We investigate the functioning of internal capital markets in Indian Business Groups. We document that intragroup loans are an important means of transferring cash across group firms and are typically used to support financially weaker firms. Evidence suggests that an important reason for providing support may be to avoid default by a group firm and consequent negative spillovers to the rest of the group. Consistent with such spillovers, the first bankruptcy in a group is followed by significant drops in external financing, investments and profits of other firms in the group and an increase in their bankruptcy probability.

We argue that internal capital market imperatives of business groups i.e., reallocation of capital across group firms, influences an affiliated firm's dividend policy. Intuition is developed in a model in which business group insiders distribute dividends from cash-rich firms and use their share of payout to invest in other affiliated firms. Employing multi-country panel-data, we find support for this channel: Dividends by a group firm are positively related with equity-financed investments by its affiliated firms. Results are corroborated by exploiting variation in a firm's investment opportunity generated by changes in import tariff policy: a shock to investment opportunity of an affiliated firm is propagated to dividend policies of other firms in its group.

Whether an inversion is associated with weaker firm governance is an open empirical question. While many inversions happen to countries that offer weaker protection to minority shareholders than the U.S., most firms that invert continue to be treated by the SEC as an “U.S. issuer”, and thus, their shareholders benefit from the full protection offered by the U.S. Federal Securities Laws. Our analysis shows that firms that invert exhibit an increase in their stock illiquidity, information asymmetries, and a decrease in their institutional shareholdings, indicating a weaker market-based governance following the inversion. Executives also receive a smaller proportion of equity-based compensation and their wealth is less sensitive to stock prices following the inversion. Thus, despite enjoying the full protection of federal securities laws, investors perceive inverted firms to have weaker governance relative to comparable U.S. firms.

We show that firms take more (but not necessarily excessive) risks when one of their directors experiences a corporate bankruptcy at another firm where they concurrently serve as a director. This increase in risk-taking is concentrated among firms where the director experiences a shorter, less-costly bankruptcy and where the affected director likely exerts greater influence and serves in an advisory role. The findings show that individual directors, not just CEOs, can influence a wide range of corporate outcomes. The findings also suggest that individuals actively learn from their experiences and that directors tend to lower their estimate of distress costs after participating in a bankruptcy firsthand.

We use administrative payroll data to estimate the effect of the minimum wage on employment and wages. We find that both effects are nuanced. While the overall number of low-wage workers in firms declines, incumbent workers are no less likely to remain employed. We find that firms reduce employment primarily through hiring, and there is significant heterogeneity across the nontradable and tradable sectors. For wages, we find modest spillovers extending up to $2.50 above the minimum wage. Spillovers accrue to both incumbent workers and new hires, but only within firms that employ a significant fraction of low-wage workers.

Using a large loan sample from 1990 to 2006, we examine why firms form new banking relationships. Small public firms that do not have existing relationships with large banks are more likely to form new banking relationships. On average, firms obtain higher loan amounts when they form new banking relationships, while small firms also experience an increase in sales growth, capital expenditure, leverage, analyst coverage, and public debt issuance subsequently. Our findings suggest that firms form new banking relationships to expand their access to credit and capital market services, and highlight an important cost of exclusive banking relationships.

Using a large data set of performance goals employed in executive incentive contracts, we find that a disproportionately large number of firms exceed their goals by a small margin as compared to the number that fall short of the goal by a similar margin. This asymmetry is particularly acute for earnings goals, when compensation is contingent on a single goal, when the pay-performance relationship around the goal is concave-shaped, and for grants with non-equity-based payouts. Firms that exceed their compensation target by a small margin are more likely to beat the target the next period and CEOs of firms that miss their targets are more likely to experience a forced turnover. Firms that just exceed their Earnings Per Share (EPS) goals have higher abnormal accruals and lower Research and Development (R&D) expenditures, and firms that just exceed their profit goals have lower Selling, General and Administrative (SG&A) expenditures. Overall, our results highlight some of the costs of linking managerial compensation to specific compensation targets.

ABSTRACT We document controlling shareholder (insider) opportunism in an insolvency regime that uses an accounting rule to determine bankruptcy eligibility. Our study sheds light on managerial incentives induced by weak investor protection laws. Using unique data on bankrupt firms from an emerging market, consistent with our prediction, we show insiders intentionally manage earnings downward to understate firm net worth so as to be able to file for bankruptcy. Downward pre‐bankruptcy earnings management is associated with more payments to insiders and weaker performance, post‐filing. A battery of tests suggests our results cannot be fully explained as an artifact of financial distress. Rather, they are consistent with insiders exploiting weak investor protection to extract private benefits at the expense of lenders and outside shareholders. Our study serves as a cautionary tale for all insolvency regimes that use a balance sheet test in an environment with weak creditor protection.

ABSTRACT We examine the extent to which deferred vesting of stock and option grants (deferred pay) helps firms retain executives. To the extent an executive forfeits all deferred pay if they leave the firm, deferred vesting will increase the cost (to the executive) of an early exit. The impact of deferred pay on executive retention, a key ingredient for firms to create shareholder value is hence an important empirical issue. Using pay duration proposed in Gopalan et al. (2014) as a measure of the extent of deferred equity, we find that CEOs and non‐CEO executives with longer pay duration are less likely to leave the firm voluntarily. The talent retention role of deferred pay is mitigated by performance‐vesting provisions and signing bonuses offered by industry peers. Moreover, we also find that voluntary turnover is less sensitive to pay duration for executives who are perceived to be more talented and have more firm‐specific skills. Overall, our study highlights a strong link between compensation design and turnover of top executives. It suggests that firms take into account the need for retaining managerial talent in designing executive compensation.

Using detailed data for U.S. homeowners, we document a negative, nonlinear relation between the loan-to-value ratio (LTV) of homeowners’ primary residence and their labor income. Consistent with high LTV individuals experiencing constrained mobility, we find stronger effects among subprime, liquidity- constrained individuals and those living in regions with limited alternative local employment opportunities and strict noncompete law enforcement. Though high LTV individuals are less likely to move across MSAs, they are more likely to change jobs without changing their residence. We find no effects among similar neighboring renters employed at the same firm and with a similar job tenure.