Knowledge that Transforms

We create a lexicon of 45 capital budgeting terms and document manager language usage in earnings conference calls during 2010-2020. A sharp contrast between prior survey evidence and capital budgeting terms actually spoken by managers during conference calls is reported. Although surveys suggest that many managers use sensitivity analysis and real options for capital budgeting decisions, these terms almost never occur in any conference calls. Managers of large firms generating more positive financial performance tend to talk more about capital budgeting in earnings calls. Finally, we find that companies that mention payback rather than net present value are smaller in size, have less R&D expenses, and are younger in age.

<div> We contribute to the relationship banking literature by uncovering the impact of a prior banking relationship on borrower's incentives to avoid default. As an identification strategy we exploit a proprietary dataset comprising 149,230 mortgage loans tracked monthly over a two-year period in a unique institutional setting that allows us to isolate the influence of borrower's incentives. Our findings indicate that a pre-existing relationship diminishes borrower's default risk by approximately 4%, exclusively attributable to the value of the relationship for the borrowers. This effect persists even during the notable surge in loan defaults during the COVID-19 pandemic. Our results also show that the impact of preexisting banking relationships on avoiding default is stronger for wealthier, more religious, and male borrowers. </div>

Common ownership has raised growing antitrust concerns. We compile a comprehensive dataset of U.S. antitrust litigation cases from the Federal Trade Commission, the Department of Justice, and consumer-initiated lawsuits to shed light on these concerns. We find no robust relationship between common ownership of firm-pairs and the likelihood of these firms being jointly sued. Furthermore, common ownership is negatively associated with potential channels of collusion, such as interlocking directors and competitor-benchmarked executive pay. Evidence from institutional mergers and S&P 500 additions of rival firms supports our main conclusions. Overall, our results offer little support for the view that common ownership promotes explicit collusion.

We estimate the financial and real effects of a subsidy program on imported capital goods recently implemented in China. We identify firms that have access to the subsidy program by combining data on catalogues of eligible products periodically released by the government and product-level import data. Our findings demonstrate that following the implementation of the program, eligible firms experience an increase in borrowing and gain access to loans at lower interest rates compared to non-eligible firms. This improved financial situation enables them to expand their fixed-asset investments, increase total output, and enhance their export performance. The expansion of production capacity also leads to improved investment efficiency and greater profitability. Further analysis reveals that the effects of the policy are particularly pronounced for non-state-owned enterprises and small firms in relatively competitive industries. This finding suggests that these firms face ex-ante financial constraints, and their marginal rate of return to capital is large.

Previous studies show that economic policy uncertainty has been rising steadily since the 1960s (Baker et al. 2014), and that this secular increase has led to harmful economic outcomes such as reduced investment rates (Gulen and Ion 2016). Other studies find that politically connected directors play a unique role in corporate decision making and firm valuation (Goldman, Rocholl, and So 2009). We combine these two lines of research to examine the ability of politically experienced directors (PEDs) to mitigate the harmful investment effects of policy uncertainty. Our results show that the presence of at least one PED on a company board reduces the sensitivity of investment decisions to policy uncertainty by 49% relative to firms without PEDs. These results are stronger when the PED serves on a presidential (as opposed to legislative) committee, and among firms most vulnerable to investment irreversibility. We explore omitted variables bias and instrumental variable estimation in robustness testing to alleviate endogeneity concerns. Overall, our findings align with the theoretical framework of Pastor and Veronesi (2013) and real options theory, and confirm that PEDs can significantly reduce the harmful effects of policy uncertainty.