Strategic alliances are voluntary corporate arrangements for mutual benefit. Although alliances are common as an alternative to M&As, they require cooperation between alliance partners who continue to operate as independent companies. Thus, relational risk—the probability and consequences of unsatisfactory cooperation or opportunistic behavior—is inherent in alliances and a major determinant of alliance success. In this paper, we examine and find that alliance announcement CARs are higher for companies sharing the same auditor with their alliance partner. Further, our findings suggest that the shared auditor effect is stronger for alliances where potential relational risk between alliance partners is greater. Our findings hold when we use “withdrawn” (i.e., the withdrawal of an announced alliance before its start date) as an alternative, albeit inverse, measure of alliance success. Collectively, we provide novel evidence which suggests that auditors add shareholder value by playing a matchmaking role in alliance formation, building inter-company trust and mitigating relational risk by facilitating the sharing of non-financial information between potential alliance partners among their audit clients.

When corporations make an effort to be socially responsible beyond what is required by the law, this effort is often described as strategic—made mainly for the shareholders’ or managers’ benefit. A large body of literature corroborates this belief. But, could the incentives for corporate social responsibility (CSR) come from an altruistic inclination fostered by the social capital of the region in which the firm is headquartered? We investigate whether this phenomenon exists by examining the association between the social capital in the region and the firm’s CSR. We find that a firm from a high social capital region exhibits higher CSR. This result suggests that the self-interest of shareholders or mangers does not explain all of the firm’s CSR, but the altruistic inclination from the region might also play a role.

We find that societal trust—the extent to which residents of a country trust others—is associated with a more efficient bankruptcy process. Bankruptcy resolutions are faster, efficient outcomes are more likely, and the value lost during the bankruptcy process is lower in countries with higher societal trust. This effect of societal trust on the efficiency of the bankruptcy process is more pronounced in countries with low-income per capita, and in corrupt countries. Our results are derived from the analysis of survey data concerning the outcomes of a hypothetical firm's bankruptcy in 99 countries from 2004 to 2020, a dataset also utilized by Djankov et al. (2008).

We examine the impact of social capital on audit fees. We find that firms headquartered in U.S. counties with high social capital pay lower audit fees. Social capital measures the level of mutual trust in a region. Our results suggest that auditors judge the trustworthiness of their clients based on where the firm is headquartered and charge a premium when they trust the firm less. The basis of our results is the examination of more than 28,000 audit fees for more than 5,000 firms spanning the period of 2000 to 2009. The results are robust to controlling for a large number of firm-level and county-level characteristics.

Stock repurchases are controversial. Researchers often view the positive association between free cash flow and the volume of the stock repurchases to be in the shareholders’ interest and the positive association between executive options and stock repurchases to be in the managers’ interest. Using firms’ corporate social responsibility (CSR) ratings as a measure of ethical culture—one that increases the cost of self-serving behavior for managers— we examine whether a firm’s CSR rating is related to its stock repurchase decisions. Although the baseline regression shows a positive association between CSR and repurchases, we find that CSR amplifies the positive association between free cash flow and stock repurchases and lessens the positive association between executive options and stock repurchases. These results indicate that ethical culture might play a role in repurchase decisions: it may encourage repurchases aligned with shareholders’ interests and discourage those primarily in managers’ interest. Furthermore, we also find that high CSR firms are associated with a greater completion rate of announced repurchase programs and receive more favorable stock market reaction to their repurchase announcements.

We find that managers obfuscate during conference calls when their firm's headquarters is in a politically corrupt state, and they do so to shield assets from corrupt officials. The positive association between corruption and obfuscation by managers is much stronger when the expropriation risks are higher, such as when the firm (a) does not pay dividends, (b) is making a profit, (c) has more cash, (d) has fewer subsidiaries, and (e) is not making any political contributions. We do not find evidence that managers obfuscate during conference calls to hide their self-dealing.

Pursuing delinquent borrowers requires considerable effort, and creditors may lack the incentive to exert this costly effort in uncompetitive banking sectors. To examine this, we use a uniquely large data set of public and private corporate bankruptcy filings spanning a banking-sector reform that deregulated bank entry across different regions of India. We find that increased banking competition is associated with more firms seeking a stay on assets, a decline in bankruptcy duration, and a shift toward workouts rather than liquidations. The results are consistent with creditors exerting greater effort to pursue delinquent firms and resolve bankruptcies more quickly when competition increases.

We posit that credit ratings are higher for firms headquartered in high social capital regions, where managers are more likely to be trustworthy. To test this hypothesis, 9460 corporate debt ratings of US firms from 2001– 2015 was examined. We find that firms headquartered in a county with high social capital in the US have a higher credit rating. This effect is incremental and economically comparable to that of corporate social responsibility. Additional tests suggest that the impact of social capital on ratings is likely because analysts find them more credible. We conclude that credit analysts may consider the social norm around the firm's headquarters when rating firms.

We use strategic alliances as a setting to examine whether the readability of a firm's partner's 10-K matters. We find that the increase in the cumulative abnormal return (CAR) around the announcement of an alliance is relatively lower when the firm's partner in a strategic alliance has a less readable 10-K report. Additional tests show that the impact of the readability of a partner's 10-K is much stronger when investors suspect insufficient due diligence before the alliance's formation, when the partner is from a different industry, and when the alliance occurs before the Sarbanes–Oxley Act. Overall, our results show that the readability of a partner's annual report matters—it pays to partner with a firm that writes these reports well.