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with Davidson Heath, Roni Michaely, and Matthew Ringgenberg
Review of Financial Studies (2022)
Passively managed index funds now hold over 30% of U.S. equity fund assets; this shift raises fundamental questions about monitoring and governance. We show that, relative to active funds, index funds are less effective monitors: (a) they are less likely to vote against firm management on contentious governance issues; (b) there is no evidence they engage effectively publicly or privately; and (c) they promote less board independence and worse pay-performance sensitivity at their portfolio companies. Overall, the rise of index funds decreases the alignment of incentives between beneficial owners and firm management and shifts control from investors to managers.
with Thomas Bourveau, Emmanuel De George, and Atif Ellahie
Journal of Accounting Research (2022)
JAR Top Cited Paper 2021 & 2022, JAR Top Downloaded Paper 2021
Using an international sample of 2,113 initial coin offerings (ICOs), we explore the role of disclosure and information intermediaries in the unregulated crypto-tokens market. First, we document substantial cross-sectional variation in the voluntary disclosure practices of ventures seeking to raise capital through ICOs, such as the extent of information released in a prospectus-type document called a white paper; releasing the technical source code; and communicating through social media platforms. Second, we find that, even with limited disclosure verifiability, ventures with higher levels of disclosure have a greater ability to raise capital. Finally, we find that this association is stronger in the presence of mechanisms that lend credibility to ventures’ voluntary disclosures, such as internal governance practices or external scrutiny from information intermediaries. Overall, our results suggest that voluntary disclosure and information intermediaries facilitate the functioning of ICOs as an alternative capital market.
with Hans Christensen, Arthur Morris, and Valeri Nikolaev
Journal of Accounting and Economics (2022)
We provide evidence that financial shocks to lenders influence the composition of financial covenants in debt contracts. Using two distinct measures of lender-specific shocks—defaults in a lender’s corporate loan portfolio that occur outside the borrower’s region and industry, and non-corporate loan delinquencies—we show that lenders respond to financial shocks by increasing the number and strictness of performance-based but not of capital-based covenants in debt contracts. We examine two possible channels for this result. We find evidence consistent with lenders using stricter control rights because of concerns about capital depletion (a capital channel) and because of new information about lenders’ own screening ability (a learning channel). Our results indicate that lender preferences influence how accounting information is used in debt contracts.
with Brian Cadman, and Mirko Heinle
The Accounting Review (2023)
We investigate the relationship between insider horizon and disclosure policy. First, we develop and analyze a rational expectations model assuming insiders are able to commit to a disclosure policy. Insiders with a short-horizon prefer more disclosure and are willing to bear costs of disclosure to reduce information asymmetries among capital market participants. We then empirically test our predictions in the setting of newly public firms and firms where the CEO is approaching retirement. We find that firms with insiders that have a shorter horizon disclose more and experience lower information asymmetry. Our study contributes to the understanding of firms' disclosure choices by suggesting that the horizon of insiders shapes a firm's disclosure policy.
with Davidson Heath, Roni Michaely, and Matthew Ringgenberg
Review of Finance (2023)
- Winner of the 2024 Pagano and Zechner Price for the best non-investment paper published in the Review of Finance
- Winner of the Best Paper Award at the 2021 UMass Boston – EM Normandie Conference on Corporate Social Responsibility
- Winner of the University of Miami Provost's Research Award
- Winner of the Best Paper Award at the 2021 Boca Corporate Finance and Governance Conference
Using micro-level data, we examine the behavior of socially responsible investment (SRI) funds. SRI funds select firms with lower pollution, more board diversity, higher employee satisfaction, and better workplace safety. Yet both in the cross-section and using an exogenous shock to SRI capital, we find SRI funds do not significantly change firm behavior. Moreover, we find little evidence they try to impact firm behavior using shareholder proposals. Our results suggest SRI funds are not greenwashing, but they are impact washing; they invest in a portfolio of firms with better environmental and social conduct, but do not follow through on their promise of impact.
