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"John, Kose"
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Corporate Governance and Risk-Taking
Better investor protection could lead corporations to undertake riskier but value-enhancing investments. For example, better investor protection mitigates the taking of private benefits leading to excess risk-avoidance. Further, in better investor protection environments, stakeholders like creditors, labor groups, and the government are less effective in reducing corporate risk-taking for their self-interest. However, arguments can also be made for a negative relationship between investor protection and risk-taking. Using a cross-country panel and a U.S.-only sample, we find that corporate risk-taking and firm growth rates are positively related to the quality of investor protection.
Journal Article
Do Classified Boards Deter Takeovers? Evidence from Merger Waves
We exploit the arrival of industry-wide synergistic merger waves to identify whether classified boards deter takeover bids. In a stylized model, we show that when target classified boards are costly to bidders, their negative effect on takeover likelihood should be more pronounced during merger waves. Using a sample of takeover bids in the United States between 1990 and 2016, we find strong evidence supporting this prediction. The results are robust to accounting for the benefits of classified boards and controlling for other antitakeover provisions. Our findings suggest that classified boards effectively reduce a firm’s exposure to the takeover market.
Journal Article
Urban Agglomeration and CEO Compensation
We examine the relation between the agglomeration of firms around big cities and
chief executive officer (CEO) compensation. We find a positive relation among the
metropolitan size of a firm’s headquarters, the total and equity portion
of its CEO’s pay, and the quality of CEO educational attainment. We also
find that CEOs gradually increase their human capital in major metropolitan areas and
are rewarded for this upon relocation to smaller cities. Taken together, the results
suggest that urban agglomeration reflects local network spillovers and faster
learning of skilled individuals, for which firms are willing to pay a premium and
which are therefore important factors in CEO compensation.
Journal Article
Earthly Reward to the Religious: Religiosity and the Costs of Public and Private Debt
We document that a firm’s culture, specifically, its religiosity, affects its cost of debt. Firms in higher-religiosity counties have higher credit ratings and lower debt costs. The impact of religiosity is stronger for firms with greater information asymmetry and during recessions. Further, religiosity has additional explanatory power for the cost of bank loans (but not the cost of public bonds) beyond its impact through ratings. This supports the argument that banks have superior abilities in pricing soft information, such as corporate culture. Finally, the impact of religiosity is stronger when the lender is a small bank.
Journal Article
Auditor Expertise and Bank Failure: Do Going Concern Opinions Predict Bank Closure?
This study investigates how the quality of engagement auditors, assessed using the auditor’s industry expertise and size at both national and state levels, influences the likelihood of going concern opinion (GCO) issuance for U.S. banks from 2002 to 2023. We also examine how auditor quality affects the accuracy of GCOs, specifically regarding Type I (false positive) and Type II (false negative) errors in GCO issuance. Using a dataset of 4992 bank-year observations from 414 unique banks, we analyze the correlations between auditor characteristics and these error types. We find that state-level audit industry experts issue significantly more accurate GCOs, demonstrating lower rates of both Type I and Type II errors compared to their counterparts. National-level experts and larger audit firms primarily show a reduced likelihood of Type II errors, indicating a more conservative approach. Our findings underscore the importance of localized auditor expertise in assessing bank financial health and suggest that enhanced collaboration between auditors and regulators could improve the predictive power of GCOs. These results offer important implications for regulatory policy and emphasize the need for improved audit standards to bolster financial system stability.
Journal Article
Actively Keeping Secrets From Creditors: Evidence From the Uniform Trade Secrets Act
We find that an increase in a firm’s incentives to use trade secrets to protect its intellectual property results in a more actively managed capital structure. Exploiting U.S. states’ adoption of the Uniform Trade Secrets Act as a positive “shock” in the protection afforded to trade secrets, we find that firms covered by the Act reduce debt levels while increasing investments in intangibles. Additional tests suggest that firms fund these financing and investment activities by issuing more equity. Consistent with an increase in overall intangibility magnifying contracting problems with creditors, we find that covered firms experience higher costs of debt.
Journal Article
Does Corporate Governance Matter More for High Financial Slack Firms?
The effect of corporate governance may depend on a firm’s financial slack. On one hand, financial slack may be spent by managers for their private benefits; a high level is likely associated with severe agency conflicts. Thus corporate governance matters more for high financial slack firms (i.e., the
wasteful spending hypothesis
). On the other hand, financial slack provides insurance against future uncertainties; a low level may signal deviations from the best interests of shareholders. Then corporate governance is more effective for low financial slack firms (i.e., the
precautionary needs hypothesis
). We differentiate the two hypotheses using the passage of antitakeover laws to identify exogenous variation in governance. Consistent with the wasteful spending hypothesis, the laws’ passage has a larger negative impact on the operating and stock market performance of high financial slack firms. Further analysis shows that these firms do not invest more but become less efficient at cost management after the laws’ passage.
This paper was accepted by Wei Jiang, finance
.
Journal Article
R&D investment intensity and jump volatility of stock price
This paper studies the important but unexplored relationship between R&D investment intensity and different components of stock price volatility. The total volatility of stock price is decomposed into a continuous component and a jump component. We find that firms with higher R&D investment intensity have less jump volatility of stock price. We explain the findings through a channel of stock liquidity and information disclosure. We argue that R&D-intensive firms prefer higher stock liquidity, and empirically document that they achieve higher stock liquidity by actively releasing R&D information. We apply a textual analysis technique and show that R&D-intensive firms voluntarily disclose more R&D information in 10-K, 10-Q and 8-K filings, resulting in higher stock liquidity and hence less jump volatility of stock price. The negative relationship between R&D investment intensity and jump volatility of stock price is more pronounced for financially constrained firms, which have stronger incentives to release R&D information and hence increase stock liquidity. Propensity-score matching approach and instrumental variable approach are used to address endogeneity. A rich set of robustness tests are conducted to confirm the findings.
Journal Article