Knowledge that Transforms

While bank supervisors frequently cooperate across countries, novel data on 268 cooperation agreements reveal that such cooperation falls short of covering the global operations of large banking groups. We show that this causes material regulatory arbitrage: banking groups allocate lending activities and risk into third-country subsidiaries when cooperation agreements cover their operations in other countries. The average distortion in a country’s foreign lending caused by regulatory arbitrage is 21 percent, with the effect being magnified in the presence of a weak supervisory framework. Taken together, our results indicate that incompleteness in cooperation substantially diminishes its global effectiveness.

This study explores the influence of U.S. Environmental Protection Agency (EPA) enforcement on corporate green innovation, as measured by green patent counts and citations. Our findings show that EPA-enforced firms experience a substantial uptick in green innovation outputs. This boost can be attributed to enhanced green innovation efficiency and increased hiring of green inventors. Moreover, this effect is more pronounced for firms headquartered in states with stronger environmental enforcement intensity, firms with higher institutional ownership, and firms with fewer financial constraints. Finally, we find that green innovations help enforced firms avoid future EPA enforcements and reduce toxic chemical releases. Taken together, these results imply that EPA enforcement actions can indeed foster positive impacts on corporate green innovation.

This paper examines corporate mergers and acquisitions (M&A) outcomes under lender scrutiny. Using the unique shocks of U.S. supervisory stress testing, we find that firms under increased lender scrutiny after their relationship banks fail stress tests engage in fewer but higher-quality M&A deals. Evidence from comprehensive supervisory data reveals improved credit quality for newly originated M&A-related loans under enhanced lender scrutiny. This improvement is further evident in positive stock return reactions to M&A deals financed by loans subject to enhanced lender scrutiny. As companies engage in fewer but higher-quality deals, they also experience higher returns on assets. Our findings highlight the importance of lender scrutiny in corporate M&A activities.

This study investigates the impact of government contracts on labor investment efficiency in U.S. public firms between 2001 and 2019. We find that firms awarded with government contracts exhibit improved labor investment efficiency, characterized by reduced abnormal labor hiring, evident in both overinvestment and underinvestment issues. Government contracts are particularly beneficial for financially constrained firms, enhancing their ability to manage labor resources effectively. Additionally, the regulatory framework associated with government contracts reduces labor overinvestment, although it may exacerbate underinvestment where labor rights are weak. The political sensitivity of contractors also improves labor investment efficiency. However, this effect diminishes with contractors' increased bargaining power . Contrary to expectations, political connections and lobbying activities do not significantly alter the impact of government contracts on labor investment efficiency. This study highlights the nuanced role of government contracts in shaping labor investment practices and unravels the underlying mechanisms driving these outcomes, thus contributing to the literature on government contracts, corporate finance, and labor rights.

Using a hand-collected dataset, we study whether CEO political ideology affected S&P 500 firms’ reactions to the COVID-19 pandemic in 2020. During the pandemic, CEOs had the option to distribute the pain of the pandemic’s impact onto shareholders by paying lower dividends, onto the workforce by reducing labor costs, or to share the pain. We hypothesize that conservative CEOs were more likely to aggressively reduce labor costs while still meeting dividend expectations. Conversely, other CEOs would have been less likely to meet dividend expectations and less likely to reduce labor costs. Our findings support this hypothesis. We also find that during the pandemic, conservative CEOs used temporary downsizing to avoid earnings losses, enabling them to meet dividend expectations.

We develop a model in which feedback effects from equity markets allow uninformed traders to profit by short selling a firm’s stock while going long on its product market competitor. As this strategy distorts the investment of the firm targeted by short selling to the benefit of its rival, we label it predation by stock price manipulation . A short selling ban does not prevent manipulation since the speculator can still induce a firm to underinvest by establishing a long position in its rival. Our analysis unveils how competitive interactions among firms expand the scope of manipulation, providing new insights into equity markets and short sales regulation.

We employ firm-macro matched data on small and medium-size enterprises in the European Monetary Union to study the investment response to tight monetary policy shocks. We show that firms with higher leverage and longer debt maturity are more negatively responsive to monetary restrictions. Capital structure significantly interacts with monetary policy transmission: a leverage ratio one percentage point larger than average is associated with a semi-elasticity of investment to a nominal interest rate hike approximately 8 % higher two years following the monetary shock. Firm-level heterogeneity proves to be more pronounced in the presence of long-term—rather than short-term—indebtedness. We further argue that the investment response to monetary contractions is heterogeneous not only with respect to the firm-level financial structure but also in relation to the country-specific financial and productive conditions. Specifically, we show that the investment semi-elasticity to rate hikes significantly increases in countries characterized by higher frictions in accessing the credit market and in countries featured by either a larger share of small-size firms or a larger share of intangible assets.

We examine whether voluntary adoptions of clawback (executive compensation recovery) provisions are followed by changes in market outcomes, specifically changes in institutional investment decisions. Institutional investors dominate the US capital markets and are generally viewed as informed investors. Using difference-in-differences (DID) research design, we find that clawback adoptions are followed by a decrease (increase) in transient (dedicated) institutional investors' equity holdings. Our findings are robust to both level and change specifications. Also, the decrease (increase) in holdings for transient (dedicated) investors is stronger for adopters who display reduced information asymmetry (increase in long-term orientation) following clawback adoption. The results are robust to several tests for endogeneity and alternative specifications. Collectively, our findings suggest that clawback adoptions make the firm potentially less attractive to transient institutions and more desirable to dedicated institutions. Our findings have implications for clawback adoptions that are now mandatory for all US public companies with an effective date (most recently) of December 1, 2023.

We examine how the issuance of green bonds affects the cost of bank loans. We find that an initial bond issuance reduces loan costs by 55 basis points (bps), with an even larger reduction of 66 bps for firms issuing green bonds for the first time. These effects are more pronounced among firms with greater information asymmetry and lower bond financing costs. We explore two potential mechanisms behind these results: a signaling channel, where bond issuance helps mitigate information asymmetry, and an alternative financing channel, where access to bond markets enhances a firm's bargaining power with banks. Overall, our findings reveal spillover effects from bond to bank financing, offering empirical insight into how direct financing influences the cost of indirect financing in the Chinese market.

This paper explores the impact of executive compensation structure on firm debt choices. To analyze the relationship between executive compensation and firm debt structure via the managerial effort channel, we extend the theoretical model developed by Boot et al. (1991) by incorporating an agent-principal model. We employ data from US Equity Real Estate Investment Trusts (REITs) to empirically assess the model's implications. The evidence presented in this study reveals that when executive compensation exhibits a higher sensitivity to the firm's stock price (represented by a higher Delta), the firm tends to use a greater proportion of secured debt within its overall debt structure. This phenomenon can be attributed to the managerial effort channel: firms with higher Delta values tend to engage in investments that are more effort-sensitive, and these investment choices are positively associated with increased utilization of secured debt, where the collateral plays the role of incentivizing the manager to put more effort into projects – an “effort-lifting” behavior. These findings hold for an expanded sample consisting of firms from all industries. Our analysis offers a fresh perspective on the use of collateral and executive compensation as a tool to mitigate principal-agent problems.