REFEREED JOURNAL ARTICLES

Employment, Corporate Investment, and Cash Flow Risk  (Journal of Financial and Quantitative Analysis)                                                           

with Sanjai Bhagat, and Iulian Obreja

We highlight the role of cash flow uncertainty on corporate employment and corporate investment in both tangible and intangible assets. We find that cash flow uncertainty has a significantly negative impact on corporate employment, and corporate investment in both tangible and intangible assets. Our results are statistically and economically significant. A 1% increase in cash flow uncertainty leads to a 0.62% decrease in tangible investment, a 1.39% decrease in intangible investment, and a 3.67% decrease in corporate employment. We further find that these relationships are stronger during economic recessions. Our findings have significant policy implications. To wit, if policy makers would like corporations to increase their employment and investment, they should focus on policies that decrease corporate cash flow uncertainty.

Political Ideology in M&A   (Journal of Business Finance and Accounting)                                                                    

with Bader Alhashel

We study the effect of shared political identity between acquirers and targets on merger outcomes. In a sample of publicly traded U.S. mergers, we find that targets are more likely to be acquired by an acquirer of a similar political orientation. We document that acquirers in politically matched mergers experience significantly worse cumulative abnormal returns around the merger announcement compared to their non-politically matched counterparts. Acquirers in those mergers pay less takeover premiums, less advisory fees, and experience worse post-merger operating performance. We also find that target executive retention rate is higher, and that the top management team receives a larger bonus post-merger in politically matched mergers. Our results indicate that politically matched mergers are value destroying to shareholders.

WORKING PAPERS

Firm Political Leanings, Washington, and Stock Market Returns   (Under Review)                                                      

with Bader Alhashel

In this paper, we study the effects of political identity on firm market performance. Specifically, we investigate whether a shared political orientation between a firm’s executives and Congress, or the President, affect the firm’s stock performance. Using hand collected political contributions data from the Federal Election Commission (FEC) to identify an executive’s political orientation, we find evidence that firms with executives’ political orientations matching that of the President or the Senate tend to generate higher excess and abnormal returns and outperform other firms. Our results are consistent with the hypothesis that the market perceives political alignment positively.

Individual Traders, Informed Trading, and Stock Market Liquidity   (Under Review)                                                  

with Abdullah M. Al-Awadhi

We investigate the relationship between individual trading intensity and stock liquidity, and the extent to which individual traders can be classified as informed traders. Using an unbiased comprehensive data gathered from intraday individual trading activity, we find evidence consistent with a negative relationship between liquidity and individual investors trading intensity. Further, we find that higher individual trading intensity is associated with lower returns, and that individual trades are less informed using probability of informed trading proxies. Our sample covers all listed companies from Boursa Kuwait, and provides a unique opportunity to test the impact of individual trading intensity on liquidity directly in a clean setting, and without the influence of market makers. Controlling for known determinants of liquidity, our results are robust to different regression model specifications, including, industry and time fixed effects, as well as alternative measures of liquidity. We alleviate concerns of self-selection driving our results by employing a Heckman two stage regression. Taken together, our results suggest that individual traders execute less informed trades, and that stocks more heavily traded by individual traders are associated with reduced stock liquidity and lower returns.

Bank Runs, Insured Deposit Concentration, and Stock Market Returns: An Event Study of Silicon Valley Bank Collapse   (Under Review)            

with Mohammad Al-Hashel, Abdullah M. Al-Awadhi, and Ahmad Bash

In this study, we explore the impact of contemporary bank-run incidents on stock market performance, and whether insured deposit concentration affects the outcome. We examine the recent downfall of Silicon Valley Bank (SVB) to gauge its influence on stock returns and assess the subsequent regulatory response. By employing event-study methods with the mean adjusted return model and market models, we evaluate the cumulative abnormal returns (CARs). Our findings reveal a substantial negative CAR, ranging from 455 to 678 basis points for all the listed companies in our sample, suggesting that the SVB crisis adversely affected stock returns. Further analysis reveals an even more pronounced effect on the banking sector, with a decline of 1624 to 2191 basis points within the same event window, and that banks with high concentration of insured deposits experienced economically and statistically less negative CARs.

(How) Do Equity Capital Requirements Affect Banks’ Cost of Capital?  (Under Review)                                             

with Sanjai Bhagat

Banks argue that increasing equity capital requirements significantly raises their cost of capital. I empirically test this claim and find that increasing the equity capital ratio for banks by 10% increases their cost of capital by 35 to 92 basis points. Results from IV and Difference-in-Difference-in-Differences frameworks yield consistent results. The IV strategy exploits time-series and cross-sectional exogenous variation in statutory state income taxes levied on banks to instrument for the book equity capital ratio. Triple differences with entropy balance confirm that when states increase statutory state tax rates, BHCs respond by decreasing their book equity capital ratio (increasing leverage) relative to peer out-of-state BHCs. I argue this causes the subsequent decrease in a bank’s cost of capital. Given the social and economic welfare costs of excessive risk taking by banks through leverage, the results in this paper indicate that raising equity capital requirements is not as costly banks claim.

Shadow Banks, Systemic Risk, and Money Market Funds Reform. (Under Review)                                   

with Sanjai Bhagat

Implosion of the Money Market Fund (MMF) industry in 2008 has raised alarms about MMF risk-taking; inevitably drawing the attention of financial regulators. Regulations were passed by the U.S. Securities and Exchange Commission (SEC) in July 2014 to increase MMF disclosures, lower incentives to take risks, and reduce the probability of future investor runs on the funds. The new regulations allowed MMFs to impose liquidity gates and fees, and required institutional prime MMFs to adopt a floating (mark-to-market) net asset value (NAV), starting October 2016. Using novel data compiled from algorithmic text-analysis of security-level MMF portfolio holdings, as reported to the SEC, this paper examines the impact of these reforms. Using a difference-in-differences analysis, I find that institutional prime funds responded to this regulation by significantly increasing risk of their portfolios, while simultaneously increasing holdings of opaque securities. I also find that opaque holdings is associated with significantly higher fund yields compared to other types of known asset class holdings. Large bank affiliated MMFs hold the riskiest portfolios. This evidence suggests that the MMF reform of October 2016 has not been effective in curbing MMF risk-taking behavior; importantly, MMFs still pose a systemic risk to the economy given large banks’ significant exposure to them.

Are Private Firms Valued at a Discount? Evidence from M&As and IPOs after SOX. (Under Review)

I investigate how Sarbanes-Oxley Act (SOX) affects the exit decisions of private companies. SOX, since its passage in July 2002, has had a significant impact on the regulatory costs of existing public companies and the private ones that seek to go public. Private companies looking for an exit might therefore be constrained to the only other viable exit option through an acquisition. I test whether public acquirers are now pricing-in this increased bargaining power over private targets by valuing the private target at a discount at an acquisition event. Using propensity score matching, coarsened exact matching, and a two-stage Heckman selection methodology, I control for selection bias and endogeneity in the choice of the private firm to exit. I find consistent evidence that there exists a US private firm discount when acquired by a US public acquirer after SOX. I also find evidence that private firms are less likely to go public after SOX and that there exists a size effect in that smaller private firms are now more likely to be acquired than before.