Knowledge that Transforms

This paper analyzes the relationship between firms’ innovation success and their capital structures. I hypothesize that firms’ innovation success reduces the extent of information asymmetry facing them in the equity market, leading to a greater propensity of firms to issue equity rather than debt to raise external financing. Supporting these hypotheses, I show empirically that firms with higher levels of innovation success have lower leverage ratios and a greater propensity to issue equity rather than debt. Further, these firms face a lower extent of information asymmetry in the equity market. I establish causality using instrumental variable analyses, instrumenting for patent grants with patent examiner leniency.

I examine the effect of religious observance, represented by fasting hours during the month of Ramadan, on bank liquidity creation. I exploit exogenous variation of Ramadan fasting hours that depends on: (1) the timing of Ramadan based on the rotating Islamic calendar; and (2) a country’s latitude. My results document that one additional Ramadan fasting hour reduces bank liquidity creation by 1.1% within countries with the share of Muslim population above 50%. No such effect is found in Muslim-minority countries. In terms of transmission channel, I find that intensified Ramadan fasting reduces the productivity of economic agents that use financial services, hence lower the demand for bank liquidity creation. My results are robust for a battery of sensitivity checks and omitted variables concerns. The results offer novel insights into the effect of a specific religious observance on bank liquidity creation in the Islamic world.

This paper builds on recent advances in the domain of dynamic M&A option games under uncertainty and looks closer at the determinants that drive the strategic choice between mergers and tender offers. In particular, our model sheds new light in understanding the effects of uncertainty and relative size of firms on the choice of the M&A strategy. We not only show that uncertainty and relative size do impact the choice of the strategy, but we also show that the impact of uncertainty is non-monotonic. In fact, tender offers are more likely in a context of relatively low/high volatility. For intermediate uncertainty values mergers become more likely. Furthermore, the smaller/weaker the target relative to the bidder the more likely are tender offers. Additionally, our model also shows that the tender offer payoff is larger than the merger payoff, suggesting that larger combined CARs should be observed for tender offers. Our empirical study gives support to these results.

We investigate whether and how CEO marital status is related to dividend policy. We find that firms run by single CEOs are less likely to pay dividends. Further analyses reveal that the aforementioned relation is stronger for single CEOs who are more risk-seeking, have compensation packages with lower pay-performance sensitivity, are less conservative, or are less engaged in corporate social responsibility activities. Our results hold in multiple robustness and endogeneity tests, including propensity score matching, difference-in-differences estimation, and an instrumental variable regression. Overall, our findings contribute to the literature highlighting the importance of CEOs' personal attributes for corporate decisions.

We use firm-level data to provide some early evidence on the effectiveness of COVID-19 economic policy packages. Our empirical strategy relies on the varying degree of vulnerability to the pandemic across industries. We find a robust association of fiscal support with changes in firm performance indicators (as measured by sales-to-assets ratio, profit margin, interest coverage ratio as well as probability of default) in pandemic-prone sectors. We also observe marginal effects of monetary policy on the sales-to-assets ratio and of foreign exchange intervention on the interest coverage ratio in the hardest-hit firms. These results broadly survive a battery of exercises to address endogeneity. Additionally, we show that firms with a better financial position are more likely to take advantage of the support packages to withstand the pandemic shock. Overall, this preliminary evidence suggests that policy interventions have bought time for the hardest-hit industries, by supporting turnover and improving liquidity.

This paper studies the role of lease financing in disaster-affected firms under collateral constraints. Disaster-affected firms demand funds for post-disaster reconstruction. However, the destruction of natural disasters leads to collateral constraints, which create external financing frictions. I find that affected firms obtain financing through operating leases after natural disasters. The significance of the findings highlights the importance of operating leases for collateral-constrained firms.

On January 1, 2010, the Shenzhen Stock Exchange (SZSE) in China launched an online interactive platform named “Hudongyi.” This platform enables individual investors to communicate directly with executives of firms listed on the SZSE, under the supervision of the SZSE, thereby providing a quasi-natural experiment to study the impact of individual investors on corporate governance. Employing a difference-in-differences design, we document that the investor-firm interactions on Hudongyi deter real earnings management by firms listed on the SZSE through reducing information asymmetry and raising reputational costs. This effect varies with posting specificity, interaction effectiveness, and firm features. These findings suggest that individual investors can effectively engage in corporate governance when their right to speak up is facilitated by proper technology and regulatory scrutiny.

We find that financially unconstrained firms claim temporary investment tax incentives more frequently than their constrained counterparts. Notably, these extensive claims from unconstrained firms do not lead to an incremental total investment beyond pre-claim levels; instead, these firms appear to treat the tax cut as a windfall, increasing their cash holdings in subsequent years. In contrast, constrained firms increase their investments relative to pre-claim levels when they manage to claim tax incentives. Our analysis draws from a 2014 tax reform in Japan which introduced both an investment tax credit and bonus depreciation, available for nearly three years. We use a proprietary tax return survey that provides data on tax incentive claims across both public and private firms. Our findings highlight a novel tradeoff of investment tax incentives: while stimulating investments among financially constrained firms upon claiming tax incentives, they also disproportionately allocate tax benefits to unconstrained firms, not necessarily resulting in the intended investment stimulation.

The story of Blackstone and Hilton is a defining moment of the private equity industry. This story involves a high stakes leveraged buyout, layoffs, allegations of corporate espionage, the revival of an iconic brand, a $14 billion capital gain, the largest ever in private equity, and the emergence of the largest private market firm. Moreover, this success occurred with a highly-leveraged and cyclical business going through the worst financial crisis since 1933. Somebody deserves a trophy; but who? The answer might be surprising and shows both the difficulty and pertinence of carefully decomposing the sources of value creation in Leveraged Buy-Outs.

While previous research has characterized the key features of contracts between entrepreneurs and venture capitalists, little is known about the contracts' evolution over time and across funding rounds. We overcome significant data challenges to compile a novel panel dataset of U.S. early-stage ventures that includes the main financial and control rights offered to investors at each (equity) funding round. We find that there is a ‘default contract’ with a distinct combination of rights that the majority of companies gravitate to. This default contract is typically implemented in the initial Series A funding round and rarely deviated from in later rounds. Whenever deviations do occur, terms are usually revised in favour of investors, and not entrepreneurs. Due to this stickiness of the default contract, for successful startups we argue that post-money valuations in later rounds can be a reasonable proxy for the economic value of the firm.