research
research
Research Paper
M. Kalimipalli, O. Morohunfolu, and S. Ramachandran, "Do Government Infusions Help Financial Stability? Evidence from an Emerging Market," Journal of Financial Stability, vol. 75, 2024, 101334. (Link)
Best Paper Award in Finance- Research Symposium on Finance and Economics (RSFE 2023)
Textbook Chapter
M. Halek, and O. Morohunfolu (2024). Risk treatment: risk financing for speculative risks in A.E., Kleffner, M. Kelly and M. Halek. Fundamentals of Risk Management and Insurance in Canada. Kendall Hunt Publishing, Co. Dubuque, Iowa. p 275-306. (Link)
This paper examines how passive institutional ownership shapes the design of corporate debt contracts. Using the annual reconstitution of the Russell 1000/2000 indexes as a source of quasi-exogenous variation in passive ownership, I find that higher passive ownership causally reduces covenant intensity in both public bond and private loan markets, but selectively — along dimensions where shareholder monitoring can substitute for creditor protection. Early-warning covenants that constrain specific managerial actions decline, while alignment constraints that impose predetermined balance-sheet boundaries are unaffected. The effect is concentrated in low-tangibility firms and short-maturity bonds, where creditor monitoring needs are highest. The findings suggest that passive institutional investors act as partial substitutes for creditor monitoring
Presented at: 2024 FMA , 2024 NFA , 2023 Wilfrid Laurier University
with Madhu Kalimipalli, Si Li, and Buvaneshwaran Venugopal
This paper examines how labor union strength may influence private and public debt covenants. We employ Regression Discontinuity Design (RDD) and use plant-level union election outcome data for firms as quasi-exogenous shock to examine the effect of labor unions on bond and loan market covenants. We find that unionization leads to significantly lower covenants in public bond covenants, and in particular, reduced levels of (a) Investment, (b) Subsequent financing, and (c) Event-related restrictions. However, In the loan markets, we observe less evidence of covenant reduction (evident from reduction in Performance covenants only). This overall result implies that bank lending, typically collateralized, is less sensitive to labor market frictions. In cross-sectional analyses relating to public bond covenants. We show that firms currently with other forms of monitoring mechanisms in place (specifically firms with higher institutional ownership, credit rating, and corporate governance quality, and firms in highly competitive product markets) experience a stronger negative effect of union on debt covenants.
Presented at: 2023 FMA, 2023 Wilfrid Laurier University, 2022 Atlantic Canada Economics Association (ACEA) 48th Annual Conference, 2021 International Centre for Economic Analysis Conference, Lazaridis School for Business and Economics Research.
Best Paper Award in Finance- Research Symposium on Finance and Economics (RSFE 2024)
with Jin Wang, and Li Yao
This paper investigates whether peer firms’ R&D activities increase the focal firm’s tendency to engage in discretionary R&D spending by building upon network concepts. Using Panel Data on US innovative public firms, we show that peer firms’ R&D activities indeed increase the focal firm’s tendency to engage in discretionary R&D spending. Further analyses show that this effect is weaker for firms with high incentive to engage in earnings management. Such firms include (a) firms suspected to manipulate their earnings, (b) firms engaging in SEO in the following year, (c) firms with low institutional holding, and (d) firms with low profitability. Our subsample analyses suggest that potential benefit from enhanced innovation productivity (due to reduced earnings management through R&D) is of second-order importance compared to firms’ incentive to engage in earnings management.
Passive Institutional Ownership and Climate Risk (Link)
with Kai Chen, and Madhu Kalimipalli
This paper examines whether passive institutional ownership affects firms’ climate risk using the Russell Index Reconstitution as an identification setting for increases in passive ownership. We apply a two-stage instrumental-variable (IV) approach to Russell index reconstitution data over the period 2002–2020. Climate risk is measured using firm-level forward-looking climate risk exposures constructed from textual analysis of quarterly earnings conference call data. The IV results show that increased passive institutional ownership leads to greater attention to overall climate risk exposure, particularly after the 2015 Paris Accord, following the adoption of State Climate Action Plans (SCAPs), and around other major climate-policy events such as the 2016 U.S. presidential election and the 2017 U.S. withdrawal from the Paris Accord. However, we find no robust evidence that increased passive ownership leads to reductions in firms’ carbon emissions.