with Thomas Bourveau, Xinlei Li, and Chengzhu Sun
Contemporary Accounting Research (2023)
We examine a regulatory change that increased the reporting frequency of mutual funds' portfolios. Using a difference-in-differences design, we find that firms with greater ownership by mutual funds increase share repurchases following the regulatory change. We show that these share repurchases are a firm's rational response to undervaluation, which occurs because fund managers become shortsighted following the regulation and sell companies with good long-term prospects. Collectively, our results shed light on an unintended consequence of more frequent reporting in a delegated asset management framework.
with John Barrios and Yael Hochberg
- NBER Working Paper No. w28606
Using novel data on new business registrations in the US, we examine how historical factors which shape persistent individualistic culture in modern times affect the geographic distribution of entrepreneurial activity. We document that current-day new business formation in US counties is positively related to the historical time spent by the county on the western frontier in the 1800s. The relation holds when we exploit plausibly exogenous variation in frontier experience driven by shocks to the westward expansion of the US that arise from weather-driven historical immigration flows. We provide evidence that the effects of frontier experience and its associated individualistic culture on entrepreneurial activity persist into modern times through both the formation of formal institutions and informal transmission of cultural norms. Our study points to the fundamental role of historical-cultural features in explaining the geographic distribution of contemporary new business formation in the US.
with Hans Christensen, Emmanuel De George, and Anthony Joffre
Using micro-level data of US weekly brand-level sales, we examine end-consumer responses to public revelations of corporate social irresponsibility (CSI). Despite survey evidence that suggests end consumers care about CSI, we find that the vast majority of CSI revelations are not followed by changes in sales. It is only when we narrow our focus to a small number of highly visible CSI events that we find a 5.8% reduction in weekly brand-level sales over the four-week period following the event. This suggests that visibility plays a critical role in reducing end consumers’ awareness and integration costs with respect to CSI. While the direct consumer response is limited, it is likely that CSI events carry broader economic consequences beyond direct consumer responses. Consistent with this notion, we find that analysts reduce their long-term forecasts following the revelation of visible CSI events and discuss these issues in earnings conference calls. Overall, our findings highlight the importance of visibility in shaping consumer behavior towards CSI and suggest that the costs of highly-visible CSI events extend beyond immediate changes in end-consumer purchasing behavior.
Using a quasi-experimental setting, we study whether investors respond to a purely mechanical change in ESG ratings––i.e., a change independent of concurrent changes in firms’ actual ESG activities. We find that when a firm experiences a mechanical increase in ESG ratings, the probability of being selected by an ESG fund increases (extensive margin). In contrast, if the firm is already in the fund’s portfolio, its holdings do not change (intensive margin), consistent with portfolio weighting being based on market capitalization. The selection effect is observable not only among funds that follow an ESG index but also among active ESG funds, which presumably should have the incentives and ability to identify and filter out the mechanical increase in ESG ratings. Among active ESG funds, the selection effect is stronger for funds with less assets under management (AUM), larger portfolios of firms, and lower expense ratios, consistent with the notion that resource constraints may impede a fund’s screening ability. Our findings imply that passive investing based on commercial ESG ratings––whether due to resource constraints or portfolio indexing––might result in portfolio allocations that do not reflect the actual ESG activities of firms.
Institutional investors engage with their portfolio companies to communicate information and preferences with corporate managers. We provide the first estimates of the costs and benefits of engagement using a discrete choice model and novel data on engagement. On average, $10,000 spent on engagement leads to a 0.3 bps expected increase in firm value. However, the costs and benefits vary significantly across funds and firms. Passive funds engage less than active funds due to lower fees. Counterfactual simulations show that as active funds shrink and passive investing rises, engagement generates more value for investors and society because active funds exhibit diseconomies of scale but passive funds do not. The results establish the importance of economic incentives as a driver of value creation by institutional investors.
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