Knowledge that Transforms

This study examines how institutional investors' corporate site visits affect tax avoidance. Using quantile regressions, we find that corporate site visits decrease tax avoidance for firms at high levels of tax avoidance and increase tax avoidance for firms at low levels. The effect of corporate site visits on tax avoidance is stronger for firms subject to a weaker information environment, which suggests that institutional investors acquire additional firm-specific information via corporate site visits and play a more effective monitoring role. We also find that visitors who visited low-tax firms in prior years share tax-planning knowledge with high-tax firms which they visit in the current year. The effect of tax knowledge transfer is more pronounced when the visitors are from incumbent institutional shareholders. This study identifies corporate site visits as a channel via which institutional investors serve as monitors to managers and as facilitators of tax knowledge transfer.

Whether and how credit default swaps (CDSs) affect corporate debt structure remains an unanswered question. We find that firms use more public debt relative to bank debt when CDSs referencing their debt start trading. The results are robust to the endogeneity of CDS trading. Furthermore, the increase in public debt is concentrated in senior bonds and notes, which are the most common CDS reference assets. The effect of CDS trading is most pronounced when bond underwriters take a net selling CDS position and for informationally opaque firms. These findings suggest that the hedging and informational roles of CDSs have real effects on corporate debt structure.

We analyze what role debt overhang and covenants have in a manager’s choice between issuing callable or convertible debt when a firm needs to issue a substantial amount of debt. Callable bonds provide a higher coupon in exchange for a repurchase option. Convertible bonds offer bondholders the option to exchange debt to equity. Using a dynamic capital structure model with investment choice, we find that callable debt implies a larger debt overhang friction, and for highly leveraged firms convertible debt is preferred. Moreover, if outstanding bonds have net-worth covenants attached, callable bonds are more likely to be issued. Our empirical findings support the theory.

We incorporate both labor and capital as production inputs and discuss the effects of labor choice on a firm’s optimal investment decision and output dynamics based on real options framework. In particular, we introduce different levels of labor flexibility and examine how it affects the firm’s investment and employment strategy. We show that upward-only adjustable labor, which can arise from employment protection, discourages investment and makes a negative short-run impact on labor employment but a positive impact in the long-run. We also show that the firm invests earlier and produces more at the investment timing when it is either highly labor-intensive or highly capital-intensive. The impact of labor share on output is more pronounced as time elapses and it is more significant when labor is only upward-adjustable than the case of fully flexible labor. Furthermore, we show that uncertainty can make both positive and negative impacts on investment, but that the latter is more pronounced when the labor share is high.

Leased capital accounts for a large fraction of U.S. public firms’ total productive physical capital. In this paper, we extend the neoclassical investment q theory with financial frictions by explicitly considering firms’ option to lease. Our model features firms’ optimal buy-versus-lease decisions with collateral constraints and monitoring costs, and gives a strong implication that measured Tobin’s Q has to be adjusted by leased capital. Empirically, we use our model as guidance to construct the lease-adjusted Tobin’s Q, consistent with the recent leasing accounting change (ASC 842). We show that our lease-adjusted Tobin’s Q is a superior proxy for investment opportunities, especially for firms that rent more capital.

Violations of financial covenants shift control rights to lenders. When borrowers have lending relationships with these lenders in control, they experience not only smaller declines in investment, but also lesser deteriorations in both firm survival probabilities and in sales. These effects are largely driven by opaque borrowers without any credit ratings. They are present where lending relationships existed already before loan issuance (ex-ante), but also where a contractual relationship without pre-issuance interaction is more mature (ex-post). Surprisingly, there is no evidence of any “dark side” of lending relationships when creditors are in control, such as an increase in interest expenses or a lesser degree of financial discipline.

We use exogenous variation in federal courts' composition, for instance due to a judge's death, as a quasi-natural experiment to study the equity value implications of court ideology. This design allows us to establish that firms experience an equity value loss when federal court ideology shifts in favor of plaintiffs and against corporations. The value loss stems from: (i) an increase in the expected costs of litigation; (ii) the deterioration of market-based governance mechanisms; (iii) and a perverse managerial incentive to decrease corporate disclosure in a heightened litigation environment.

In this study, we examine whether emphasized tone in earnings releases systematically predict managers' insider trading activities in the post earnings releases periods and whether managers' choices of tone placement in earnings releases are motivated by opportunistic incentives. We find that, holding constant the net tone of the overall document, managers make more insider sales (purchases) immediately after earnings releases when positive (negative) tone is presented more prominently in the document. In addition, we document that the relation between tone emphasis and the observed insider trading activities is more (less) pronounced when insiders have greater information advantage or when a firm's overall information environment is more opaque (when a firm has better corporate governance). Overall, our findings suggest that managers use narrative characteristics strategically to facilitate their insider trading and achieve personal gains.

This study investigates retail investor responses to corporate engagement in corporate socio-political activism (CSA). Using manually collected evidence of companies' support for the Black Lives Matter (BLM) campaign, we find that speaking up in support of BLM attracts retail investor attention. However, it influences their investment decisions only if speaking up is backed up by a monetary donation to BLM-related causes on the same day. This effect is observed for companies that have black directors on their board and companies headquartered in Democrat-leaning states. There is no corresponding increase in firm value. Our results suggest that retail investor preferences for companies that engage in CSA are likely guided by moral sentiment.

We examine the link between board gender diversity and managerial ability to transform corporate resources into revenue. Drawing on a sample of U.S firms during the period 2001–2016, we find a positive and economically meaningful association between female directors on boards and managerial ability, particularly when female directors are in monitoring roles on the board. The documented effect is stronger when using a tenure weighted measure of female representation on boards; and more pronounced for firms that have three or more women on the board of directors, in line with the critical mass hypothesis. We uncover that critical mass of female directors in monitoring roles is particularly conducive to enhancing managerial ability. Our channel analysis tests further reveal a distinctive tendency of firms with more gender diverse boards to shape the human capital of the firm by promoting managers with more generalist managerial skills. We find consistent results when we employ propensity score matching estimates and difference-in-differences using sudden deaths of female directors as a potential shock to address endogeneity concerns. We discuss implications for theory and policy.