Knowledge that Transforms

We empirically study whether carbon emissions affect firms’ cost of capital raised on conventional bond markets. We find that firms with higher carbon emissions face higher spreads in the secondary market but not in the primary market. We show that this gap is related to uncertainty about climate concerns that affects differently primary and secondary market. This gap is also affected by the reputation of underwriting dealers: high reputation promotes the incorporation of climate concerns into bond yields. Our findings imply that, on average, carbon emissions do not affect the cost of capital in bond markets, thereby reducing firms’ financial incentives for decarbonization.

I examine how political ideology shapes China’s privatization wave around 2000. Using a novel ideology measure constructed based on belief formation mechanisms, I show that provincial governors with above-median communist beliefs privatize 2.8% fewer state-owned enterprises (SOEs) each year than their below-median-belief colleagues. Firms privatized under such governors also achieve fewer efficiency gains after the sale. Mechanism analysis finds evidence that this performance gap arises from ideologically driven choices: pro-communist governors are more likely to privatize weaker or less important firms, adopt transaction structures associated with inferior outcomes, and manage subsidies in ways that exacerbate post-privatization challenges. Moreover, ideology moderates how governors learn from experience and respond to signals, shaping their adaptation in managing privatization. Jointly, these results demonstrate that political leaders’ beliefs can substantially influence the trajectory and outcome of major economic reforms. It also highlights the importance of ideology in driving politicians’ decisions under authoritarian regimes.

Traditionally, fiduciaries' duty of loyalty requires them not to pursue business opportunities that could benefit their own companies. However, starting with Delaware in 2000, several states began allowing companies to waive this duty. We find that the debt structure of firms in waiver-adopting states shifts from public debt to bank debt, suggesting that these firms rely on more intense bank monitoring to address potential managerial disloyalty. The shift is more pronounced for firms with CEOs who are more likely to appropriate business opportunities and less pronounced for firms with stronger shareholder monitoring. We also find that bank debt mitigates the adverse effect of corporate opportunity waivers on shareholder wealth, the stock market reacts positively to the bank debt issuances of firms affected by these waivers, and corporate opportunity waiver laws increase the total debt market funding costs for affected firms. Collectively, our paper provides novel evidence that firms seek creditor governance to mitigate the loss of internal governance resulting from changes in the legal environment.

An important aspect of the conduct of business in China is the need to develop relationships and make facilitation payments in the form of entertainment and gift giving. We use three different methods to extract firms' relationship spending from their reported entertainment and travel costs, and evaluate whether this spending enhances their ability to respond and adapt to changes in the business environment – their strategic flexibility. We employ a real options approach that identifies strategic flexibility as the firm's ability to take advantage of increased uncertainty, measured as its value gain associated with increased asset volatility. We document that relationship spending is positively associated with strategic flexibility in a way that is both significant and economically meaningful, consistent with rent-seeking behavior under institutional voids. This relation is both independent of, and supplemented by, firms' political connections, and is unaffected by the important anti-corruption campaigns implemented in 2013. The relation is nonlinear, strategic flexibility declining at very high levels of spending, implying firms become over-embedded in their relationships consistent with path dependence theory. Our findings are supported by detailed robustness testing, including quasi-exogenous variation, an instrumental variable approach, a decomposition of political connectedness and the estimation of alternative specifications. Thus, we identify a new source of firms' strategic flexibility and, relatedly, an important benefit that firms derive from the associated spending. This might explain why such spending is resilient, persisting despite ongoing attempts by the government to restrict it.

This study provides the first empirical evidence that directors' nationality significantly influences the profitability of insider trading. Using a large sample of reported stock transactions by directors of U.S.-listed firms between 1996 and 2023, I find that foreign directors earn statistically and economically lower abnormal returns following their trades compared to their domestic counterparts. The informational disadvantage of foreign directors appears only in firms with either a domestic CEO or CFO, lower board-level national diversity, when the directors work in overseas branches, and during the early stages of their tenure at the firm. These findings suggest that foreign directors face disadvantages in accessing private information due to the impact of national identity on information flow. I also find that this informational disadvantage only appears when foreign directors do not serve as top executives or independent directors and in firms with higher levels of information asymmetry. Further analysis suggests that the alternative explanation that foreign directors are less willing to trade on private information due to concerns about legal risks does not explain the findings. Additionally, I find that foreign directors' trades are less likely to be classified as opportunistic or to follow a clustered trading pattern, consistent with the finding that they exploit private information to a lesser extent. Moreover, I also find that trades by foreign directors trigger weaker market reactions compared to those executed by domestic directors. Finally, geographical distance and linguistic barriers are also found to influence foreign directors' ability to access and process information.