Forthcoming Articles

The Effects of a U.S. Approach to Enforcement: Evidence from China

Tinghua Duan, Kai Li, Rafael Rogo, and Ray Zhang

We examine the effects of implementing a U.S. approach to the enforcement of mandatory disclosure in China. Using a hand-collected sample of comment letters (CLs) issued by the Shanghai Stock Exchange over the period 2013-2018, we show that stock price reactions to CL receipts and replies are negative and significant. Using textual analysis to match issues raised by regulators to targeted firms’ changes in disclosure, we show that these firms address CL issues point by point, but do not experience significant improvements in their information environments. Our paper highlights the importance of incentives rather than regulation/enforcement in reducing information asymmetry.

State Controlling Shareholders and Payout Policy

Chen Lin, Hang Liu, Chenkai Ni, and Bohui Zhang

We study the role of state controlling shareholders in corporate payout policy. The State Capital Operation Program in China requires parent central state-owned enterprises (CSOEs) to contribute part of their consolidated income to a new fiscal fund. We find that listed CSOEs, partially controlled by parent CSOEs, experience significant reductions in dividend payouts as the income-contribution ratio increases. The dividend reductions are concurrent with increases in intragroup resource transfers—listed CSOEs’ loans to, and commercial trades with, group peers. The program yields adverse consequences for listed CSOEs’ investment and employment, yet being mitigated by group-level dividend reductions.

Access to Finance and Technological Innovation: Evidence from Pre-Civil War America

Yifei Mao and Jessie Jiaxu Wang

This paper provides new evidence on how access to finance affects technological innovation and establishes the role of labor practices in shaping this relation. We exploit a unique setting — pre-Civil War America — where staggered adoption of free banking laws across states encouraged bank entry, and variation in the use of exploited workers in agriculture generated differences in producers’ demands for labor-saving technologies. Results show that access to finance spurred innovation; the positive effect on agricultural innovation diminished with labor exploitation. We establish the causal role of labor exploitation using the 1850s cholera pandemic and the influx of Irish immigrants.

Credit Default Swaps and Lender Incentives in Bank Debt Renegotiations

Indraneel Chakraborty, Sudheer Chava, and Rohan Ganduri

Using a regression-discontinuity design and within lender-borrower variation, we analyze how Credit Default Swaps (CDS) affect bank incentives and borrower outcomes in renegotiations after covenant violations. While existing studies document an investment decline after covenant violations, we find that covenant-violating firms maintain their investment subsequent to the introduction of CDS trading. Moreover, after CDS introduction, covenant-violating firms are less likely to default. Our results suggest that in the private debt markets, CDS discipline borrowers, while the empty creditor problem due to CDS is mitigated because of lenders’ reputation concerns and lower coordination frictions.

The Distribution of Voting Rights to Shareholders

Vyacheslav Fos and Clifford G. Holderness

This is the first comprehensive study of the distribution of voting rights to shareholders. Only individuals owning stock on a record date may vote. Firms, however, reveal record dates after the fact 91% of the time. With controversial votes, firms are more likely to do the opposite, and this tendency is associated with a lower passage rate for  shareholder-initiated proposals . The New York Stock Exchange sells non-public record-date information to select investors. When stocks go ex vote, prices decline and trading volume surges, suggesting that activist investors are buying marginal votes. These trends are most pronounced with controversial votes.

Insider Filing Violations and Illegal Information Delay

Brandon N. Cline and Caleb Houston

We document that a significant number of insiders violate SEC reporting requirements by filing open market transactions after the legally required deadline. Prior to SOX, 29% of transactions fell outside the required reporting window. Following SOX, 8% continue to be filed delinquent. Violations tend to occur during periods of high information asymmetry, incentivizing insiders to keep trades private and earn abnormal returns. Collectively, these findings suggest a subgroup of insiders personally benefit from violating SEC disclosure requirements. Evidence also suggests blockholders provide governance for violations. Guilty insiders also experience a reduction in board seats and an increased likelihood of turnover.

M&A Activity and the Capital Structure of Target Firms

Mark J. Flannery, Jan Hanousek, Anastasiya Shamshur, and Jiri Tresl

Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and target (optimal) leverage ratios soon after their acquisition, consistent with previous findings that acquired European firms become less financially constrained (Erel et al., (2015)). These adjustments are large: the typical over-leveraged firm adjusts its debt-to-assets ratio from 34.4% in the year before acquisition to 20% in the year after. These adjustments occur primarily through debt issuances or retirements; post-acquisition equity changes are uncorrelated with leverage deviations. Our results are consistent with the trade-off theory of capital structure with adjustment costs.

Machine Learning and the Stock Market

Jonathan Brogaard; Abalfazl Zareei

Practitioners allocate substantial resources to technical analysis, whereas academic theories of market efficiency rule out technical trading profitability. We study this long-standing puzzle by applying a diverse set of machine learning algorithms. The results show that an investor can find profitable technical trading rules using past prices, and that this out-of-sample profitability decreases through time, showing that markets have become more efficient over time. In addition, we find that the evolutionary genetic algorithm technique discovers more profitable strategies compared to the strict loss-minimization-focused machine learning algorithms.