Forthcoming Articles

Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers

Ugur Lel, Gerald S. Martin, and Zhongling Qin

Upon the revelation of corporate misconduct by firms in their portfolios, institutional investors experience a significant discount in the market value of their portfolios, excluding misconduct firms, creating a short-term spillover that averages $92.7 billion losses per year. We examine an expansive set of channels under which this spillover to non-target firms can occur, and find that it reflects the loss of the embedded value of monitoring by a common institutional owner, enforcement wave activity, and industry peer and business relationships. Institutional investors also experience significant abnormal outflow of funds in the year following the misconduct event.

Retail Attention, Institutional Attention

Hongqi Liu, Lin Peng, and Yi Tang

We document distinctly different clientele effects in investor attention and return responses to information. Macro news crowds out retail investor attention to firms’ earnings news by 49%. For stocks with high retail ownership, macro news dampens earnings announcement returns by 17% and substantially increases post-announcement drift, especially during high VIX periods. In contrast, macro news increases institutional investor attention to scheduled earnings announcements but not their attention to unscheduled analysts’ forecast revisions. The findings confirm the implications of rational inattention models and highlight the importance of considering clientele effects in understanding the effect of news on attention and asset prices.

The Capital Structure Puzzle: What Are We Missing?

Harry DeAngelo

An important piece of the capital structure puzzle has been missing, and it is not a contracting friction. It is recognition that managers do not have sufficient knowledge to optimize capital structure with any real precision. The literature critique in this paper (i) identifies the conceptual sources of the main empirical failures of the leading models of capital structure and (ii) shows how those failures can be repaired by taking into account imperfect managerial knowledge and several other factors. The analysis yields a compact set of principles for thinking about capital structure in an empirically supported way.

Financial Costs of Judicial Inexperience: Evidence from Corporate Bankruptcies

Benjamin Iverson, Joshua Madsen, Wei Wang, and Qiping Xu

Exploiting the random assignment of judges to corporate bankruptcy filings, we estimate financial costs of judicial inexperience. Despite new judges’ prior legal experience, formal education, and rigorous hiring process, their public Chapter 11 cases spend 19% more time in bankruptcy, realize 31% higher legal and professional fees, and 21% lower creditor recovery rates. Examining possible mechanisms, we find that new judges take longer to rule on motions and cases assigned to these judges file more plans of reorganization. Conservative estimates suggest that minor policy adjustments could increase creditor recoveries by approximately $16.8 billion for the public firms in our sample.

The Response to Share Mispricing by Issuing Firms and Short Sellers

Paul Schultz

Short sale constrained stocks are overpriced on average. I show that firms exploit mispricing by selling shares when their stock is short sale constrained and repurchasing shares when their stock is easily shorted. Stocks underperform following SEOs if and only the stock is difficult to short. This suggests that some SEOs are motivated by mispricing while others are not. Short selling costs make it difficult for investors to profit from the poor performance following SEOs. Short selling and SEOs are alternative ways to supply shares to investors and firms become the low cost share provider when short selling is costly.

Synthetic Options and Implied Volatility for the Corporate Bond Market

Steven Shu-Hsiu Chen, Hitesh Doshi, and Sang Byung Seo

We synthetically create option contracts on a corporate bond index using CDX swaptions, overcoming the limitations that stem from the lack of traded corporate bond options. Our approach allows us to estimate forward-looking moments concerning the corporate bond market in a model-free manner. By constructing an aggregate volatility measure and the associated variance risk premium, we examine the role of volatility risk in the corporate bond market. We highlight that the ex ante conditional second and higher moments we estimate from synthetic corporate bond options carry important implications for credit risk models, providing an extra basis for testing their validity.

Inter-Firm Inventor Collaboration and Path-Breaking Innovation: Evidence from Inventor Teams Post-Merger

Kai Li and Jin Wang

Using a large and unique data set tracking inventors’ career paths following mergers and acquisitions over the period 1981–2012, we show that collaboration between acquirer and target inventors post-merger is associated with more path-breaking patents than those filed by either acquirer or target inventor-only teams. We further show that such collaboration is more important in improving acquirers’ innovation capabilities than hiring target inventors and knowledge spillovers. Finally, we show that recombining tacit knowledge embodied in the human capital of acquirer and target inventors is likely the mechanism. We conclude that inter-firm inventor collaboration is one key means for achieving synergies.

Crises as Opportunities for Growth: The Strategic Value of Business Group Affiliation

Ronald W. Masulis, Peter Kien Pham, Jason Zein, and Alvin E. S. Ang

We document a novel strategic motive for family business groups to utilize their internal capital markets (ICMs) during financial crises. We find that crisis-period group ICM activity is targeted toward exerting product market dominance over standalone rivals. Groups make significant post-crisis gains in market share that are concentrated among affiliates (and industry segments within affiliates) operating in highly competitive product markets, where capturing such gains is difficult in normal times. These patterns are observed only in emerging markets, suggesting that ICMs enable groups to exploit crises to realize long-term competitive advantages only when rivals face chronic financing frictions.