Knowledge that Transforms

For many firms, voluntarily delisting from a stock exchange can be optimal. We model an entrepreneur's incentives to voluntarily delist the firm as a trade-off between consumption of private benefits when listed and expected improvements in the firm's performance after delisting. Our model allows for heterogeneity across firms and countries, and various micro and macro shocks affect the delisting decision. Such a model makes novel predictions regarding the delisting patterns around the world. We empirically confirm these predictions using manually collected delisting data from 26 countries. Increasing policy and regulatory uncertainties can partially explain the greater popularity of voluntary delistings.

The average total compensation of directors in U.S.-listed companies was $342,030 in 2020, 5.06 times the median household income. Directors set their own pay, giving rise to potential self-dealing. We argue and document that in the presence of self-dealing, external mechanisms such as legal standards act as effective means of governance. Following a landmark Delaware court ruling that subjected director pay to a more stringent legal standard, Delaware-incorporated firms reduced director compensation relative to non-Delaware firms and experienced positive and non-transient stock price reactions. Our results indicate that proper governance of director compensation enhances firm value.

Comparing coverage of the same corporate financial news by the conservative Wall Street Journal and the liberal New York Times , we find strong evidence of political polarization in their reporting on both the intensive and extensive margins of coverage. We show that this politics-induced disagreement in corporate financial news leads to an increase in abnormal trading volume for the most politically extreme firms. Our results highlight a new source of investor disagreement, arising out of polarized reporting of corporate financial news, that generates trade among investors.

Capital ages and must eventually be replaced. We propose a theory of financing in which firms borrow to finance investment and deleverage as capital ages to have enough financial slack to finance replacement investments. To achieve these dynamics, firms issue debt with a maturity that matches the useful life of assets and a repayment schedule that reflects the need to free up debt capacity as capital ages. In the model, leverage and debt maturity are negatively related to capital age while debt maturity and the length of debt cycles are positively related to asset life. We provide empirical evidence that strongly supports these predictions.

RMBS sponsors contributed to the rise of new product features in securitized mortgages prior to the 2008 financial crisis. Using a regulatory shock to sponsor competition , we show securitization influences the design of mortgage contracts, empirically demonstrating a unique, feedback loop of product differentiation from the derived security (MBS) to the underlying asset (loans). Product differentiation in Prime MBS collateral rises faster than that of non-prime in the early boom period (2000–2004), a strategic choice by MBS sponsors in the face of increasing competition. At very high levels of competition, product differentiation targets non-prime (marginal) borrowers. We develop a theoretical framework for sponsor-induced product differentiation that explains these empirical findings.

We estimate a structural model of borrowing and lending in the illegal money lending market using a unique panel survey of 1,090 borrowers taking out 11,032 loans from loan sharks. We use the model to evaluate the effects of interventions aimed at limiting this market. We find that an enforcement crackdown that occurred during our sample period increased lenders’ unit cost of harassment and interest rates, while lowering volume of loans, lender profits and borrower welfare. Policies removing borrowers in the middle of the repayment ability distribution, reducing gambling or reducing time discounting are also effective at lowering lender profitability.

We document aggregate outflows from corporate bond mutual funds days before and after the announcement of increases in the Federal Funds Target rate (FFTar). To rationalize this phenomenon, we build a model in which funds’ net-asset-values (NAVs) are stale and investors strategically redeem to profit from the mispricing when they learn about the increases of FFTar. Consistent with the model’s predictions, we find that stale NAVs and loose monetary policy environments weaken (strengthen) outflows sensitivity to increases in FFTar during illiquid (liquid) market conditions. Our results highlight when and how monetary policy could systematically exacerbate the fragility of corporate bond funds.

This paper studies the rise of direct lending using a comprehensive dataset of investments by business development companies (BDC). We exploit three exogenous shocks to credit supply, including new banking regulations and a major finance company collapse, to establish that BDC capital acts as a substitute for traditional financing. Using firm-level data, we further document that firms’ access to BDC funding stimulates their employment growth and patenting activity. Beyond credit provision, BDCs contribute to firm growth through managerial assistance.

We show that firm valuations fell after a key expense became more visible in financial statements. FAS 123-R required firms to deduct option compensation costs from earnings, instead of disclosing them in footnotes. Firms that granted high option pay experienced earnings reductions, while fundamentals remained unchanged. These firms were more likely to miss earnings forecasts, and they experienced recommendation downgrades and valuation declines. Our findings suggest that market participants exhibited limited attention to option costs before FAS 123-R. As we reuse the FAS 123-R natural experiment, we show how one can address confounding channels by integrating reduced-form and structural estimation.

Using granular data on U.S. hotel investments over the past two decades, we show that industry-specialist PE firms achieve higher net income from operations and higher capital gains from sale than generalist PE firms for comparable properties. Those results are driven by specialists implementing more and larger cost savings without compromising revenues. Fundamentally, specialists utilize their hotel-specific operating expertise to produce superior performance outcomes. We show that specialists across investment sectors possess deeper industry-specific operating expertise. Our results suggest that specialist PE firms can compete with their generalist rivals by leveraging such expertise in a chosen market niche.