Forthcoming Articles

Board Governance and Investment Sensitivity to Stock Price: International Evidence

Hamdi Driss

This paper examines the effect of board governance on investment efficiency. I use the staggered enactment of board reforms in 41 countries as a shock to board structure that exogenously improves the quality of board oversight of managers. I find that investment–Q sensitivity improves by roughly half post-reform. This effect is more pronounced for firms that are more exposed to the reforms or when external governance mechanisms are less likely to discipline managers. These findings suggest that increased board oversight strengthens managers’ incentives to make investment decisions that are more in line with their firms’ growth opportunities.

Workforce Policies and Operational Risk: Evidence from U.S. Bank Holding Companies

Filippo Curti, Larry Fauver, and Atanas Mihov

Using supervisory data on operational losses from large U.S. bank holding companies (BHCs), we show that BHCs with socially responsible workforce policies suffer lower operational losses per dollar of total assets. The association significantly varies by the type of workforce policies and the type of operational losses. It is driven not only by small frequent losses, but also by severe tail operational risk events. Further, the risk-reducing effects of the socially responsible workforce policies are stronger for larger BHCs with more employees. Our findings have important implications for banking organization performance, risk, and supervision.

CEO Compensation Incentives and Playing It Safe: Evidence from FAS 123R

Nicholas F. Carline, Oksana Pryshchepa, and Bo Wang

This paper uses FAS 123R regulation to examine how reduction in CEO compensation incentives affects managerial `playing-it-safe’ behavior. Using proxies reflecting deliberate managerial efforts to change firm risk, difference-in-difference tests show that affected firms drastically reduce both systematic and idiosyncratic risks, leading to an 8% decline in total firm risk. These reductions in risk are achieved by shifting to safer, but low-Q, segments while closing the riskier ones, without significant changes in investment levels. Our findings suggest that decrease in risk-taking incentives provided by option compensation, when not compensated for by alternative incentives or governance mechanisms, exacerbates risk-related agency problem.

Negation of Sanctions: The Personal Effect of Political Contributions

Sarah Fulmer, April Knill, and Xiaoyun Yu

We show that political contributions are associated with reduced civil and criminal sanctions for fraudulent executives. These managers benefit more from contributions if their firm also gained from the fraud, if they occupy top positions in firms with weak boards, or if they contribute to powerful politicians. Political contributions reduce budgetary resources for government enforcers and lengthen the SEC’s case time-to-resolution. They also facilitate penalty transfer from fraudulent managers to the firm, resulting in their entrenchment and long-term destruction of shareholder value. Our findings highlight an agency cost of political contributions and a mechanism undermining the disciplining effect of regulations.

Do Private Equity Managers Raise Funds on (Sur)real Returns? Evidence from Deal-Level Data

Niklas Hüther

Recent studies on agency problems in private equity fueled the suspicion that fund managers strategically manipulate performance estimates around fundraising times. While these studies use aggregated portfolio data, this paper offers the first analysis of “window dressing” in private equity based on deal-level performance. In contrast to previous findings of a smoking gun at the fund level, I do not find any evidence of inflated performance at the deal level. Fund performance peaks are driven by a cohort effect whereby late investments are made under pressure before fundraising and have lower returns than those made earlier in the fund’s life.

Investor Behavior at the 52 Week High

Joshua Della Vedova, Andrew Grant, and Joakim Westerholm

This study uncovers how household investors intensify the effect of the 52 week high (52WH): increased volume and momentum-like returns at the 52WH price. Using daily household and institutional trading data, we find that households sharply increase their selling, particularly with limit orders at the 52WH price. This behavior is indicative of anchoring, as it is robust to past returns and intensified by proximity, market uncertainty, and salience of the 52WH. This uninformed limit order selling at and prior to the 52WH leads to a doubling of unconditional 52WH anomaly returns. Post-event returns benefit institutions, which act as counterparties.

Patent Trolls and the Market for Acquisitions

Arash Dayani

I study the effect of patent-infringement claims by patent trolls on acquisitions of small firms. Exploiting staggered adoption of state anti-patent troll laws, I find that the laws have two effects. First, the number of acquisitions of small firms declines after these laws are adopted. Second, the anti-troll laws increase the acquisition price for acquirers. The market reflects the increased cost of acquisition as measured by lower acquisition announcement returns. Large firms increase R&D after the adoption of state laws, replacing external innovation. Using a sample of acquisitions that are plausibly unaffected by the laws, I disentangle alternative explanations.

Proprietary Knowledge Protection and Product Market Performance

Justin Hung Nguyen, Peter Pham, and Buhui Qiu

Does proprietary knowledge protection (PKP) spur or hinder the product-market performance of new firms? Exploiting the staggered adoptions of the Inevitable Disclosure Doctrine by US State Courts, which enhance PKP, we show that treated firms increase industry adjusted sales growth by 2% compared to control firms. The effect is concentrated among small and young firms, and increases with the scope of proprietary knowledge and rivals’ access to external finance. PKP encourages firms to develop new products and stimulates IPO activity. Our results suggest that PKP alleviates predation risk associated with “deep-pocket” rivals by allowing firms to maintain competitive advantages.