Knowledge that Transforms

We examine the Cohen and Wang (2013) conclusion that a staggered board lowers firm value based on the stock price reaction to two 2010 Delaware court rulings in the Airgas, Inc. case. The first ruling weakened the potency of a staggered board and the second restored it. We find that the Cohen and Wang results, for their sample, become insignificant after excluding a few penny stocks, stocks with value below $10 million, or over-the-counter (non-exchange) stocks. The effects of the rulings are also insignificant for an alternative sample.

Opacity assumes at least two prominent forms in asset markets. Dark exchanges and over-the-counter markets enable expert investors to hide their orders while originators carefully control the disclosure of fundamental information about the assets they source. We describe a simple model in which both forms of opacity – hidden orders and limited disclosure – complement one another. Costly investor expertise gives originators incentives to deliver assets of good quality. Keeping expert orders hidden generates the rents investors need to justify investing in expertise in the first place. Limiting disclosure mitigates the resulting adverse selection issues. Originators prefer to restrict the information they can convey to experts because it encourages the participation of non experts. This optimal organization of asset markets can be decentralized using standard financial arrangements.

Using jumps in stock prices as a proxy for large information shocks, we provide evidence consistent with short-term underreaction in the US equity market. Strategies long (short) stocks with positive (negative) lagged jump returns earn significantly positive returns over the next one- to three-month horizons. The results based on intraday jumps, especially overnight jumps, provide further evidence consistent with underreaction. The underreaction is robust to controlling for other firm characteristics, extends stock return momentum over intermediate to short horizons, and captures market underreaction to information shocks beyond earnings surprises. We further show that limited investor attention contributes to short-term underreaction.

In this paper, we examine the relation between innovation and a firm’s financial dependence using a sample of privately held and publicly traded US firms. We find that public firms in external finance dependent industries spend more on research and development and generate a better patent portfolio than their private counterparts. However, public firms in internal finance dependent industries do not have a better innovation profile than private firms. The results are robust to various empirical strategies that address selection bias. The findings indicate that the influence of public listing on innovation depends on the need for external capital.

The simultaneous occurrence of jumps in several stocks can be associated with major financial news, triggers short-term predictability in stock returns, is correlated with sudden spikes of the variance risk premium, and determines a persistent increase (decrease) of stock variances and correlations when they come along with bad (good) news. These systemic events and their implications can be easily overlooked by traditional univariate jump statistics applied to stock indices. They are instead revealed in a clearly cut way by using a novel test procedure applied to individual assets, which is particularly effective on high-volume stocks.

We study the impact of the zero lower bound interest rate policy on the industrial organization of the U.S. money fund industry. We find that in response to policies that maintain low interest rates, money funds: change their product offerings by investing in riskier asset classes; are more likely to exit the market; and reduce the fees they charge their investors. The consequence of fund closures resulting from interest rate policy is the relocation of resources in affected fund families and in the asset management industry in general, as well as decline in capital of issuers borrowing from money funds.

We exploit staggered changes in state-level corporate tax rates to show that an increase in taxes reduces future innovation. A variety of tests, including those based on policy discontinuity at contiguous counties straddling borders of politically similar states, show that local economic conditions do not drive our results. The effect we document is consistent across the innovation spectrum: taxes affect not only patenting and R&D investment but also new product introductions, which we measure using textual analysis. Our empirical results are consistent with models that highlight the role of higher corporate taxes in reducing innovator incentives and discouraging risk-taking.

This paper addresses regulatory concerns that large shareholders of credit rating agencies can influence the rating process. Unlike Standard & Poor's, which is a privately held division of McGraw-Hill, Moody's is a public company listed on the NYSE. From 2001 to 2010, Moody's has two shareholders, Berkshire Hathaway and Davis Selected Advisors, which collectively own about 23.5% of Moody's. Moody's ratings on bonds issued by important investee firms of these two stable large shareholders are more favorable relative to S&P, as well as Fitch, ratings. We exploit Moody's initial public offering in 2000 to address endogeneity and to mitigate concerns that the results are driven by issuer characteristics or by the greater informativeness of Moody's ratings. S&P's parent, McGraw-Hill, has a large shareholder for much less time, and some weak evidence exists that S&P ratings are relatively more favorable toward the owners of McGraw-Hill. These findings are consistent with regulatory concerns about the ownership and governance of rating agencies, especially those that are publicly listed.

We develop a model to characterize and quantify the effects of stock, option, and fixed compensation on a manager’s risk-taking incentive and investment choice. We find the average chief executive officer’s (CEO) compensation contract incentivizes overinvestment by 1.3 percentage points per year, with significant variation across firms and over time. We estimate a value of CEO effort implied by compensation contracts and find it to be strongly related to firm intangibility. Finally, we assess the effects on investment of FAS 123R and a hypothetical ban on option grants and find heterogeneous responses that depend on firm volatility and the prior structure of compensation.

We investigate whether firms in close customer–supplier relationships are better able to identify and implement tax avoidance strategies via supply chains. Consistent with our prediction, we find that both principal customers and their dependent suppliers avoid more taxes than other firms. Further analysis suggests that principal customers and dependent suppliers likely engage in tax strategies involving shifting profits to tax haven subsidiaries. Moreover, tax benefits appear to explain both principal customer firms’ and dependent supplier firms’ organizational decisions. Overall, our study provides evidence of the importance of tax avoidance as a source of gains from these relationships.