Knowledge that Transforms

We investigate how a shock to corporate demand for experienced directors (i.e., U.S. Congress’ grant of Permanent Normal Trade Relations status to China in 2000) affects U.S. firms’ board structure and board advisory role. We find that firms appoint more outside directors with China-related experience after the grant. Firms with such directors realize higher returns around announcements of investments involving Chinese firms and better post-deal operating performance, particularly when these directors reside in the U.S. The appointment of directors with China experience is also greeted more positively by the stock market and they gain more board seats after the grant.

We model a dynamic economy with strategic complementarity among investors and study how endogenous government interventions mitigate coordination failures. We establish equilibrium existence and uniqueness, and we show that one intervention can affect another through altering the public information structure. A stronger initial intervention helps subsequent interventions through increasing the likelihood of positive news, but also leads to negative conditional updates. Our results suggest optimal policy should emphasize initial interventions when coordination outcomes tend to correlate. Neglecting informational externalities of initial interventions results in over- or under-interventions. Moreover, saving smaller funds disproportionally more can generate greater informational benefits at smaller costs.

We analyze a model in which information may be voluntarily disclosed by a firm and/or by a third party, e.g., financial analysts. Due to its strategic nature, corporate voluntary disclosure is qualitatively different from third-party disclosure. Greater analyst coverage crowds out (crowds in) corporate voluntary disclosure when analysts mostly discover information that is available (unavailable) to the firm. Nevertheless, greater analyst coverage always improves the overall quality of public information. We base this claim on two market quality measures: price efficiency, which is statistical in nature, and liquidity, which is derived in a trading stage that follows the disclosure stage.

Venture capital, an important source of financing for potentially high-growth new businesses, is believed to suffer from information frictions. This paper quantifies the magnitude of these frictions among participants in new venture competitions. In a regression discontinuity design with data from 87 competitions, winning a round increases the chances of external financing by about 35%. Winning is most impactful for ventures that are ranked just above the cutoff but receive no cash prize, and judge ranks strongly predict venture success. The results indicate that these information problems in new venture finance are large, and competitions can help resolve them through certification.

Using data on White House visitors from 2009 through 2015, we find that corporate executives’ meetings with key policymakers are associated with positive abnormal stock returns. We also find evidence suggesting that firms receive more government contracts and are more likely to receive regulatory relief (as measured by the tone of regulatory news) following meetings with federal government officials. Using the 2016 presidential election as a shock to political access, we find that firms with access to the Obama administration experience significantly lower stock returns following the release of the election result than otherwise similar firms. Overall, our results provide evidence suggesting that political access is of significant value to corporations.

This paper explores the creation and evolution of new stock exchanges around the world geared toward entrepreneurial companies, known as second-tier exchanges. Using hand-collected novel data, we show the proliferation of these exchanges in many countries, their significant volume of Initial Public Offerings (IPOs), and lower listing requirements. Shareholder protection strongly predicted exchange success, even in countries with high levels of venture capital activity, patenting, and financial market development. Better shareholder protection allowed younger, less-profitable, but faster-growing, companies to raise more capital. These results highlight the importance of institutions in enabling the provision of entrepreneurial capital to young companies.

How and to what extent do managerial control benefits shape the efficiency of the takeover market? We revisit this question by estimating both the dark and bright sides of managerial control benefits in an industry equilibrium model. On the dark side, managers’ private benefits of control distort firms’ takeover incentives and hinder the reallocation role of the takeover market. On the bright side, fear of a takeover induces underperforming managers to exert more effort and enhances the disciplinary role of the takeover market. Our estimates suggest that the bright-side effect increases the value created by an active takeover market by 21%, comparable in magnitude to the dark-side effect. It is also important to account for this bright-side effect in explaining certain features of the takeover market, including a low takeover-performance sensitivity.

Management, directly or indirectly, learns from its firm's stock price, so a more informative stock price should make the firm more productive. We show that stock price informativeness increases firm productivity. We provide direct evidence of one channel through which stock price informativeness affects productivity; specifically, we find that CEO turnover is less sensitive to Tobin's q when informativeness is lower. We predict and confirm that the productivity of smaller and younger firms, better governed firms, more specialized firms, and firms with more competition is more strongly related to the informativeness of their stock price. We further address endogeneity concerns with the use of brokerage closures, S&P 500 additions, and mutual fund redemptions as plausibly exogenous events.

Sovereign credit default swap quanto spreads tell us how financial markets view the interaction between a country’s likelihood of default and associated currency devaluations (the Twin Ds). A no-arbitrage model applied to the term structure of eurozone quanto spreads can isolate the Twin Ds and can gauge the associated risk premiums. Conditional on the occurrence of default, the true and risk-adjusted one-week probabilities of devaluation are 42% (2%) and 90% (55%) for the core (periphery) countries. The weekly risk premium for euro devaluation in case of default for the core (periphery) exceeds the regular currency premium by up to 18 (13) basis points.

This study uses two distinct quasi-natural experiments to examine the effect of institutional shareholders on corporate social responsibility (CSR). We first find that an exogenous increase in institutional holding caused by Russell Index reconstitutions improves portfolio firms’ CSR performance. We then find that firms have lower CSR ratings when shareholders are distracted due to exogenous shocks. Moreover, the effect of institutional ownership is stronger in CSR categories that are financially material. Furthermore, we show that institutional shareholders influence CSR through CSR-related proposals. Overall, our results suggest that institutional shareholders can generate real social impact.