Forthcoming Articles

Alternative Work Arrangements and Cost of Equity: Evidence from a Quasi-Natural Experiment

Atsushi Chino

We examine whether firms’ use of alternative work arrangements, particularly temporary agency workers, affects their cost of equity. Exploiting a major labor market deregulation in Japan that induced manufacturing firms to increase their employment of temporary agency workers, we show that the cost of equity decreased in manufacturing firms, relative to nonmanufacturing firms, after the deregulation. Further analysis using variations within manufacturing firms provides corroborating evidence. The rigidity in labor expenses and the cost of debt also decreased in manufacturing firms. Overall, alternative work arrangements increase the flexibility in labor costs, leading to lower operating leverage and cost of capital.

Corporate Leverage and the Dynamics of Its Components

Armen G. Hovakimian and Gayane Hovakimian

We investigate the dynamics of observed and target leverage ratios and deviations from the targets. The cross-sectional persistence in leverage ratios is driven by persistent targets, whereas the time series variation is driven by transitory deviations from targets. Consistent with dynamic trade-off theories, persistence is higher when the costs of deviating from targets are lower and when the adjustment costs are higher. Deviations are less persistent for firms that are over-levered and firms that are smaller, younger, focused, or have lower credit ratings. In recessions, excess leverage is less persistent for larger firms and is more persistent for smaller firms.

Unconventional Monetary Policy, Bank Lending, and Security Holdings: The Yield-Induced Portfolio Rebalancing Channel

Karol Paludkiewicz

This paper studies the impact of unconventional monetary policy on bank lending and security holdings. I exploit granular security register data and use a difference-in- differences regression setup to provide evidence for a yield-induced portfolio rebalancing: Banks experiencing large average yield declines in their securities portfolio – induced by unconventional monetary policy – increase their real sector lending more strongly relative to other banks. The effect is stronger for banks facing many reinvestment decisions. Moreover, I find that banks with large yield declines reduce their government bond holdings and sell securities bought under the ECB’s asset purchase program.

Intangible Capital and Leverage

Philipp Horsch, Philip Longoni, and David Oesch

We investigate the causal effect of intangible capital on leverage. To address endogeneity, we exploit patent invalidations by the US Court of Appeals for the Federal Circuit, where judges are randomly assigned to cases. Differences in judge leniency provide exogenous variation in the probability that firms’ patents are invalidated. Using this probability as an instrument for exogenous losses in intangible capital, we find a patent invalidation leads to a 14.1% reduction in leverage, suggesting that intangible capital causally supports leverage. This local average treatment effect is stronger if the invalidated patent serves as loan collateral and among less creditworthy firms.

Do (Should) Brokers Route Limit Orders to Options Exchanges That Purchase Order Flow?

Robert Battalio, Todd Griffith, and Robert Van Ness

We examine whether options exchanges’ pricing schedules affect broker order routing behavior and limit order execution quality. We find that some brokers seemingly maximize the value of their order flow by selling marketable orders and sending nonmarketable orders to exchanges that offer large liquidity rebates. Other brokers appear to bypass liquidity rebates by routing both marketable and nonmarketable orders to exchanges that purchase order flow. Using a decision by the PHLX to change its trading protocol, we provide empirical evidence that brokers can enhance limit order execution quality by routing nonmarketable limit orders to options exchanges that purchase order flow.


Does Independent Advice to the Board Affect CEO Compensation?

Tor-Erik Bakke and Hamed Mahmudi

This paper investigates the role external advice plays in the board’s determination of CEO compensation. We show that CEO incentive pay increases with the degree of compensation consultant independence using a quasi-natural experiment provided by the creation of an independent consultant after separation from an affiliated consultant. Specifically, switching to an independent consultant significantly increases Pay-Performance Sensitivity and Relative Performance Evaluation of CEO contracts. Despite the benefits of independent advice, independent consultants may not be hired due to the influence of powerful CEOs or because boards already possess adequate expertise.

Corporate Liquidity, Acquisitions, and Macroeconomic Conditions

Isil Erel, Yeejin Jang, Bernadette Minton, and Michael Weisbach

This paper evaluates how the relation between firms’ cash holdings and their acquisition decisions changes over macroeconomic cycles using a sample of 47,378 acquisitions from 36 countries between 1997 and 2014. Higher cash holdings and stronger macroeconomic conditions each increase the likelihood a firm will make an acquisition. However, larger cash holdings decrease the sensitivity of acquisitions to macroeconomic factors, suggesting that cash holdings lower financing constraints during times when the cost of external finance is high. Announcement day abnormal returns for acquirers follow a consistent pattern: they decrease with acquirer cash holdings and with better macroeconomic conditions.

Less Popular But More Effective Toeholds in Corporate Takeovers

Yun Dai, Sebastian Gryglewicz, and Han T.J. Smit

Despite their claimed advantages, toehold strategies have rarely been adopted in recent corporate takeovers and do not seem to increase acquirer returns. Are toeholds ineffective and becoming obsolete? We show that this is not the case. We find that toeholds are preferred for executing difficult takeovers. After controlling for such endogeneity in toehold-based acquisitions, toeholds do increase returns to acquirers. Moreover, the performance of toehold strategies improves over time due to more selective and more effective acquisition of toeholds. We find that this time trend is in part explained by learning-by-doing from past toehold acquisitions.