Knowledge that Transforms

Using a sample of over 99,000 firm year observations encompassing extgreater13,800 firms from 1978 to 2007, we analyze how changes in labor market conditions influence the disciplining effect of debt on employee productivity. We document that better (worse) outside employment opportunities weaken (strengthen) the disciplinary effect of debt on employee output. The influence of outside employment options on leverage-output relation is robust to various controls for endogeneity, including using instrumental variables, a quasi-natural experiment, both firm and industry-level analysis, alternative model specifications, and controls for employees' work conditions and changes in work efficiencies. Altogether, our findings highlight the importance of labor market conditions on the efficacy of corporate financial policies and our understanding of how these policies influence economic outcomes.

Firms are more likely to pay dividends with higher payout ratios in an imputation environment. The effects of profitability and earned/contributed capital mix on the decision to pay dividends and dividend payout are weaker for firms following imputation tax system than traditional tax system. Insider ownership is positively related to the decision to pay dividends and dividend payout and this effect does not vary between traditional and imputation tax systems. Firms with higher foreign institutional ownership are less likely to pay dividends and have lower payout ratios. The study demonstrates the significance of the imputation tax system upon dividend policy.

UK companies have been making large contributions to reduce the deficits of their pension funds, and are believed to fund such contributions in part by reducing dividends. Using data from 2003 to 16, we find little evidence that large deficit-reduction contributions are associated with reductions in regular dividends, though we find some restraint in dividend increases and total payout. Most companies make large contributions when they have healthy cash flows and strong profitability, or inflows from disposals of assets. This suggests that the Pensions Regulator allows companies flexibility regarding the timing of contributions.

Director stock ownership is most consistently and positively related to future corporate performance. Public policymakers and long-term investors should find this result especially relevant given their strong interest in long-term corporate performance. Equally important, corporate governance researchers should consider director stock ownership as a measure of corporate governance; this will also aid in the comparability of results across different studies. In our 2008 paper, Corporate governance and firm performance, we considered data through 2002. In this paper, we extend our sample period through 2016. These additional 14 years of data provide a powerful out-of-sample test of the specification and power of director stock ownership as a measure of corporate governance. Further, extending the period allows us to capture the dynamics of the financial crisis, the Great Recession, Sarbanes-Oxley (2002), and Dodd-Frank (2010). We find director stock ownership most consistently and positively related to future corporate performance in this out-of-sample period (2003–2016) across a battery of different specifications, estimation techniques, and for different sub-samples. One particular sub-sample of considerable public interest is the 100 largest U.S. financial institutions around 2008. Bank director stock ownership is positively related to future bank performance, and bank director stock ownership is negatively related to future bank risk, both prior to and during the financial crisis – both results of considerable interest to senior bank regulators.

Are MNEs more socially responsible, and where is this more likely to occur? Are firms less responsible in emerging or transitional economies, and what impact does the dominant national corporate governance regime have? We explore the association between public listing and the existence of a CSR code within specific institutional settings and assess whether MNEs are any different to their local counterparts, based on an internationally comparative survey. We find that listed firms as well as firms from civil law countries are more likely to have CSR statements. MNEs are also more likely to have CSR statements, independent of their country of origin. While we find consistent evidence of a correlation between the existence of a CSR statement and investment in staff training, the correlation between the former and employee-friendly HRM is weaker.

Using a panel of Chinese listed firms over the period 1998–2015, we examine the extent to which liquidity impacts firms' acquisition decisions, method of payment choice, and performance following mergers. We observe that cash-rich firms are more likely to attempt acquisitions, especially if they are subject to tunneling. Next, we find that bidders with higher growth opportunities are less likely to use cash payments in acquisitions. This effect is stronger for financially constrained bidders, who face greater opportunity costs of holding cash. Our last set of results highlights the under-performance of cash acquisitions in both the short and long term.

This study examines the relation between bank equity ownership and corporate hedging in Japan, an economy where banks are allowed, to a certain limit, to hold shares of firms to which they lend funds. The results show that bank equity ownership is positively related to the corporate usage of derivatives. We also find very little evidence that firm-level financial constraints affect derivatives usage. We further analyze the relation between derivatives usage and firm value to assess whether derivatives usage is driven by bank rent-seeking or speculative behavior. We find that derivatives usage is positively related to firm value providing support to the notion that bank equity ownership increases corporate hedging which, in turn, leads to high firm valuation. Robustness tests show that the relation between hedging and main bank equity ownership is not driven by endogeneity. In the end, our findings suggest that corporate hedging is driven by risk-averse incentives resulting from bank monitoring. We conclude that, in addition to relevant economic factors, ownership structure can also affect corporate hedging behavior.

We propose a new order of financing investments based on the considerations of control and financial constraints in a market with the presence of business groups. We base our analysis on a sample of acquisitions, one of the largest forms of investments, made by India's publicly listed firms from 1997 through 2016. We test the relative propensity of group-affiliated firms, as well as that of standalone (non-affiliated) firms, to finance their investments with stock on the one hand, and either cash or debt on the other. We find that group-affiliated bidders have the greatest propensity to finance their investments with stock when taking over firms affiliated with the same business group (within-group acquisitions), followed by standalone firms making acquisitions (standalone acquisitions). Finally, group-affiliated bidders acquiring either standalone firms or firms not affiliated with their group (outside-group acquisitions) have the lowest propensity to finance their investments with stock. The evidence of higher stock-financing of within-group acquisitions is robust to alternative explanations of tunneling and propping up in business groups.

Nearly 30% of US banks employ at least one board member who currently serves (or has previously served) the Federal Reserve in a public service role. Public service roles take the form of Federal Reserve directorships or memberships in Federal Reserve advisory councils. We show that connections between banks and the Federal Reserve are linked to decreases in the sensitivity of bank leverage to risk. Further, connected banks extract larger public subsidies by shifting risk to the financial safety-net. Jointly, our results suggest that interactions between banks and regulators reduce supervisory effectiveness.