This paper studies the linkages between bank performance, connections to powerful politicians, and the degree of economic freedom in a bank’s home state. We find that bank performance is positively related to state economic freedom. We also reconfirm the finding of Gropper et al. (2013) that bank performance is improved by political connections. However, the positive effect of political connections appears to be significantly reduced when there is a higher degree of economic freedom in the state, indicating that political connections may matter less to banks when there is more economic freedom. Economic freedom in a state can have a beneficial effect on state economic growth and hence may outweigh any political connection benefits. However, the declines in state economic freedom in recent years could make political connections potentially more valuable to banks.

We show that firm headquarters’ geographic proximity to political power centers (state capitals) is associated with higher abnormal returns. Consistent with the notion that this effect is rooted in social network links, we find it is more pronounced in communities with high levels of sociability and political values’ homophily, and that it dissipates when firms move their headquarters to another state. Finally, in line with the view that investors perceive such networks to be associated with political risk, we find that this effect is particularly strong when there are substantial levels of corruption, dependency on government spending, and politicians’ turnover.

Does a politician with power in the U.S. Congress positively affect the value of firms headquartered in their home state? We investigate this question by examining the profitability and stock performance of commercial banks. Banks can be enormously influenced by the political and regulatory environment. We find that banks headquartered in states where a Senator or member of the House of Representatives serves as the chairman on their respective banking committee in Congress outperform banks headquartered in other states. In addition, we find that this “chair effect” is more pronounced when the committee chairs are strongly aligned with other politicians in Congress, when they are more experienced, and when banks are clustered in the home state, suggesting that the potential benefits generated from chairmanship are in more demand. Overall, our results suggest that there are some important value implications of a local politician’s power in Congress.

We investigate whether and how well firms’ stock market valuations reflect their employees’ collective skills and effectiveness relative to that of their industry peers and competitors. We devise a relative stock market valuation measure of human capital intangibles (EVHC) and find that portfolios of low EVHC firms systematically outperform portfolios of high EVHC firms by an average 1.34% per month. However, this is primarily a small firms effect, because for large firms the excess returns of the arbitrage portfolio that is long on the low EVHC stocks and short on the high EVHC stocks is zero. Our results suggest that reliance on human capital intangibles may proxy for risk not fully accounted for by conventional asset pricing models, or alternatively, that the market cannot correctly price human capital intangibles for small size firms.

We examine the performance of several types of the consumption-based CAPM (C-CAPM) models to explore if consumption factors matter for determining excess returns across 17 MSCI country indexes. While the classic world C-CAPM does exhibit some power in explaining cross-sectional variations of expected excess returns, the model seems to require an implausibly large coefficient of risk aversion. The more sophisticated models including the heterogeneous C-CAPM, the world surplus consumption and the habit-formation models provide more reasonable estimates and add substantial explanatory power for the variation in the cross section of excess stock returns. Our results suggest that country-specific consumption risk is not fully diversified thus implying that stock returns are related to idiosyncratic consumption risk.

We provide a link between diversification discount and corporate use of financial derivatives. We show that diversified firms benefit from financial risk management. Our findings are consistent with the notion that derivative usage lowers information asymmetry and thereby reduces the negative valuation effects of diversification. Our evidence complements the earlier findings of both the risk management literature and diversification discount literature and is robust to controls for endogeneity and information asymmetry levels.

We expand on prior evidence that national-level policy uncertainty affects corporate cash policies and hypothesize that political geography has a significant effect on corporate cash holdings as bi-annual shifts in firms' location on the political map give rise to both time- and spatially-varying levels of exposure to policy risk. We use a state-level index of political alignment with the President as a proxy for political geography and empirically confirm that companies headquartered in states closely aligned with the President tend to increase their cash holdings. Moreover, and in line with the notion that policy uncertainty associated with proximity to political power provides a precautionary motive for holding more cash, the cash flow sensitivity of cash is more pronounced among firms that are financially constrained and politically unconnected. Finally, our tests suggest that such corporate cash management policy in the face of exposure to policy risk can have value implications.

Previous literature provides multiple conflicting arguments on why and when multinationality should enhance or impede the value-relevance of firms' real options. We address this issue by examining whether the relationship between stock returns and changes in return volatility varies with multinationality. Our results indicate that multinationality does indeed act as a real option facilitator. Furthermore, we show that, consistent with the notion that there are limits to the operating flexibility associated with multinationality this benefit only accrues fully if the firm is not financially constrained and stabilizes at very high degrees of multinationality.

We investigate the effect of top managers' myopia on firms' market valuation. We devise a measure of expected CEO tenure as a proxy for the length of CEO decision horizon. After accounting for the endogenous nature of CEO horizon, our empirical tests show that shorter CEO horizon is associated with more agency costs, lower firm valuation and higher levels of information risk. The results are consistent with the notion that a short CEO decision horizon is indicative of preference for investments that offer relatively faster paybacks at the expense of long-term value creation.

We examine the relation between CEO delta, firm locality, and firm value for a sample of 7749 firm-year observations. We find that CEO delta is more value-enhancing for rural firms, those associated with exacerbated agency conflicts resulting from decreased observability of managerial investment decisions and higher levels of information asymmetry. Further, the positive relation between CEO delta and firm value is stronger for rural firms with higher levels of information asymmetry or in less religious areas. Our findings imply that managerial ownership is more effective in mitigating agency conflicts in rural areas with higher levels of information asymmetry and lower degrees of local trustworthy constituents. Our results are robust to alternative definitions of urban/rural firms, the inclusion of additional control variables, and various tests controlling the endogeneity between firm location and value. Finally, the results do not appear to be driven by reverse causality.