Forthcoming Articles

Regulating Commission-Based Financial Advice: Evidence from a Natural Experiment

Stanislav Sokolinski

Do limitations on commissions paid to financial advisers reduce prices of financial products and stimulate investment? I examine these questions by estimating the causal effects of regulating commissions for mutual fund distribution. I exploit the unique institutional setting in Israel and the 2013 policy change when the government reduced commissions differently for different fund types. The reform led to a major decline in fund expense ratios and a consequent increase in fund flows. Funds with price-sensitive investors experienced a 35% larger inflows. I interpret these results as investor response to price competition fostered by a reduction in distribution costs.

Shareholder Litigation Risk and Firms’ Choice of External Growth

Chenchen Huang, Neslihan Ozkan, and Fangming Xu

We provide novel evidence showing that shareholder litigation risk influences firms’ choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk, low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms’ choices of boundary-expanding transactions.

Collateral Constraints, Financial Constraints, and Risk Management: Evidence from Anti-Recharacterization Laws

Douglas (DJ) Fairhurst and Yoonsoo Nam

We use the staggered enactment of anti-recharacterization laws as a plausibly exogenous shock to the value of securitizing collateral through Special Purpose Vehicles (SPVs) and test how collateral values impact corporate risk management. Following the laws’ enactment, we find increases in commodity, foreign exchange, and interest rate hedging, especially for firms with exposure to these risks and that rely on SPVs. Supporting the collateral constraints literature, the effect is weaker for firms that likely need the collateral for external financing, such as financially constrained firms. Our findings highlight fluctuations in collateral values as an important consideration in risk management decisions.

The Role of the Discount Rate in Investment and Employment Decisions

Stig Vinther Møller and Richard Priestley

Time variation in the discount rate affects investment and employment decisions in a manner consistent with Q-theory predictions. This evidence is uncovered when using cyclical consumption as proxy for the discount rate. The results, which are consistent across both U.S. and international data, suggest that firms respond rationally to variations in the cost of capital and that the discount rate has a substantial impact on macroeconomic dynamics and hence business cycle fluctuations.

The COVID-19 Crisis and the Allocation of Capital

Ran Duchin and Jarrad Harford

We summarize and synthesize the results of the papers in this symposium issue on research related to the COVID-19 Pandemic. We argue that, taken together, the papers present evidence that the pandemic resulted in a shock to capital allocation. The reasons include accelerating technological shifts that disrupted financial and real economic activities, thus affecting both the supply of capital and reshuffling the demand for capital across sectors and businesses, as well as unprecedent stimulus packages that allocated capital to individuals, firms, and local governments through a myriad of programs and program designs. We present additional evidence on the heterogeneous cross-industry impacts on profit, payout, investment, employment and productivity.

Venture Capitalists and COVID-19

Paul Gompers, Will Gornall, Steven N Kaplan, and Ilya A. Strebulaev

We survey over one thousand venture capitalists (VCs) on how the COVID-19 pandemic has affected their decisions and investments. VCs expect aggregate returns to be largely unchanged because winners have offset losers. This suggests the primary impact of COVID-19 has been an increase in volatility and uncertainty. We find only moderate evidence of disruption to VC capital flows. Despite the historical importance of in-person meetings, VCs do not report difficulty finding quality entrepreneurs. We also find little change in how VC allocate their time. Finally, our outcome measures are not correlated with local COVID-19 impact.

The COVID-19 Pandemic and Corporate Dividend Policy

Georg Cejnek, Otto Randl, and Josef Zechner

This paper shows for major equity markets that the proportion of index values attributable to the first five years of dividends dropped substantially in the first quarter of 2020 and that this drop has not been reversed by the end of the year. In the cross-section, this breakdown of dividend smoothing due to COVID-19 was less severe for firms with higher operating cash flows and more positively co-skewed stock returns and more pronounced for those with higher leverage and in the financial sector. Heavy dividend cutters also experienced a substantial increase in exposure to systematic risk.

Public Market Information and Venture Capital Investment

Brian Gibbons

I study VCs’ use of public market information and how attention to this information relates to private market investment outcomes. I link web traffic to public filings hosted on EDGAR to individual VCs. VCs analyze public information about industry peers before most deals. An increase in industry filing views relates positively to the probability of an exit through acquisition, suggesting that public information helps identify paths to acquisition. The effect is stronger when the VC has less access to private information — especially for low reputation VCs. Policymakers should consider spillover effects on private markets when setting public disclosure requirements.