Research

We provide a model of governance in which a board arbitrates between an activist investor and a manager facing reputational concerns. The optimal level of internal board governance depends on both the severity of the agency conflict and the strength of external governance. Internal governance creates a certification effect, so greater intervention by the board can lead to worse managerial behavior. Internal and external governance are substitutes when external governance is weak (the board commits to an interventionist policy to induce participation from the activist) and complements when external governance is strong (the board relies to a greater extent on the activist's information).

This study uses corporate tax return data to examine the evolution of firms' financial structure and performance after leveraged buyouts for a comprehensive sample of 317 LBOs taking place between 1995 and 2007.  We find little evidence of operating improvements subsequent to an LBO, although consistent with prior studies, we do observe operating improvements in the set of LBO firms that have public financial statements.  We also find that firms do not reduce leverage after LBOs, even if they generate excess cash flow.  Our results suggest that effecting a sustained change in capital structure is a conscious objective of the LBO structure.

We use events related to a proxy access rule passed by the SEC in 2010 (but never implemented) as natural experiments to study the valuation effects of exogenous changes in the degree of shareholder control. We find that increases (decreases) in perceived control have positive (negative) effects, and that the effects are strongest for poorly-performing firms, for firms with shareholders likely to exercise control, and for firms where acquiring a stake is relatively cheap. We also find evidence that the benefits of increased shareholder control are muted for firms with shareholders who might have interests other than shareholder value maximization. Our results overall suggest that an increase in shareholder control from its current level would generally benefit shareholders.

How Much Do Analysts Influence Each Other's Forecasts?, with Jennifer Juergens (April 2013)

This paper develops and applies a new regression approach to disentangle the influence of analyst’s on each other’s earnings forecasts from the effects of correlated information shocks.  We estimate that, on average, a new forecast by an analyst that is x cents above (below) another analyst’s forecast influences the other analyst to revise her forecast upwards (downwards) by approximately 0.17x cents.  We find that more-skilled analysts influence less-skilled analyst more, that influence declined after Regulation FD, and that more positive forecasts are less influential.  We find no support for career concerns driving herding behavior.

The Effect of Financial Leverage on Workplace Safety, with Malcolm Wardlaw (March 2013)

This paper uses establishment-level injury data to study the effects of a firm's capital structure on the safety of its workplace. We find that an establishment's injury rate is positively-related to its parent firms' financial leverage, especially when its operating profits are low. Two quasi-natural experiments - one involving a tax law change and the other oil price shocks - suggest that cash constraints impacting a firm's investment in safety-related activities play a role in driving the relationship between leverage and injury rates. Debt overhang also appears to play a role, as injury rates are lower following an increase in creditor control in the form of covenant violations. Finally, we find that employee bargaining power can mitigate the adverse effects of leverage on workplace safety.

This paper analyzes the real consequences of making a firm's executives more accountable for the fidelity of a firm's financial reports using a basic model of investment under asymmetric information with reporting. Greater accountability generally leads to less underinvestment but more overinvestment. The level of accountability that maximizes investment efficiency is low enough to allow some misreporting to occur in equilibrium. The results yield a sharp testable implication and have implications for reporting regulation.

Anecdotal and empirical evidence suggest that price is an important determinant of firms’ share repurchase decisions. We investigate a factor that could affect a firm’s stock price around a repurchase and thus the number of shares a firm repurchases. We predict that tax-sensitive investors’ reluctance to sell stocks for which they have unrealized capital gains reduces the supply of a firm's shares available in the market, and thus raises the price at which the firm can repurchase its shares. Using unique data on the tax-sensitivity of a sample of institutional investors, we find evidence consistent with our prediction. Moreover, as expected, the negative relation between capital gains lock-in and the number of shares repurchased is only present when the supply of a firm’s shares is inelastic.

Existing literature focuses on how corporate taxation affects firms' investment decisions by altering after-tax returns. This paper instead examines how corporate taxation affects investment by reducing the cash flow a firm has available to invest in the current period. I use a sharp nonlinearity in the mapping from pre-tax profitability to taxes created by the tax loss carryforward feature of the tax code to identify the cash flow effect of taxes. The results indicate that firms reduce investment when they pay more taxes, especially when unfavorable capital market conditions create a greater dependence of investment on internal sources of cash.

It is well accepted that aligning managerial incentives with those of stock holders enhances shareholder value. In theory models, such alignment is usually modeled as giving managers a stake in the realized cash flows of the firm's projects. However, such a stake, which entails a manager holding on to her equity position until all cash flow uncertainty is resolved, can lead a risk averse manager to turn down risky positive NPV projects. In this paper, we argue that equity-linked incentives can mitigate the manager's bias against assuming risk, provided the manager is allowed the flexibility of trading out her equity position early. Thus, allowing managers to hedge away partially the risks associated with their firm's stock price may actually be in the shareholders' best interests. However, it can lead to excessive risk-taking when the firm has debt in its capital structure.

Bank Risk-Taking and Capital, with Richard Lowery

Optimal Disclosure with Market Feedback, with Uday Rajan

Credit Ratings, Screening and Disclosure, with Uday Rajan and Gunter Ströbl

The Causes and Consequences of Private-to-Private Leveraged Buyouts: Evidence from U.S. Corporate Tax Returns, with Erin Towery

The Role of Non-Activist Institutions in Proxy Fights, with Mitch Towner