Many emerging markets allow foreign investment as a way to reform domestic markets. Extant studies have found a positive externality on innovation brought forth by foreign direct investment (FDI); however, we know very little about the externality of another form of foreign investment, ownership by foreign institutional investors (FII), on innovation. In this paper, we document one form of FII externality by showing that foreign institutional ownership of the customer firm results in higher supplier innovation. We also show that the FII externality on supplier innovation is stronger when customers have more influence on the suppliers and when the FIIs can facilitate information flow better. Our findings suggest that the real impact of FII can go beyond the underlying firms, and promoting FII may benefit firms, especially smaller firms in emerging countries that do not directly have foreign ownership.

We study how firms build relations with local governments in emerging markets without established rules of political lobbying. We document that following a turnover of the Party Secretary or mayor of a city in China, firms (especially privately owned enterprises, POEs hereafter) headquartered in that city significantly increase their “perk spending,” for example, expenses for travel and entertainment among others. Both the instrumental-variable-based results and heterogeneity analysis are consistent with the interpretation that the perk spending is used to build relations with local governments. In addition, we find that local political turnover in a city tends to be followed by changes of the Chairmen or the CEOs of state-owned enterprises that are controlled by the local government. We also discuss and rule out several alternative explanations for the above findings.

We provide novel evidence showing that shareholder litigation risk influences firms’ choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk and low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms’ choices of boundary-expanding transactions.

We combine personnel records of the United States federal bureaucracy from 1997 to 2019 with administrative voter registration data to study how ideological alignment between politicians and bureaucrats affects turnover and performance. We document significant partisan cycles and turnover among political appointees. By contrast, we find no political cycles in the civil service. At any point in time, a sizable share of bureaucrats is ideologically misaligned with their political leaders. We study the performance implications of this misalignment for the case of procurement officers. Exploiting presidential transitions as a source of “within‐bureaucrat” variation in political alignment, we find that procurement contracts overseen by misaligned officers exhibit greater cost overruns and delays. We provide evidence consistent with a general “morale effect,” whereby misaligned bureaucrats are less motivated to pursue the organizational mission. Our results thus help to shed some of the first light on the costs of ideological misalignment within public organizations.

An audit committee (AC) report is the primary channel through which investors learn about the responsibilities and activities of an AC. AC members may use personal language (“we”) or impersonal language (“the audit committee”) in an AC report. Psychology research suggests that personal (vs. impersonal) language signals that the language user has greater warmth and sense of communion (i.e., being part of a larger group). Applying this theory, we predict that an AC's use of personal (vs. impersonal) language leads investors to perceive a warmer and more communal AC, and that an AC's perceived warmth/communion (cued by personal language) positively impacts investor judgments. We further posit that the positive effect of personal language is stronger when AC compensation is largely short term than long term. This is because investors need more assurance of AC oversight effectiveness when AC compensation is short term, which makes investors rely more on heuristic cues such as AC language to make judgments. Consistent with this prediction, we find that when AC compensation is largely short term, nonprofessional investors (proxied by Master of Business Administration students) react more positively to an AC's use of personal language than impersonal language. The effect of AC language is insignificant when AC compensation is largely long term, as the long‐term compensation structure already provides assurance about the AC's oversight effectiveness, and thus, investors rely less on heuristic cues. Furthermore, we find that the perceived warmth of AC members explains the effect of AC language. Finally, our interviews with nonprofessional investors corroborate some of our main findings and validate their practice implications.

This paper examines the benefits of having an executive or director elected as a fellow of the Chinese Academies of Sciences and Engineering (i.e., a star academician). Evidence indicates that markets react positively to news of company executives/directors being elected. We further document that having a fellow spurs innovation, brings additional government subsidy, increases Tobin's q, lowers costs of capital, attracts analyst attention, and suppresses audit fees in the years following successful elections. These outcomes appear to be largely driven by fellows who (i) are executives rather than non-executive directors, and (ii) have held no government office.

We study the real effects of certification to demonstrate the value of mandatory certification over and above mandatory disclosure in enhancing investment efficiency. In our model, a firm's manager selects a project to maximize the firm's short‐term stock price, which is a function of her certification and disclosure decisions about the outcome of the project. Although the manager might be either forthcoming or strategic with regard to the disclosure of her private information, she can strategically choose whether to incur a cost or not to certify her disclosure, unless mandated. The manager always selects the first‐best project when both certification and disclosure are mandatory. However, when certification is voluntary, project selection is inefficient. In addition, mandating disclosure without mandating certification can lead to lower investment efficiency than mandating neither. In justifying why mandatory certification is beneficial for public firms, our results offer a note of caution regarding the contemplated regulatory moves for increased disclosures by public firms without corresponding certification requirements, for example, the recent SEC proposal requiring extensive climate‐related disclosure.

This study investigates the financial and operational implications of enterprise systems (ESs) in corporate risk management. Using matched difference‐in‐differences analyses based on ES implementation events, we document a significant reduction in the volatility of operating cash flows following ES implementations. We further show that ES implementers have better post‐implementation operational efficiency than matched non‐ES firms and better manage sales, costs of sales, working capital, and operating expenses to reduce operating cash flow volatility. Consistent with the benefits of lower cash flow volatility documented in prior literature, we find ES implementers demonstrate higher investment efficiency, lower reliance on external financing, and higher debt capacity post‐ES‐implementation than the matched non‐ES firms. Our study sheds light on the economic benefits of utilizing ESs in corporate risk management and in so doing responds to the paucity of empirical research in this area.

This paper investigates whether banks value the presence of prosocial CEOs when designing loan contracts. Using personal charitable donation behavior to identify prosocial CEOs, we find robust evidence that the presence of prosocial CEOs is negatively related to firms' cost of debt. We address endogeneity concerns by employing a difference-in-differences setting that exploits exogenous CEO turnover events. Moreover, we show that the presence of prosocial CEOs mitigates the conflicts of interest between shareholders and creditors, thereby reduces the agency cost of debt. In addition, we find that the effect of prosocial CEOs also extends to non-price loan contract terms. Finally, we show that the presence of prosocial CEOs has positive implications for firm value and is associated with lower default risk.