We exploit the staggered adoption of the universal demand (UD) laws across U.S. states, which impedes shareholder rights to initiate derivative lawsuits, as a quasi-natural experiment to examine the relation between shareholder litigation rights and firm capital structures. We find that weaker shareholder litigation rights due to the UD laws adoption lead to higher financial leverage, which enhances firm value. Furthermore, the positive relation between the UD laws adoption and financial leverage is more pronounced for firms exposed to higher shareholder litigation risk ex ante or financially constrained firms. Our evidence is consistent with lower shareholder litigation threats motivating firms to increase financial leverage.

This research examines the relation between political corruption and mergers and acquisitions (M&As). We find that local corruption increases firm acquisitiveness but decreases firm targetiveness. The levels of corruption in acquirer areas relate positively to the bid premiums and negatively to the likelihood of deal completion. Corruption motivates acquiring firms to use excess cash for payment, which mitigates the negative effect of corruption on acquirer shareholder value. The evidence indicates that acquisitions help acquiring firms convert cash into hard-to-extract assets and relocate assets from the high to low corruption areas, thereby shielding their liquid assets from expropriation by local officials.

We examine the diversification choices and financial performance of companies run by former bureaucrats in China. We find that the ex-bureaucrat led companies are involved in more diversified business lines than other firms managed by professionals without such government backgrounds. While former bureaucrats that manage state-owned enterprises (SOEs) tend to operate in unattractive industries, those who manage private firms do businesses in more profitable, faster-growing, and more related industries. The diversification of private firms is helped by additional borrowing capacity brought in by ex-bureaucrat CEOs, while no such financing effect is found in SOEs. The overall diversification performance associated with bureaucrat CEOs is positive in private firms, but not in SOEs. As manifested by the different diversification strategies and outcomes between private firms and SOEs, the government-linked CEOs facilitate transfers of critical business resources that benefit either owners' or governments' goals.

Size threshold-based regulatory requirements are pervasive in banking, but little is known about how they affect the merger and acquisition (M&A) behavior of banks around the thresholds. M&As cause discrete increases in size, so we hypothesize changes in banks' M&A behavior near regulatory size thresholds and associated real effects (changes in small business lending by the acquiring banks). We develop a novel research design that estimates indirect treatment effects for banks just below the thresholds. We find strong evidence of indirect treatment effects on bank M&A behavior and the small business lending of the merged banks. Our results illustrate the importance of indirect treatment effects in difference-in-differences studies involving size thresholds.

We find that co-opted boards facilitate more erratic and arbitrary decision-making, contributing towards default risk. A one standard deviation increase in co-option increases default risk by 11% relative to normal levels. Supporting the notion that co-option makes decision-making more erratic, we find that stock return volatility and fundamental volatility are higher among co-opted boards and that strategic conformity among such firms is lower. We find no evidence that our results may be driven by firm risk-taking, however, we do find evidence suggesting that co-opted boards are less engaged and involved in strategic decision-making. We also find that external oversight mechanisms, in the form of institutional investors, financial analysts, media coverage, and takeover susceptibility, mitigate the documented effect. Overall, our study documents new evidence on the adverse effect of co-opted boards on firm default probability.

Although subsidiary disclosures in firms’ filings with the Securities and Exchanges Commission (SEC; Exhibit 21) represent the most granular required public disclosure of a firm's geographic footprint, little is understood about the quality of the disclosure, and anecdotal evidence suggests firms may not fully comply with the disclosure requirements. We use data provided by multinational firms to the Internal Revenue Service regarding their foreign subsidiary locations to explore the accuracy of public subsidiary disclosures on Exhibit 21 of Form 10‐K per SEC rules. The overall incidence of nondisclosure is low, suggesting that most firms comply with Exhibit 21 disclosure rules, and that for most applications, Exhibit 21 disclosures provide a reasonable proxy for locations of significant subsidiaries. Nevertheless, there is some evidence of nondisclosure, particularly when subsidiaries are in tax havens, when the firm is more highly scrutinized in the media, or when the firm has other characteristics consistent with low‐quality disclosures such as SEC comment letters.

Middle-aged people have a higher demand for bank loans compared to other age groups and banks that are active in regions with more middle-aged residents are exposed to higher loan demand. This generates a geographically varying demand for loans. Using this variation, we show that banks increase their loan supply and expand their balance sheet with an increase in their loan demand. They finance this expansion mainly with debt. This leads to a decrease in their Tier 1 ratios and an increase in their leverage, i.e., leverage is procyclical. By differentiating between worse-and better-capitalized banks, we highlight the importance of bank capital in banks’ lending and financing decisions.

Exploiting a unique setting in China where internal controls are intended to manage risks, we investigate how internal controls shape the cash holding policies. Results show that firms with higher internal control quality (ICQ) are less likely to have abnormal cash holdings, either excess or deficit cash, and this effect is not driven by corporate governance quality. We also find that firms with higher ICQ are more likely to increase dividend payments and are less likely to increase M&A investments, especially when the firms have had a negative experience with prior M&A investments. Furthermore, our tests on the market valuation of cash holdings show that investors place a higher value on cash holdings of firms with higher ICQ. Collectively, our findings suggest that internal controls help companies shape reasonable cash policies that lead to value creation.

Using limit order books across all US exchanges, we show that while liquidity for small orders (e.g., the quoted and effective spreads) decreases, liquidity for large orders (e.g., the cumulative depth and the price impact of multiple trades) improves after the implementation of the Tick Size Pilot Program. We find significant spillover effects on liquidity for small and large orders that extend beyond the top of the book. Finally, we show that the pilot program results in an improvement in pricing efficiency, an increase in trade size, and a decrease in the number of trades.

We study when and why firms exercise real options. Using detailed project-level investment data, we find that the likelihood that a firm exercises a real option is strongly related to peer exercise behavior. Peer exercise decisions are as important in explaining exercise behavior as variables commonly associated with standard real option theories, such as volatility. We identify peer effects using localized exogenous variation in peer project exercise decisions and find evidence consistent with information externalities being important for exercise behavior.