We examine the impact of stock-price formation process on firms’ dividend smoothing using Regulation SHO. We find that pilot firms are more likely to increase dividends and less likely to omit them during the pilot program; however, they are more likely to decrease dividends after the program ends. These firms also smooth less and have higher adjustment speeds. Our findings are more pronounced for firms with higher information asymmetry, stronger financials, and weaker governance. In general, this study shows that financial markets tend to have a significant and long-lasting impact on dividend smoothing policy.

This study examines the impact of auditor quality on financial covenants in debt contracts. We conjecture that high‐quality auditors have two related effects on these debt covenants: (i) they encourage fewer and less restrictive covenants by providing assurance to lenders at contract inception and, consequently, (ii) they ensure a lower probability of eventual covenant violations. Consistent with the conjectures, we find that auditor quality is negatively associated with the intensity and tightness of financial covenants. Specifically, high‐quality auditors are associated with fewer covenants (especially performance covenants) and less binding covenants. Additionally, we find that auditor quality is negatively associated with the likelihood of covenant violations. In an ancillary test, we provide evidence that high‐quality auditors mitigate the detrimental effect of covenant violations on the cost of borrowing. Together, these findings highlight the important role of auditors in debt contracting.

We show that firms’ organization capital has a positive and economically important impact on innovation. Specifically, we find that firms with more organization capital have greater number of patents and receive more citations on their patents. The results are robust to alternative measures of organization capital and innovation, and endogeneity concerns. We also find that the ability to handle inherent difficulties associated with the innovation process and the reduction in managerial career concern threats are possible mechanisms through which organization capital affects firm innovation positively. These results provide strong evidence of the importance of a firm’s organization capital in their innovation process.

We show how external credit market development can affect corporate social responsibility. Using a sample of US public firms over the period 1991–2010, we find that bank deregulation negatively affects CSR performance. We argue that deregulation-induced banking competition enhances credit accessibility, thereby reducing firms’ incentives to pursue CSR as a means of securing stakeholder rewards. Empirical evidence shows that firms increase their use of debt financing in response to the intensified banking competition, and these firms experience a more pronounced decline in CSR performance. We alleviate the potential concern that the observed decline in CSR could be attributed to changes in bank monitoring following deregulation. Further analyses find that firms reduce CSR regardless of their material nature, suggesting that the primary driver of CSR could be the trade-off between costs and returns. Overall, our findings shed light on the strategic motives of CSR, which exhibits adaptability in response to business dynamism.

Prior studies find mixed evidence about the substitution relation between bank credit and trade credit. In this paper, using two bank interest rate deregulations in China, we revisit the substitution hypothesis by examining how exogenous increases in the availability of bank credit affect trade credit. We find that firms with higher credit risk increased their use of bank credit and reduced their use of trade credit after the 2004 bank interest rate ceiling deregulation, whereas firms with lower credit risk increased their use of bank credit and reduced their use of trade credit after the 2013 bank interest rate floor deregulation. Our results provide supportive evidence for the substitution hypothesis that firms reduce their use of trade credit after the relaxation of bank credit and suggest that bank credit is more favorable short-term financing than trade credit.

We find that organization capital is negatively related to the cost of bank loans. This finding is robust to additional analyses including those that address omitted variable bias and reverse causality. In addition, we find that organization capital reduces all-in-spread-undrawn. When we decompose the bank loan cost, we find that organization capital increases facility fees due to its risk-engendering characteristics. Finally, we find that organization capital is positively associated with a high likelihood of the presence of inventors and innovation output, consistent with the argument that organization capital is embedded in the key talent within a firm.

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.

This paper investigates the effect of CFO gender on corporate financial reporting decision making. Focusing on firms that experience changes of CFO from male to female, the paper compares the firms' degree of accounting conservatism between pre‐ and post‐transition periods. We find that female CFO s are more conservative in their financial reporting. In addition, we find that the relation between CFO gender and conservatism varies with the level of various firm risks, including litigation risk, default risk, systematic risk, and CFO ‐specific risk such as job security risk. We further find that the risk aversion of female CFO s is associated with less equity‐based compensation, lower firm risk, a higher tangibility level, and a lower dividend payout level. Overall, the study provides strong support for the notion that female CFO s are more risk averse than male CFO s, which leads female CFO s to adopt more conservative financial reporting policies.

We show that firms led by politically partisan CEOs are associated with a higher level of corporate tax sheltering than firms led by nonpartisan CEOs. Specifically, Republican CEOs are associated with more corporate tax sheltering even when their wealth is not tied with that of shareholders and when corporate governance is weak, suggesting that their tax sheltering decisions could be driven by idiosyncratic factors such as their political ideology. We also show that Democratic CEOs are associated with more corporate tax sheltering only when their stock-based incentives are high, suggesting that their tax sheltering decisions are more likely to be driven by economic incentives. In sum, our results support the political connection hypothesis in general but highlight that the specific factors driving partisan CEOs' tax sheltering behaviors differ. Our results imply that it may cost firms more to motivate Democratic CEOs to engage in more tax sheltering activities because such decisions go against their political beliefs regarding tax policies.

Despite the significance of social networks in influencing firm behavior, research on their impact on corporate tax behavior is limited. In this paper, we construct social networks of CFOs from U.S. companies based on their employment history, education, and non-professional activities. We find that firms with more socially connected CFOs have lower effective tax rates (ETR) compared to firms with less socially connected CFOs. This effect is more pronounced when corporate governance is weaker and managers have higher incentives. Furthermore, a firm's ETR decreases as CFO centrality increases. We do not observe similar results regarding the connectedness of boards of directors. Additionally, firm pairs exhibit similar ETRs when their CFOs are socially connected, suggesting an exchange of tax-related information among CFOs through their social networks. We also find that the past ETRs of firms with central CFOs predict the ETRs of firms with non-central CFOs. This indicates that less socially connected CFOs tend to follow the tax planning strategies of their more socially connected counterparts. Overall, our findings indicate that more socially connected CFOs possess more relevant information and resources regarding tax planning, leading to the adoption of more aggressive tax strategies compared to their less socially connected counterparts.