Knowledge that Transforms

We examine the extent to which directors with supply chain experience (DSCs) on corporate boards create informational advantages that improve strategies and outcomes related to mergers and acquisitions (M&A). Our results suggest that DSCs play a dual role by motivating value-enhancing acquisitions while simultaneously deterring value-destroying ones. The nature and extent of these effects depend on such factors as the size of the acquiring firm and the level of uncertainty in its operating environment. Furthermore, we find that DSCs are positively associated with abnormal announcement returns. Acquirers with at least one DSC outperform their counterparts without DSCs by 3.1% during a three-day window around the announcement. Our results hold after we address endogeneity concerns using multiple methods. Finally, we show that acquirer board representation by DSCs is positively related to post-merger operating performance and negatively related to the premium paid for the target.

We examine whether outside investors mimic insider trades by analyzing the daily transactions of foreign institutional investors (FII) in the Indian emerging market. We find that the value relevance of insiders' opportunistic buy trades is much higher in our context relative to that reported for developed markets. More importantly, we find that FII mimic opportunistic buy trades, which is more pronounced for firms that are informationally more opaque or have lower corporate governance quality. A long-short strategy based on FII's transactions after opportunistic trades generates an additional abnormal return of approximately 29% annually, compared to transactions based on routines trades.

Internationalization enables multinational corporations (MNCs) to diversify their sources and types of debt, as well as earnings, although doing so can negatively impact firm risk and the agency costs of debt. Utilizing a primary sample of United States (US) based MNCs compared with domestic corporations (DCs), we find that MNCs are indeed riskier than DCs when considering systematic risk. Further, recognizing the heterogeneity of long-term debt, we find these MNCs consistently maintain a higher convertible debt ratio compared to DCs. We argue this is to mitigate the agency costs related to the asset substitution problem.

From 2005 to 2015, the 25 largest global financial institutions paid combined more than $285 billion in legal penalties. We examine the reaction of banks' stocks, bonds, and credit default swaps to the announcements of monetary penalties. We observe a reduced default risk and lower financing costs, as well an increase in the stock market valuation, suggesting that banks benefit from settling lawsuits. The positive reaction is likely driven by the resolution of uncertainty surrounding these proceedings. While the sued bank's systemic risk increases in the size of the relative monetary penalty, we also document positive spillover effects to other banks facing pending lawsuits with the same plaintiff, demonstrating the systemic effect of law enforcement against banks. Furthermore, banks appear to correctly anticipate penalties, as they are cash flow-effective but not income-effective in the year they are announced.

We examine managers’' disclosure decisions in response to non-fundamental price shocks. Using mutual fund fire sales as a source of market disruption, we show some firms respond by issuing earnings guidance. Others, especially firms with weaker performance and more short-term-oriented investors, engage in accrual-based earnings management. To identify the efficacy of firm disclosure choices, we examine passage of Sarbanes-Oxley and Regulation Fair Disclosure and show that they increased reliance on guidance rather than earnings management. The shift is associated with faster post-fire-sales price recovery, suggesting enhancing information disclosure rather than manipulation is effective in mitigating the effect of market disruptions.

In response to corporate governance concerns, SEC disclosure rules, and pressure from Institutional Shareholder Services, most large U.S. public firms have adopted executive stock ownership requirements (‘SORs’) in recent years. Compared to CEOs already in compliance, CEOs who have not yet fulfilled the requirement at adoption subsequently increase stockholdings, exposing themselves to more company-specific risk, potentially providing risk-reduction incentives and diminishing their subjective valuation of firm equity. We find that these CEOs on average subsequently reduce firm risk through diversifying M&A, less financial leverage, and smaller R&D investment. They experience a deterioration in firm performance and valuation, each associated with firms that do reduce risk, but receive significantly increased stock grants. Our evidence suggests that boards should exercise judgment when adopting this popular governance initiative.

This paper studies the communication of “voice” in shareholder activism. Using hand-collected data, I investigate how the use of investor presentations, among other communication strategies, affects the outcomes of proxy contests. Being the first to make presentations to investors increases the dissident's chance of winning by 60%. To understand this first-mover advantage, I examine the allocation of investor attention and variation in investor sophistication. The evidence is consistent with an explanation of limited investor attention. The findings highlight the role of communication in corporate governance.

We document a novel pattern that campaign goal amounts set by entrepreneurs on Kickstarter exhibit clear clustering at round numbers. We propose that the round number heuristic, a tendency to adopt round numbers as cognitive shortcuts when facing complicated and uncertain situations, may explain the clustering pattern and predict campaign outcomes. Based on 162,863 campaigns between 2009 and 2017, we find a negative relation between the use of round goal amounts and the likelihood of campaign success. Our findings suggest that setting a round number goal conveys useful information about entrepreneur quality that could be used by campaign backers or platforms.

Investment banker human capital is valuable in mergers and acquisitions. Exploiting a unique hand-built dataset, this paper studies whether and how investment banker's education and experience impact the merger performance in China. We find that investment bankers' education credentials are positively related to the post-merger performance; however, greater investment banker experience does not. We further explore the channels and show that the education effect is stronger in deals with higher information asymmetry and acquirers with worse corporate governance. On the other hand, experience increases merger performance in deals with high information asymmetry but reduces deal performance in poorly governed firms. Our findings suggest that higher education attainment facilitates both the advisory and monitoring role of investment bankers, while more experience makes investment bankers better advisors yet worse monitors. Our findings also suggest that investment bankers' roles in value creation are highly dependent on different institutional backgrounds, and one cannot generalize the findings in the U.S. across borders.

This paper examines the impact of takeover law enforcement on corporate acquisitions. We use the European Takeover Directive as a natural experiment, which harmonizes takeover law across countries, while leaving its enforcement to the discretion of individual countries. We exploit this heterogeneity in enforcement quality across countries in a difference-in-differences-in-differences model, while employing an overall inductive research approach, following Karpoff and Whittry's (2018) recommendation. We find that acquirer returns increase in countries with improvements in takeover law, driven by better target selection and lower cost of financing. The increase in acquirer returns is lower in weak enforcement jurisdictions, which we identify by developing a novel Takeover Law Enforcement Index (TLEI). The findings show that takeover law can mitigate agency conflicts, but its true value depends on its enforcement. Our results are strongly robust to alternative model specifications.