Knowledge that Transforms

The study examines the effect of earnings management by classification shifting on firm success, focusing on the survival of newly listed firms. We argue that shifting income-decreasing expenses from core to special items should negatively associate with future operating performance because of improper signaling of actual repeatable core profitability. We find that classification shifting strongly and negatively affects future Initial Public Offering (IPO) success and survival. We further identify the economic mechanisms that drive this finding and observe that our results are mitigated when the quality of external corporate governance alleviating agency concerns is stronger, also for IPO firms operating within stronger business contexts. Therefore, in an environment that facilitates firm survivability, the existence of weaker than reported sustainable performance may not end up materializing in the form of lower firm survivability as these factors aid firms' continuing operations from a business perspective. Our findings provide evidence of the longer-term implications of a method of earnings management that has long been considered “soft” and without any longer-term reversing consequences.

The paper examines the effect of dividend taxation on employment and productivity. I exploit a dividend tax cut of 10 percentage points for closely held private corporations in Sweden. Using data on all closely held Swedish firms with exact information on employees and their wages, I find that firms with limited internal funds increase productivity and wages relative to firms with sufficient internal funds whose investment decisions are less affected by dividend taxes. My findings indicate that dividend taxes constrain firms in investing efficiently. Lower taxes can result in higher capital and labor input and, thus, in higher productivity.

Prior evidence indicates that proximity increases investments resulting in stronger economic growth. The introduction of a non-stop direct flight between two locations in different countries allows for faster travel and a lower cost of acquiring information, potentially facilitating acquisitions abroad. We examine this channel by considering cross-border mergers and acquisitions (M&A) activity between China and the U.S. Our results suggest that direct flights matter most in target selection. Direct flights are more important for M&A activity where information asymmetry is greater and for first time acquirers in the market. We demonstrate that endogeneity is unlikely to drive the results.

We investigate loan price in mergers and acquisitions (M&As), using hand-matched loan information for a sample of 512 U.S. M&A transactions. We find the relative size of a deal constitutes a prominent determinant of the loan price measured by the all-in spread drawn (AISD). This result is robust to several specifications that address endogeneity concerns. Cross-sectional analyses show that aggravated credit risk and information uncertainty after M&A go some way towards explaining lenders' concerns over large relative deal size. Further analysis demonstrates higher AISD is associated with lower post-transaction performance, indicating loan price factors in the risk of poor post-transaction performance correctly.

Political pressures can bias public pension funds (PPFs) toward activist shareholders. The pension business ties mutual fund families (MFFs) have with portfolio firms can bias them toward firm management. We examine how these contrasting conflicts of interest affect institutional investors' proxy voting behavior and show PPFs (MFFs) are considerably more supportive of activist shareholders (firm management) in voting, even if doing so may harm investment value. The biases are more pronounced when incentive conflicts are stronger. PPFs support shareholder (management) proposals more (less) when Democrats gain more power in the fund's home state. Conflicted PPFs are particularly active in supporting value reducing shareholder proposals.

The COVID-19 shock and its unprecedented financial consequences have brought about vast uncertainty concerning the future of climate actions. We study the cross-section of stock returns during the COVID-19 shock to explore investors' views and expectations about environmental issues. The results show that firms with responsible strategies on environmental issues experience better stock returns. This effect is mainly driven by initiatives addressing climate change (e.g., reduction of environmental emissions and energy use), is more pronounced for firms with greater ownership by investors with long-term orientation and is not observed prior to the COVID-19 crisis. Overall, the results indicate that the COVID-19 shock has not distracted investors' attention away from environmental issues but on the contrary led them to reward climate responsibility to a larger extent.

The economic disruption from the COVID-19 pandemic prompted governments around the world to initiate an unprecedented number of temporary lending and tax deferment programs. Which firms will benefit from these programs? What are the implications for firm balance sheets and post-crisis survival? We provide some novel insights on these questions by studying one of the first government programs of this type, which Sweden launched at the height of the 2008–2009 financial crisis. The Swedish program allowed firms to temporarily suspend payment of all labor-related taxes and fees, treating these deferred amounts as a short-term loan from the government. Firms participating in the program are younger, less profitable, hold fewer cash reserves, are more leveraged, and have less unused slack in their credit lines when the crisis hits. Given the structure of the Swedish program, it provided more liquidity to firms with relatively larger ex ante wage bills. Exploiting this feature of the policy, we find that firms use the program to increase overall debt levels rather than to substitute for other borrowing. The leverage increase is due entirely to higher levels of non-bank debt. Firms use the funds to avoid making even deeper cuts to current assets. Despite the increase in leverage, access to the lending program is unrelated to the likelihood a firm files for bankruptcy and is negatively related to the likelihood a firm encounters severe financial distress in the years immediately following the crisis.

The effects of natural disasters on capital markets have been investigated by limited evidence even though these calamities bring considerable damages or loss of life. To fill this gap, we investigate the impacts of natural disasters, particularly earthquakes, on security analysts' earnings forecasts for affected firms in China. We obtain three key findings. First, analysts' optimism significantly decreases for firms located in neighborhood areas. Second, earthquakes do not significantly affect firm earnings and stock returns, thereby indicating that post-earthquake analyst pessimism is not based on rational judgment. Third, media attention promotes irrational pessimism among analysts, and post-earthquake pessimism is a result of heuristics bias attributable to psychological shocks. However, analysts correct the bias after initial irrational forecasts. Taken together, our findings contribute to the broader psychology and economics literature on the effects of natural disasters on analyst forecasts.

We compare CRSP dividend data to data from firms' financial statements in the SEC's EDGAR database. Data screens typically used in the extant literature produce a sample in which about half of the apparent reductions in dividends per share are not actually dividend cuts. Many of the fictitious cuts are due to CRSP misclassifying special dividends as regular dividends. We demonstrate that the fictitious cuts can affect point estimates and inferences in studies of the information content of dividends. We provide a simple filter that eliminates most of the fictitious cuts in our sample – remove dividend cuts from the sample that are preceded by a dividend increase in the prior quarter. This filter produces empirical results that are similar to our sample of true cuts.

This paper examines whether firms are able to use acquisitions to ease their financial constraints. The results show that acquisitions do ease financing constraints for constrained acquirers. Relative to unconstrained acquirers, financially constrained firms are more likely to use undervalued equity to fund acquisitions and to target unconstrained and more liquid firms. Using a propensity score matched sample in a difference-in-difference framework, the results show that constrained acquirers become less constrained post-acquisition and relative to matched non-acquiring firms. This improvement is more pronounced for diversifying acquisitions and constrained firms that acquire rather than issue equity and retain the proceeds. Following acquisition, constrained acquirers raise more debt, increase investments, and reduce cash holdings relative to matched non-acquirers, consistent with experiencing reductions in financing constraints. These improvements are not seen for unconstrained acquirers. Finally, the familiar diversification discount is non-existent for financially constrained acquirers.