Knowledge that Transforms

Using a sample of Chinese firms from 2000 to 2018, we document that hometown firms (firms with hometown chairpersons) engage in less green innovation than non-hometown firms. Evidence suggests that local stakeholders offer hometown chairpersons more protection from environmental consequences than non-hometown chairpersons. We identify two possible mechanisms: government patronage and accommodation by local supply chain partners. Furthermore, we find that the double standards are alleviated with insignificant difference in corporate green innovation when non-hometown chairpersons marry hometown spouses or build local political relationships. Additional analyses suggest that (1) the double standards drive hometown firms to emit more pollutants than non-hometown firms, (2) when a firm is under government scrutiny for environmental issues, located in the city with severe air pollution, or in heavily polluting industries, the adverse effect of a chairperson's hometown on green innovation is minimal, and (3) our findings on green innovation also extend to a decrease in the number of pollutant treatment facilities and treatment capacity in a firm.

Utilizing positive quasi-random shocks to local housing prices in Shanghai, we show that stock investors who experienced significant returns from the real estate market traded less actively, took less risk, and spent less effort trading. We confirm the effect of housing price changes on investors' trading behavior in a national sample. Our findings suggest a substitution effect between the real estate and stock market and highlight the importance of understanding investors' trading behavior in light of intertemporal variations in other asset market.

We examine the impact of mergers on drug prices and document significant differences between the post-merger pricing strategies of highly innovative pharmaceutical firms and other firms. While the former raise prices of overlapping drugs, especially brand name drugs that tend to be first-in-class and patented, we find pervasive evidence of price reductions by generic manufacturers. Our evidence suggests that the price reductions are due to cost cuts realized by less innovative firms in overlapping product spaces. We also show that less innovative acquirers cut R&D and shift product development from high-novelty products to cheaper, less-risky products.

We study the performance of PE-backed companies during the COVID-19 pandemic. Our findings suggest that, on average, PE-backed firms were more resilient compared to closely matched industry peers during the pandemic. However, this outperformance is of a smaller magnitude than during the pre-pandemic non-crisis period, suggesting that the outperformance is driven by investor selection of target firms ex ante, rather than active support mechanisms. The outperformance during the pandemic is found to be insignificant among firms which were the most vulnerable at the onset of the pandemic, and firms in the most exposed industries. These more vulnerable firms appear to have been less active in obtaining additional financing during the pandemic, and consequently, suffered a significantly higher incidence of distress. However, non-PE-backed firms in distress had a higher incidence of liquidation, while PE-owned firms more often negotiated formally with creditors to continue trading. Our analysis shines light on the role of PE investors during a large, exogenous shock, and suggests that, in the case of the pandemic, their adept target selection may help to explain the outperformance more so than their actions to protect vulnerable firms in a crisis.

This paper examines the role of governmental venture capital firms (GVCs) in supporting industries endorsed by the government. Specifically, we find that GVCs are more likely to invest in industries targeted by the industrial policy compared to non-GVCs. Further analyses on investment behavior suggest that GVCs make larger investments, invest in earlier rounds, and have longer holding periods in government-endorsed industries compared with non-GVCs. In terms of investment outcome, although GVCs have poorer financial performance while supporting targeted industries, they do play a positive role in promoting corporate innovation. Taken together, this paper provides novel empirical evidence on the important role of GVCs in facilitating the implementation of industrial policies.

Joining the debate on the banking sector's impact on the real economy, this study examines the impact of banks' market power on local businesses' financial reporting quality. Based on the market power hypothesis and the information-based hypothesis, we propose four ways the banking market could affect the financial reporting quality. The proposed mechanisms suggest that borrowers and bank lenders face increased market power by implementing different earnings management and monitoring practices. Our documentary evidence suggests that since the banking market deregulation, restrictions on inter- and intra-state banking and branching have been removed, with banks gaining more power and the market becoming more consolidated. Using a large sample of U.S. listed firms from 1995 to 2019, we find a favourable impact of bank market power on corporate financial reporting quality, primarily driven by heightened monitoring by banks with greater market power, supporting the monitoring-stringent conjecture. In addition, this positive relationship is more pronounced among firms heavily reliant on local banks. Our results are robust to a rich set of tests, such as using alternative measurements for financial reporting quality and bank market power, including macroeconomic factors, and considering drastic changes in the bank market structure. We also address the endogeneity concerns and test the robustness of our key findings in a loan syndication setting. Our research suggests that facing increased bank market concentration and power, firms must pay additional attention to their financial reporting, which is widely used to access external finance.

We examine the effect of board members with venture capital experience (VC directors) on executive incentives at non-venture-backed public firms. VC directors serving on the compensation committee are associated with greater CEO risk-taking incentives (vega) and pay-for-performance sensitivity (delta). These effects are more substantial if VC directors are from highly reputable VC firms. Using the change of direct flight availability to VC hub cities caused by major airline mergers and annual estimates of VC dry powder per industry as instruments, we show that these results are causal. In addition, VC directors are more focused on growth performance goals in CEO compensation contracts. We also document that prior finding of greater research intensity and innovation when VC directors serve on boards of public firms is partly explained by stronger CEO incentives instilled by such directors. Lastly, we find that having VC directors on nominating and/or governance committees is associated with a higher likelihood of forced CEO turnover.

We examine how the size of the labor market for corporate directors impacts board appointments in Italian private firms. Using the high-speed railway expansion as an exogenous shock to costs of serving on boards, we find that an increase in the supply of non-local directors leads to a higher degree of positive assortative matching between firms and directors. High-quality firms improve their board quality at the expense of low-quality firms. The director–firm matching effects are muted among companies with owners acting as board directors. This finding highlights the importance of director entrenchment in the corporate governance of private firms.

The MiFID II regulation led to the unbundling of research and execution costs in Europe starting in 2018. We exploit the early adoption of an unbundling rule in Sweden in 2016 to provide evidence on the implications of unbundling for fund investors. Using a difference-in-differences framework and hand-collected data on bundled and unbundled commissions, we find no economically meaningful effect of unbundling on commissions. When we split the sample into more active and less active funds, we find that fund costs of more active funds increased in relative terms. Finally, we do not find evidence that the increased transparency of observing execution and research costs led to improved fund performance or information gains for investors’ fund selection process. Overall, our results suggest that investors did not significantly benefit from the unbundling of commissions.

We investigate the generalizability of widely perceived notions that buy-side analysts try to influence or manipulate a firm’s stock price by praising or criticizing management during a public earnings conference call. Despite two institutional factors that make it difficult to detect empirically, we find some evidence of stock influence behavior by using a combination of data on conference call transcripts and trading by the institutions that employ the buy-side analysts. However, we also find evidence consistent with the null hypothesis that buy-side analysts are acquiring information rather than manipulating the stock price. Subsample analyses suggest that stock influence is more detectable among hedge funds, while information acquisition is the norm among traditional buy-and-hold institutions. The evidence we provide on each behavior should be of interest to firm managers who host conference calls, market participants who use conference calls to collect company information, as well as regulators who monitor for possible market manipulation.