“Crowded out from the Beginning: Impact of Government Debt on Corporate Financing” with Nuri Ersahin and Christopher M. James [PDF]

Using hand-collected data on corporate bond and stock offerings, we identify the impact of government debt on corporate financing during World War I. The early twentieth century provides a unique opportunity to identify the impact of government debt on private financing because during this period (1) firms announced the amount they wanted to raise before each security offering and (2) the Treasury issued debt in discrete intervals. We identify the impact of Treasury issues by comparing differences in the amount firms offered to the amount they actually raised when the Treasury was borrowing to when the Treasury was not in the market. We find that long term government bond offerings negatively affect both amount of long-term corporate bonds and dividend paying stocks issued. In contrast, we find no effect of government bond offerings on short term debt issue. Our findings suggest that investors view dividend paying stocks as a close substitute for relatively safe long-term bonds.

“When Does Information Disclosure Help Innovation? Evidence from Blue Sky Laws” with Nuri Ersahin [PDF]

Using historical firm-level patent and accounting data, we analyze how information disclosure affects firm innovation. To establish a causal link, we use the enactment of blue sky laws, the first form of investor protection laws, across some U.S. states at the beginning of the 20th century, when there was no federal regulation. These laws required firms to disclose information before selling their securities and increased penalties in case of financial fraud. Using archival records, we document that young innovative firms (startups) had a large share of intangible assets and relied heavily on equity financing (venture capital). In a difference-in-differences setting, we show that following the enactment of these laws, innovative firms that previously had limited access to external finance raised more funds and increased their innovation activity. Our results suggest that disclosure requirements help innovation when the information environment is weak to begin with.