Knowledge that Transforms

We test hypotheses regarding risk taking behavior of competitors in settings characterized by one-on-one, single elimination tournaments. We draw data from 579 professional golf matches and over 18,000 holes from 2003 to 2013 in tournaments where match-play scoring is used rather than stroke-play. Because of the uniqueness of the data, we are able to provide clean empirical tests of how risk taking is affected by horizon effects (holes remaining), peer effects arising from heterogeneity in player abilities, match status (whether behind or ahead), and the difficulty of the task/project (hole). The findings are applicable to corporate settings where only a few rivals compete for a prize, such as a winning bid, a promotion, market share dominance, and patents. Other applications include litigation contests and political elections.

We review the effectiveness of various adjustment methods in correcting the truncation-bias in patents data and the implications for existing studies. The NBER patents-database was recently updated, extending the sample from 2006 to 2010. The updated sample is largely free of truncation-bias over the period covered by the NBER-2006 sample, allowing us to evaluate the bias-adjustment methods. We find that existing adjustments perform poorly towards the end of NBER-2006 sample. We re-examine multiple studies from the recent literature on innovation and show that findings based on the last few years of NBER-2006 data are not supported in the updated patents-database.

This study investigates how the association between more able managers and firm performance, documented in prior research, is affected by the joint effect of managerial discretion and monitoring quality. We find that higher levels of managerial discretion afford more able managers to further improve firm outcomes only when such discretion is monitored closely to curb more able managers' rent seeking incentives. Our results are robust to a battery of additional and sensitivity analyses that we perform.

This paper examines the impact of general partners' (GPs) own investment (capital commitment) in the venture capital (VC) fund they manage on their investment behavior and fund performance. Using a unique dataset with detailed information on VC fund ownership structure, we find that GPs' capital commitment has an inverted U-shaped relationship with investment speed, investment distance, and industry specialization. GPs' capital commitment is also associated with greater exit success. These effects are more pronounced for VC funds with less monitoring by limited partners (LPs). Findings of this paper shed new light on the governance role of managerial ownership in the VC industry and on the GP-LP relationship.

This paper examines the ability of firms to overcome cross-country barriers to borrowing through foreign asset connections. We find that firm-level foreign assets are an important mechanism in reducing the boundary between borrowers and lenders and thereby enhancing capital access in the syndicated loan market. Our results suggest that firms with foreign assets are more likely to select a foreign lead lender and that the corresponding loans have better pricing terms. And, more specifically, we find that the location of the foreign assets strongly predicts the foreign lender's location. These results support the hypothesis that foreign presence helps reduce information barriers that arise across borders.

Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. We report that Chinese firms in the 2000's are more vertically integrated than the U.S. firms in the 1990s. We find that vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. Further, firms led by insiders with political connection are more likely to be vertically integrated. Finally, vertical integration among politically unconnected firms is associated with elevated per capita GDP level and growth, while vertical integration among politically connected firms is unrelated to local economy performance.

We examine the relation between earnings smoothing and stock price crash risk to evaluate the role of earnings smoothing on the downside risk of equity values. We find that, within firm, a higher degree of earnings smoothing is associated with greater crash risk; and this association, in the cross-section, is more pronounced for firms with fewer analysts following, smaller institutional holdings, and positive cumulative discretionary accruals. We also use stock returns to assess the economic significance of our results. We find that, controlling for firm fixed effects, earnings smoothing is associated with sizable negative returns in the quarter following the earnings announcement. Our findings caution investors about the downside risk of firms reporting smooth earnings, in contrast to the conventional belief that these firms are low in equity risk.

This study investigates the informational effect of stock liquidity on dividend payouts. Using a sample of Chinese listed firms during 2000–2014, we find a positive relation between stock liquidity and dividend payouts. This result is robust to the use of alternative measures of liquidity, and holds after we control for endogeneity concerns. In accord with our hypothesis that stock liquidity provides information and increases insiders' incentive to pay out dividends, we find that the positive relation between stock liquidity and dividend payouts is more pronounced when the information environment is opaque, and when conflict between controlling shareholders and minority investors is severe. Further, market reactions to regulatory stipulations requiring dividend payouts are more favorable for firms with low stock liquidity, suggesting that legal provisions and regulations are substitutes for stock liquidity. Finally, we rule out several alternative explanations concerning the governance of non-controlling blockholders and the alleviation of manager-shareholder agency conflict.

M&A deals create more value for acquiring firm shareholders post-2009 than ever before. Public acquisitions fuel positive and statistically significant abnormal returns for acquirers while stock-for-stock deals no longer destroy value. Mega deals, priced at least $500mil, typically associated with more pronounced agency problems, investor scrutiny and media attention, seem to be driving the documented upturn. Acquiring shareholders now gain $62 mil around the announcement of such deals; a $325 mil gain improvement compared to 1990–2009. The corresponding synergistic gains have also catapulted to more than $542 mil pointing to overall value creation from M&As on a large scale. Our results are robust to different measures and controls and appear to be linked with profound improvements in the quality of corporate governance among acquiring firms in the aftermath of the 2008 financial crisis.

We use a unique hand-collected data set covering the entire career path of film directors, who are re-hired (or not) after each and every film project. Film directors manage projects which can cost hundreds of millions of dollars. We examine the inter-temporal dynamics of turnover decisions to disentangle ability revelation from effort incentives and measure the contribution of project managers to project success. We show that the probability of re-hiring is increasing in average returns over an entire career path, rather than just the outcome of the most recent project, supporting an ability revelation interpretation. We also find that promotions are increasing in directors' experience. We create an ability measure for directors, and show that directors can have a significant effect on the financial and critical success of their projects. Our evidence can inform the debate on CEO effects on their firms and projects and contribute to the CEO and executive turnover literature.