We investigate how changes in the availability of bank credit influence how public firms manage their working capital, which is essential to their operations. In doing so, we provide an enhanced understanding of what significantly influences corporate working capital management. We find that changes in the availability of bank credit significantly influence a number of aspects of a firm's working capital policies, and these effects often differ across firms that are more or less dependent on bank financing. Interestingly, our evidence points to the importance of the changing mix of U.S. companies for working capital practices.

We examine whether Chinese firms whose controlling persons have foreign residency rights are more likely to engage in corporate fraud. We find a positive association between foreign residency rights and corporate fraud with causality likely going from the former to the latter. Such a finding is robust to an estimation of a bivariate probit model that incorporates undetected fraud. In the cross section, higher managerial ownership, greater analyst coverage and higher institutional holdings mitigate this association. The link, however, diminishes in more recent years after high-profile extraditions of businessmen and regulatory focus on foreign residency rights in the political sector. We conclude that a lower expected probability of getting caught and punished associated with executives with foreign residency rights induces corporate fraud.

We examine how Corporate Social Responsibility (CSR), jointly with influential institutional ownership (IO), affects firm value around the 2008 global financial crisis. We find that the effect of CSR on firm value varies with the level of influential institutional ownership and depends upon economic conditions. Using difference-in-difference methods, we show that compared with non-CSR firms, CSR firms have higher firm values before the financial crisis but experience more loss in firm value during the crisis. Our findings suggest that the overall CSR effect depends on the relative dominance of two effects: conflict-resolution and overinvestment effect. In addition, we apply triple difference analysis and show that the relation between CSR and firm value depends upon the level of influential institutional ownership. Specifically, before the crisis, CSR positively affects the value of low institutional ownership firms and the effect is significantly weaker for firms with higher influential IO. During the crisis, the CSR-firm value relation is positive for high institutional ownership firms, suggesting that overinvestment concerns dominate when the crisis occurs. However, such a positive IO effect is not significant for CSR firms with high rollover risks. Our results are supported by a series of robustness tests.

This paper analyses the effect of financial distress risk on the initial compensation contracts of new executives in the UK, where credit markets are more concentrated than in the US. We find that financial distress risk has a negative and statistically significant impact on the level of cash-based compensation and total compensation of executives, who are newly hired from either outside or inside the firm. This negative impact is accentuated in firms with a high fraction of bank debt, suggesting that banks, as creditors, provide monitoring and influence initial executive compensation packages in firms with high financial distress risk. Additionally, we find that financial distress risk has a negative and significant impact on the fraction of equity-based compensation for both externally and internally appointed executives.

This article provides new evidence on the important role of institutional investors in affecting corporate strategy. Institutional cross-ownership between two firms not only increases the probability of them merging, but also affects the outcomes of mergers and acquisitions (M&As). Institutional cross-ownership reduces deal premiums, increases stock payment in M&A transactions, and lowers the completion probabilities of deals with negative acquirer announcement returns. Furthermore, deals with high institutional cross-ownership have lower transaction costs and disclose more transparent financial statement information. The effect of cross-ownership on the total deal synergies and post-deal long-term performance is positive, which can be attributed to independent and non-transient cross-owners. Our findings are robust after mitigating the cross-ownership asymmetry concern. Overall, our results suggest that the growth of institutional cross-holdings in U.S. stock markets may greatly change corporate strategies and decision-making processes.

We extend the IPO literature analysing the role of financial market integration in the development of IPO markets and the pricing of newly listed stocks. Using a hierarchical linear model, we show that differences in underpricing between markets with high and low financial integration levels are economically significant and may explain the choice of location in the listing process. Firstly, market integration negatively affects the level of IPO underpricing by increasing the importance and efficiency of the financial intermediation process via tradable securities. Secondly, the presence of a deeper market integration has a moderation effect, which weakens the explanatory power of country institutions in the cross-country variation of IPO underpricing. Finally, we suggest a hierarchical structure be assumed for the modelling of cross-country IPO studies with heterogeneous country characteristics. Our results are robust to alternative measures of financial integration and several model specifications.

It is common practice worldwide for corporate insiders to put up stock as collateral for personal loans. We highlight a potential problem in such pledging. When controlling shareholders face a margin call threat if stock prices fall below the required level for a loan, they have an incentive to use corporate resources for their private benefit. We develop and test a margin call hypothesis that controlling shareholders may initiate share repurchases to fend off potential margin calls associated with pledged stocks in order to maintain their control rights. Investors seem to recognize such behavior and discount the potential benefits of repurchase programs. However, share pledges are not reliably related to repurchases when control rights are not a concern. We further show that regulatory restrictions of control rights on pledging effectively reduce the likelihood of firms' repurchasing. Overall, our results shed light on the impact of share pledges on corporate decisions.

This study examines whether crackdown on political corruption in China affects future stock price crashes. Using data from corruption-related prosecutions, we find that firms under prosecuted official jurisdictions experience a significant decrease in crash risk after the crackdown. Cross-sectional tests show that results are more pronounced for firms with higher political dependence on governments and for firms with worse information environment. Moreover, channel tests provide direct evidence that crackdown decreases crash risk by reducing political risk and bad news hoarding. Overall, our study offers novel evidence on how crackdown on corruption benefits firms.

We investigate the effects of NASD Rule 2711 on analysts' conflict of interest in corporate financing activities. Specifically, we examine the relations (1) between analysts' guidance in earnings forecasts and recommendations and corporate external financing and (2) between external financing and future stock returns during the 1994–2010 period. We find a positive relation of analysts' guidance in earnings forecasts and recommendations (especially long-term growth forecast and recommendations) and corporate financing activities, but the relation is weaker in the post-Rule period than in the pre-Rule period. We also find a negative relation between corporate external financing and future stock returns, but the relation is weaker in the post-Rule period. Moreover, the changes of these relations after the implementation of the Rule are greater for firms with greater conflicts of interest. Our empirical results suggest that Rule 2711 has reduced the extent of analysts' conflicts of interest in corporate financing activities.

This article examines the role of pre-saved cash in helping financially constrained firms during the 2000 dot-com crash and the 2008 financial crisis, both of which were exogenous shocks to industrial firms. The results show that constrained firms tended to increase capital investments during these severe economic downturns if they had pre-saved more cash. Constrained firms instead exhibited lower excess returns and incurred higher likelihoods of financial distress during the severe downturns if they had saved less cash prior to the events. Firms that experienced the 2000 dot-com crash and saved cash thereafter were less likely to default during the 2008 financial crisis, indicating the existence and benefit of learning effects. This study supports a precautionary motive for cash savings, showing that pre-saved cash helps financially constrained firms fund investment and reduces the likelihood of financial distress during severe market downturns. It demonstrates that saving for a rainy day really is valuable.