Knowledge that Transforms

This paper investigates the performance of venture capital-backed (VC-backed) firms upon their exits through mergers with special purpose acquisition companies (SPACs) or “more traditional” initial public offerings (IPOs) during the recent SPAC wave. Compared to their IPO peers, VCbacked ventures merging with SPACs tend to exhibit smaller size, less current and analystprojected future profitability, and additional characteristics that indicate lower venture quality. Notably, SPACs merging with VC-backed ventures demonstrate significant underperformance relative to both SPACs merging with non-VC-backed companies and “standard” IPOs. This suggests that VCs may have exploited a relative lack of regulation and investor naivety. They may have presented their lower-quality ventures as appealing opportunities for mergers with SPACs, which resulted in their substantial underperformance.

We examine the impact of CEOs' cultural heritage on corporate social responsibility. CEOs originating from countries with high Power Distance have high CSR scores, while those originating from Individualistic and Indulgent cultures have low CSR scores. This effect lasts up to three generations before it disappears due to acculturation. These results are robust to using propensity score matching, entropy balancing, Difference-in-Differences (DiD) estimation around CEO turnover, and a subsample of founder CEOs to address endogeneity and selection bias. Our findings shed light on the formation process of managers' intrinsic motives for prosocial behavior and hence improve our understanding of insider-initiate corporate philanthropy.

Customer orientation reflects the organizational culture and climate that promote behaviors enabling the firm to create superior value for its customers. Using a textual measure of customer orientation (Custor) constructed from 10-K filings, we document a positive and economically significant relation between Custor and stock returns in the financial crisis of 2008–2009 and the COVID-19 pandemic. High-Custor firms outperform low-Custor firms by 1.5% per month during the financial crisis and by 4.7% per month during the COVID-19 crisis. This positive Custor-returns relation is robust to different treatments and persists after accounting for factors that contribute to corporate resilience, such as CSR activities. Our findings lend credence to the notion that customer orientation enhances a firm’s social capital, leading to improved operational performance during adverse periods, whilst our empirical evidence further supports that Custor and CSR represent distinct pathways for building trust. Consequently, firms that prioritize customer orientation experience greater resilience to negative shocks, especially during periods of low market confidence.

Decentralized autonomous organizations (DAOs) have emerged as a new organizational structure that leverages smart contracts and blockchain technology. Academics and practitioners have paid significant attention to DAOs, yet DAO decision-making processes and the broader implications remain under-studied. This paper aims to fill this gap in the literature. First, we compare the proposal- and voting-based governance mechanisms of DAOs with those of traditional corporate governance. Second, we introduce various novel voting models adopted by DAOs. Third, we discuss DAOs' drawbacks and highlight a unique agency problem arising from large token holders, termed “whales,” within these organizations. The concentrated ownership such whales, whose interests may diverge from those of smaller token holders (i.e., users), obtain can result in governance vulnerabilities. After discussing recent instances of investor activism and contentious votes involving DAOs, we conclude by surveying the literature on the optimal DAO design.

We explore differences in the levels of dispersed ownership that lead to a returns-based free float hedging factor in addition to size, which augments the capital asset pricing model (CAPM) in explaining the cross-section of stock returns . Using the S&P 1500 stocks in the US between 1985 and 2023, the results support the advantages of free float within a three-factor CAPM including size over alternative models based on liquidity, book-to-market value, and momentum. We argue that this yields a useful means for hedging effectively against the risks associated with the fundamental underlying likelihood of expropriation in a specific firm based on its ownership structure.

Corporate insiders often become aware of hedge fund attention prior to a 13D filing. We find abnormal buying activity by insiders in the months leading up to hedge fund 13D filings. Whereas 13D announcement abnormal returns are 7.72 %, profits to insiders who buy average 12.09 %. Insider buying is not linked to common firm characteristics that predict activist targeting. Our findings indicate that insiders are benefiting from private knowledge that their firm has become the focus of hedge fund activism, and sometimes this knowledge comes directly from the activist. However, insiders largely refrain from trading when there is formal communication with the activist. Profits to insiders who buy when there are no talks prior to the 13D filing are 14.49 %, triple the amount for insiders who have had early talks with the hedge fund. Insider trading is linked to indicators of poor corporate culture, but not related to outcomes of activism campaigns.

Following the SRO rulings' requirement that analysts announce coverage terminations including either their final rating or the reason for the termination, we find 86.7 % of the voluntary terminations being attributed to ‘resources’ reallocation’ and only 13.3 % to firm poor outlook. Developing a classification algorithm to split the reallocation terminations into performance-based terminations (those driven by the dropped firm's poor outlook) and resource-constrained terminations (those unrelated to firm performance), we show that although the market's reaction to the termination announcement does not differ between the two sub-samples, future returns and financial performance of the performance-based sample significantly underperform those of the resource-constrained sample. We perform a number of additional analyses, including the use of terminations explicitly attributed to firm bleak output, to ex ante differentiate between the two types of reallocation terminations. We conclude that analysts withhold unfavorable news through the provision of news-neutral reasonings, in contrast to the regulators' intentions.

We examine the impact of potential repatriation taxes on U.S. multinationals' pre-2018 tax planning actions and capital structure policies. We construct a proxy for exogenous changes to repatriation tax rates and find that repatriation-tax-sensitive multinationals are more likely to pursue tax-free repatriation techniques, with examples provided. We also find a positive relationship between repatriation tax increases and both bond issuance and debt ratios, but only for repatriation-tax-sensitive multinationals. These results are concentrated in firms with lower costs of debt capital, while no increased likelihood of inversions is found. Our findings have important implications for current and proposed U.S. tax policies.

We reexamine the impact of hedge fund activism on corporate social performance as measured by ESG ratings. Using a high-quality dataset on hedge fund activism, we find that the impact of hedge fund activism on ESG ratings is neither statistically nor economically significant. In our preferred model, relative to control firms, the ESG ratings of target firms increase by 0.033, about 1.6 % of the sample standard deviation, following activist interventions. In addition, we find no evidence that stock market reactions to the announcement of activist interventions are significantly higher for firms with high ESG ratings, inconsistent with the view that hedge fund activism harms corporate social performance to benefit shareholders.

We show that contractionary monetary shocks, when reflecting a positive macroeconomic assessment by the Federal Reserve (hereafter “Fed”), predict an economic environment that is characterized by (a) a rise in M&A activity, (b) a higher likelihood of M&A completion, (c) larger bidder gains, (d) limited concerns about M&A overpayment, and (e) higher premia offered by foreign bidders to U.S. targets. Further, Fed information shocks have a standalone and direct causal effect on market expectations of M&A gains. That is, positive Fed information shocks trigger a positive revaluation of pending M&A. This revaluation effect, which holds after controlling for macroeconomic conditions and changes in economic forecasts, is more pronounced in deals that are relatively large, financed with stock, and have received a negative initial market reaction. Overall, our results highlight the independent and credible signaling role of the Fed in the realm of M&A.