This paper proposes consistent testing methods for examining the effect of a policy treatment on the whole distribution of a response outcome within the setting of a regression discontinuity design. These methods are particularly useful when a policy is expected to produce treatment effects that are heterogeneous along some unobserved characteristics. The test statistics are Kolmogorov-Smirnov-type and are asymptotically distribution free when the data are i.i.d. The proposed tests are applied to three seminal RD studies (Pop-Eleches & Urquiola, 2013; Abdulkadiroglu, Angrist, & Pathak, 2014; and Battistin et al., 2009).

This study analyzes how promotion-based tournament incentives for non-CEO senior executives affect corporate innovation. We measure tournament incentives using the pay gap between a CEO and the next layer of senior executives. We find that tournament incentives are positively related to innovative efficiency, as measured by the number of patents and patent citations generated per million dollars of R&D expense. Our main finding holds in an instrumental-variable analysis and regressions using alternative innovation measures, including patent generality and originality indices and stock market reactions to patent grants. Consistent with prior theories, the positive effect of tournament incentives is found to be particularly pronounced during the period prior to CEO turnovers.

We examine whether insiders’ pledging of company stock as collateral for personal loans influences a company’s debt contracting. We attempt to identify causality through difference-in-differences analyses of an unexpected legislative change that exogenously reduced board directors’ pledging incentives. We find that firms with higher initial pledging levels, which subsequently experienced a significant decline in pledging ratios due to the regulation, benefited from lower loan spreads and less stringent non-price loan terms. We further hypothesize and provide evidence that the positive impact of insider pledging on corporate borrowing costs is less pronounced in closely held firms. Examining the mechanisms, we find that share pledging is positively related to earnings management, firm risk-taking behaviors, and agency problems. Overall, these findings suggest that banks perceive insider share pledging as engendering significant risks.

This paper studies the real effects of foreign real estate capital inflows. Using transaction-level data, we document (i) a “China shock” in the U.S. housing market characterized by surging foreign Chinese housing purchases after 2008, and (ii) “home bias” in these purchases, as they concentrate in neighborhoods historically populated by ethnic Chinese. Exploiting their temporal and spatial variation, we find that these capital inflows raise local employment, with the effect transmitted through a housing net worth channel. However, they displace local lower-income residents. Our results show that real estate capital inflows can both stimulate the real economy and induce gentrification.

We find an overall negative relation between CEO inside debt holdings and the cost of equity capital. Such a negative relation holds in an instrumental-variable analysis, a test using changes in variables due to CEO turnover events, a test using seasoned equity offering (SEO) underpricing as an alternate cost of equity measure, and a difference-in-differences test based on the implementation of Internal Revenue Code Section 409A Final Regulations. Additionally, the negative relation between inside debt and the cost of equity capital is nonlinear, suggesting the existence of optimal inside debt compensation that can minimize cost of capital. The negative relation is less pronounced in firms with pre-funded executive pension plans and in firms that provide executives with the pension lump-sum option. We also provide evidence that inside debt lowers the cost of equity more for excessively levered firms. Collectively, these findings suggest that shareholders value the beneficial role of CEO debt-like compensation in constraining excessive managerial risk taking.

We examine the effect of media coverage on firm innovation. Using a comprehensive sample of corporate news coverage and patenting over the period from 2000 to 2012, we find a negative relation between media coverage and firm innovation. We further document the two offsetting economic mechanisms underlying the impact of media coverage on innovation: the media’s role of short-term pressure on managers relates negatively to innovation, while its role of mitigating financial constraints is positively associated with innovation. Our findings provide new insights into the effect of news coverage on firms’ long-term growth.

In this study we analyze how CEO risk incentives affect the efficiency of research and development (R&D) investments. We examine a sample of 843 cases in which firms increase their R&D investments by an economically significant amount over the period of 1995–2006. We find that firms with higher sensitivity of CEO compensation portfolio value to stock volatility (vega) are more likely to have large increases in R&D investments. More importantly, we find that high-vega firms experience lower abnormal stock returns and lower operating performance compared to their low-vega counterparts following the R&D increases. Our main results hold in a variety of robustness tests. The results are consistent with the conjecture that high-vega compensation portfolios may induce managers to overinvest in inefficient R&D projects and therefore hurt firm performance.

Firms with similar credit ratings, particularly high-yield ones, exhibit strong comovement in stock returns . After a firm is downgraded to high-yield status, it comoves more with other high-yield firms and less with investment-grade ones, a pattern not fully explained by changes in fundamentals or other firm characteristics. We find evidence that suggests the investor clientele explanation for rating-related comovement, potentially arising from heterogeneous lottery preferences. High-yield-averse funds reduce their holdings of firms being downgraded to high-yield status, particularly those that are more lottery-like, much more significantly than high-yield-prone funds. Furthermore, a firm’s stock returns become sensitive to flows into high-yield-prone funds after being downgraded to high-yield status, consistent with the price impact of rating-based category investing.

Agency theory suggests that outside shareholders prefer higher dividend payouts in order to reduce the free cash flows of firms that are under the insiders’ control. Our study investigates the effects of mutual funds, typically the most important and influential type of outside shareholder, on firms’ dividend payouts in China during the period from 2003 to 2011. We find that mutual funds influence firms to pay higher cash dividends. The results are consistent with the predictions from exit theory. The effects are more pronounced in firms controlled by state and regional governments and in firms with relatively higher free cash flows. We also find evidence that the mutual funds’ effects are stronger when their investment horizon is longer and the ownership interest is larger. Other institutional investors, such as banks, insurance companies, and securities companies have a lower exit threat and do not have an influence on firms’ cash dividend payments or financial performances.