Knowledge that Transforms

We use the staggered deregulation of interstate banking in the U.S. to show that CEOs who have gained career experience at multiple banks are more likely to pursue acquisitions when competition intensifies. Acquisitions completed by these CEOs perform better than those led by CEOs whose career experience is confined to a single institution. Analyzing the sources of performance gains, we find that CEOs with greater across-bank experience are more effective at identifying and integrating dissimilar targets. Our findings cannot be explained by other formative CEO experiences or a CEO general ability. The results highlight the importance of externally versus internally acquired experience in explaining how managers respond to a competitive shock.

Using an extensive matched hedge fund-prime broker panel dataset for the period 2001–2021, we document a strong positive relationship between hedge fund leverage and prime broker’s stock price crash risk after controlling for other crash risk drivers. Our results are not only statistically, but also economically significant, showing that a one-standard-deviation increase in hedge fund leverage is associated on average with an increase of around 5% of a standard deviation in the negative skewness or the down-to-up-volatility of bank stock returns. Moreover, they remain robust when accounting for endogeneity and conducting many robustness checks. We also document that some investment strategies, such as one focusing on fixed income, appear to decrease the slope of the risk metrics of prime brokers, and ultimately leading to lower stock price crash risk.

Tariffs are commonly used to protect domestic firms from foreign competition. Using 25 major trade reforms implemented in 17 countries around the world since 1990, we document that firm value significantly increases following reductions in import tariffs. This value enhancement is concentrated in emerging markets and countries with stronger ex-ante competition laws. We identify two channels driving the increase in firm value: an increase in firm efficiency and profit margins due to lower input costs, and an increase in CEO turnover-performance and pay-performance sensitivity driven by increased competition. Overall, our findings underscore the importance of trade liberalization, while also highlighting the critical role of institutional support in fostering competition from foreign firms to stimulate private sector growth. • Firm value rises significantly after major tariff reductions worldwide. • Reduced input costs and improved managerial incentives drive value enhancement. • Effects are amplified in small, manufacturing, and import-dependent firms • Effects are concentrated in emerging markets and countries with competitive legal frameworks. • Trade reforms increase firm investment, product development, and operating efficiency