Knowledge that Transforms

Abstract Financial regulators considering the desirability of a new rule or regulation sometimes use pilot studies for evidence-based decision making. Although pilot studies can generate new knowledge, they also can be expensive and subject to serious selection biases, spillover problems, and the infeasibility of a blind design. Alternatively, regulators can often evaluate a proposed regulation’s impact by analyzing archival data or applying theory based on well-accepted economic principles. We discuss why pilot studies can be useful, but also why regulators and industry participants sometimes favor pilot studies with little scientific value. We illustrate these issues by discussing various SEC pilot studies. (JEL G18, G28, G38, K22, L51)

Abstract Firms under common ownership have incentives to soften competition. I exploit unique data from Norway to document the economy-wide extent of common ownership, covering private and public firms and the universe of shareholders. Using exogenous variation in common ownership at the firm-household level due to marriages among individual shareholders, I show that firms experiencing an increase in common ownership due to a marriage increase profit margins by 7 to 16 percentage points, compared to firms affected by similar marriages that do not experience a change in common ownership. (JEL: G32, L22, L26)

Abstract Governance practices differ significantly across blockholder types. Compared with financial blockholders, nonfinancial blockholders are six times more likely to identify as activists. A textual analysis of regulatory filings shows that nonfinancial blocks govern through customized governance actions, while financial blocks follow generic performance metrics. Furthermore, blockholdings drive an important limitation in using Russell index thresholds as an identification strategy. Manipulation of index weights by Russell is strongly correlated with nonfinancial block ownership, confounding previous research on passive ownership. Using both reduced-form and structural estimates, we find that the market expects greater value creation from the entry of a nonfinancial blockholder.

Abstract This paper studies the role of scale inflexibility in explaining corporate credit spreads. We find robust evidence that firms with higher inflexibility have higher credit spreads. To mitigate the endogeneity concern, we employ a regression discontinuity design that uses the exogenous variations in labor adjustment costs resulting from close-call union elections. Furthermore, contraction inflexibility is more prominent in influencing credit spreads than expansion inflexibility is. Additionally, inflexibility increases credit spreads due to increased cash flow volatility and financial distress risk. Our findings highlight the importance of a firm’s ability to adapt to productivity shocks in fulfilling its debt obligations. (JEL G12, G30, G32)

Abstract We examine expectation documents’ effectiveness as an activism tool. We use the Norwegian sovereign wealth fund’s release of a corporate governance expectation document as a natural experiment. We introduce a novel, three-way analytical decomposition of the firms, the fund, and their joint response to this document. Firms’ governance practices adapt to the fund’s new portfolio-wide governance preferences, with heterogeneous responses across ownership and firm characteristics. The fund’s investment policies also change, even at the expense of financial returns. Overall, our research demonstrates the potential effectiveness of expectation documents as an emerging, low-cost activism tool for universal investors. (JEL F30, G32, G34)

Abstract This paper investigates whether acquisition prices reflect a specific set of nonpecuniary benefits preferred by entrepreneurs: the quality of life (QOL) associated with the business location. Using data on private firm acquisitions, we find that target firms in high-QOL cities sell for a 14% to 20% premium. Traditional financial factors do not explain this premium, which dissipates when the buyer is unlikely to have preferences for high-QOL locations. Using wage-to-housing cost differentials to decompose local amenities and data on migration patterns, we find that QOL amenities have a greater impact on entrepreneurs’ location decisions relative to wage workers. (JEL G02, G32, G34, J32, L26, R39) Received: 27 February 2022; Editorial decision: 29 January 2024 Editor: Camelia Kuhnen Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract We examine the relationship between regulatory intensity and firm value. We find that firms facing high regulatory intensity exhibit lower valuations. However, it is the reverse for politically connected firms. Firms with political ties and high regulatory exposure have higher valuation ratios, and their market values increase following new regulations. Additionally, these firms have higher markups and face lower entrance rates by new establishments, consistent with weakened competition. Nonetheless, not all results are robust to the choice of specification. Overall, our findings provide some support for a regulatory capture perspective, suggesting that regulation may enhance value for politically connected firms.

Abstract Constructing a comprehensive data set of financially distressed firms that restructured their debts from 2000–2014, we find that firms with financial institutions’ loan-equity simultaneous holdings are more likely to restructure out of court than to file for bankruptcy. The effect is stronger when loans are oversecured and when the expected bankruptcy costs are larger. We use mergers of financial institutions and instrumental variable estimations to address potential endogeneity concerns. Firms with simultaneous holdings experience higher stock returns. The evidence suggests that mitigating shareholder-creditor conflict results in cost-effective resolutions of financial distress.

Abstract Does partisanship influence loan allocation through the Paycheck Protection Program (PPP)? We examine the 2020 Presidential campaign contributions made by lenders’ employees as a partisanship measure and leverage the PPP’s phased implementation under both the Trump and the Biden administrations. We find that partisan misalignment increases lending, particularly to small and first-time PPP borrowers, as well as those in Republican areas. Misalignment is also associated with higher payroll coverage for small businesses. Our findings are consistent with Republican-leaning lenders viewing the PPP’s 2021 phase as a legacy policy of the prior administration, shedding new light on the partisan-alignment phenomenon in finance. (JEL D72, G21, G28, G32, G38, H12, H81)

Abstract Using a novel typology of serial acquirers, we examine several puzzles documented in the prior literature. We show that acquisitions by different types of acquirers are driven by different factors, they acquire different sizes of targets, and subsequent acquisitions by acquirers are predictable ex ante. Controlling for market anticipation, the most frequent serial acquirers do not earn declining returns as they continue acquiring, while less frequent acquirers do. Our methodology enhances our understanding of serial acquisition dynamics, anticipation, and economic value adjustments. The methodology is likely to be relevant to topics related to event anticipation beyond those covered in this study. (JEL G14, G34, G35)