales exhibit higher M&A announcement returns and pay lower takeover premiums, especially when the choice of payment for acquisitions is equity.

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.

We posit that credit ratings are higher for firms headquartered in high social capital regions, where managers are more likely to be trustworthy. To test this hypothesis, 9460 corporate debt ratings of US firms from 2001– 2015 was examined. We find that firms headquartered in a county with high social capital in the US have a higher credit rating. This effect is incremental and economically comparable to that of corporate social responsibility. Additional tests suggest that the impact of social capital on ratings is likely because analysts find them more credible. We conclude that credit analysts may consider the social norm around the firm's headquarters when rating firms.

Capital gains taxation creates a lock-in effect, increasing investors' incentives to monitor and decreasing portfolio firms' incentives to cater to short-term investors. We show a negative relation between lock-in and portfolio firms' earnings management, and this relation is stronger for capital gains held by tax-sensitive investors. Further, the relation between lock-in and earnings management is stronger when the capital gains tax rate is higher. We show that locked-in funds vote against management and against audit committee members' reappointment following earnings management. Locked-in funds are less likely to exit a position following disappointing earnings announcements, reducing firms' incentive to manage earnings.

This paper investigates the effects of funding from family and friends (i.e., informal funding) on subsequent access to venture capital for start-up firms. We retrieve information on financing activity of young U.S. firms from a novel dataset based on private placements filings (Form Ds). To address potential endogeneity issues, we use an instrument that hinges on the family size of founders as an exogenous constraint on the supply of informal funds. Our results show that informal finance significantly reduces the probability of future financing events. We provide suggestive evidence that this is due to conflicts of interests between informal stakeholders and professional investors.

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.

Private firms face significant financial constraints that limit their investment and growth. Recognizing the fact that many private firms belong to business groups that contain at least one publicly listed firm, we hypothesize that private firms can partially relieve their financial constraints through the cash proceeds from share pledging of publicly listed firms by the common controlling shareholder. Using data from publicly listed Chinese firms, we find results consistent with this hypothesis, especially for private firms facing greater financial constraints. However, such share pledging also creates a negative spillover on shareholder value of publicly listed firms under common ownership.