Forthcoming Articles

Activist-Appointed Directors

Jun-Koo Kang, Hyemin Kim, Jungmin Kim, and Angie Low

We examine the value impact of independent directors nominated by activists (Activist IDs). Firms appointing Activist IDs experience larger value increases than firms appointing other directors, particularly when Activist IDs have private firm experience and when their nominators remain as shareholders. This value increase persists over a long period and is greater than that of activism events without director appointments. The increase is also higher among firms with greater monitoring needs and entrenched boards. Moreover, the appointments of Activist IDs are greeted more positively by the market, and Activist IDs obtain more favorable shareholder votes and additional future directorships.

Credit Ratings and Corporate Information Production: Evidence from Sovereign Downgrades

Sicong Wang and Wensi Xie

Exploiting exogenous variations in corporate ratings due to sovereign credit downgrades and sovereign ceiling policies, we assess how firms respond to a reduction in credit ratings. We find that firms bounded by the sovereign ceiling significantly increase information production in response to a sovereign downgrade. The effects are stronger for firms relying more heavily on external finance and operating in a more opaque environment. Enhanced information production, in turn, affects firms’ subsequent access to bond markets. These findings suggest that firms actively manage information environments to maintain access to public debt markets.

Actively Keeping Secrets from Creditors: Evidence from the Uniform Trade Secrets Act

Scott B Guernsey, Kose John, and Lubomir P Litov

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.

Better Kept in the Dark? Portfolio Disclosure and Agency Problems in Mutual Funds

Teodor Dyakov, Jarrad Harford, and Buhui Qiu

We study the agency implications of increased disclosure using a regulatory change in the mutual fund industry as an experimental setting. This quasi-natural experiment mandated more frequent portfolio disclosure, which we show imposes managerial skill re-assessment risks from investors on funds with high relative performance volatility. In turn, this risk translates into greater agency costs to investors. We show that high, relative to low, volatility funds responded to the increased skill re-assessment risk post-regulation with an increase in management fees and a decrease in risk taking. These actions get transmitted to fund investors in the form of inferior net performance.

Why Are Bidder Termination Provisions Included in Takeovers?

Zhiyao (Nicholas) Chen, Hamed Mahmudi, Aazam Virani, and Xiaofei Zhao

We present a rationale for bidder termination provisions that considers their effect on bidders’ and targets’ joint takeover gains. The provision’s inclusion can create value because it enables termination when the target becomes less valuable to the bidder than on its own, but creates a trade-off because termination may also occur when the target is more valuable to the bidder than on its own. This explains why the provision is included only in some deals, and explains variation in termination fees. Inclusion of the provision is associated with larger combined announcement returns, provided that the termination fee is priced appropriately.

Fast-Moving Habit: Implications for Equity Returns

Anthony W Lynch and Oliver Randall

We find that the Campbell-Cochrane external-habit model can generate a value premium if the persistence of the consumption surplus is sufficiently low. Such low persistence is supported by micro evidence on consumption. If the mean and conditional volatility of consumption growth are highly persistent, as in the Bansal-Yaron long-run risk model, then fast-moving habit can also generate, without eroding the value premium: 1) empirically sensible long horizon return predictability; and, 2) a price-dividend ratio for market equity that exhibits the high autocorrelation found in the data. Fast-moving habit also delivers several empirical properties of market-dividend strips.

How Does Human Capital Matter? Evidence from Venture Capital

Lifeng Gu, Ruidi Huang, Yifei Mao, and Xuan Tian

We examine the effect of labor mobility on venture capital (VC) investment. Following the staggered adoption of the inevitable disclosure doctrine that restricts labor mobility, VCs are less likely to invest in affected states. This effect is more pronounced when human capital is more important to startups, when VC investment is more uncertain, and when VCs’ monitoring costs are higher. The reduced innovation productivity of employees is a plausible underlying mechanism. To mitigate this adverse effect, VCs stage finance startups more and syndicate more with other VCs. Our paper sheds new light on the real effects of labor market frictions.