Journal of Corporate Finance 65, Article 101496 (December 2020)

This paper studies how skill and past syndicate connections impact the likelihood to syndicate and how these relations influence buyout performance. I find evidence that high-skill buyout firms, that is, those with superior past performance, are less likely to syndicate than low-skill firms. I also find that low-skill buyout firms are less likely to successfully exit an LBO without syndication, but no such effect exists for high-skill firms. This evidence is robust to potential endogeneity concerns and other alternative explanations. Additionally, this paper is the first to use a robust statistical network methodology studying the formation of syndication networks that allows for a consistent estimation of effects within the network despite the lack of independence among observations. The results suggest low-skill firms utilizing syndication to pool skill, resources, and information to overcome firm-specific deficiencies.

Why CEO option compensation can be a bad option for shareholders: Evidence from major customer relationships  (with Claire Liu and Ron Masulis) – Includes Internet Appendix

Journal of Financial Economics 142, 453-481 (2021) 

We study how the existence of important production contracts affects the choice of CEO compensation contracts. We hypothesize that having major customers raises the costs associated with CEO risk-taking incentives and leads to lower option-based compensation. Using industry-level import tariff reductions in the U.S. as exogenous shocks to customer relationships, we find firms with major customers subsequently reduce CEO option-based compensation significantly. We also show that continued high option compensation following tariff cuts, is associated with significant declines in these relationships and in these firms’ performance. Our study provides new insights into how important stakeholders shape executive compensation decisions.

Does government spending crowd out R&D investment?  Evidence from government-dependent firms and their peers  (with Phong Ngo)

Journal of Financial and Quantitative Analysis 57, 888-922 (2022)

We provide evidence highlighting how managerial incentives to manipulate real activities influence the effectiveness of fiscal policy. Federal budget shocks lead government-dependent firms to expand R&D investment whereas industry-peer firms contract. The net result is a reduction in industry-level R&D investment. We offer a novel interpretation for the crowding out of peer-firm investment: peer-firm managers respond to falling relative performance by cutting R&D to manage current earnings upward. Since R&D investment affects value, we show that these differential responses manifest in firm value. These findings are robust to endogeneity and selection concerns as well as a battery of alternative explanations.

Selected Working Papers

R&D or R vs. D? Firm innovation strategy and equity ownership  (with James Driver and Adam Kolasinski)

We analyze a unique dataset that disaggregates corporate research and development. We find public firms have greater research intensity than private firms, which is inconsistent with theories predicting an equilibrium where private, not public firms, focus on exploratory innovation. Public firms also have larger development intensity and convert development into patents at a higher rate. Private equity fund-backed firms focus on development, consistent with short-termism. Changes in ownership type are generally not associated with changes in innovation strategy, suggesting our observational evidence reflects selection. Instrumental variables analyses reveal private equity fund ownership causes more aggressive patenting without impacting real innovation.

Does a VC’s commitment lead to improved investment outcomes? Evidence from climate startups  (with Aaron Burt, Jarrad Harford, and Jason Zein)

We assess whether a VC’s intrinsic commitment to a startup affects investment performance. We proxy for climate commitment using individual VCs’ contributions to the Democratic Party. Investments by Democrat VCs in climate startups have 8% higher round-to-exit returns and 29% higher round-to-exit multiples. Democrat VCs are more likely to sit on a climate startup’s board and these startups are more likely to obtain patents following a Democrat VC’s investment. Local climate-related natural disasters that exogenously increase a non-Democrat’s climate commitment results in higher exit returns. Our results are consistent with the importance of commitment in active (vs. passive) investing.

Labor mobility, trade secrets, and innovation  (with James Driver and Adam Kolasinski)

We examine whether restrictions on worker mobility stimulate firms to innovate by protecting trade secrets. With a broad sample of private and public U.S. firms, we find that when state courts increase labor mobility by weakening the inevitable disclosure doctrine, affected firms reliant on trade secrets reduce innovation relative to non-trade-secret reliant state peers. This difference in treatment response between trade-secret-reliant and non-reliant firms in affected states is larger than those in unaffected states. The effect is strongest for startups. We cannot detect innovation effects for rulings on non-compete agreements. Both types of rulings impact reliance on trade secrets.

Do connections to the U.S. President enable regulatory capture? Evidence from antitrust merger reviews  (with Claire Liu)

Corporate and political leaders often display strongly overlapping networks. We identify the shared social and professional activities of individual corporate directors and the U.S. President and examine whether directors’ personal ties to the President affect a firm’s value through regulatory enforcement. Using close presidential primary outcomes as repeated shocks to a firm’s political access, we confirm that directors’ personal ties to the President significantly enhance shareholder value. We demonstrate that a channel of this value is through regulatory capture. Firms connected to the U.S. President as well as FTC and DOJ officials experience a significantly reduced likelihood of regulatory challenge from antitrust merger reviews. Conversely, bidders connected to the President’s within-party political opponent and those with politically-connected industry rivals experience a higher likelihood of regulatory challenge. Overall, our study shows that political connections can lead to regulatory capture in the context of antitrust enforcement.

Political connections and peers  (with Bohui Zhang and Le Zhang)

We examine the mechanisms between political connections and firm value and performance by studying how the political connections affect connected firms and their peers. Following the announcement of anti-corruption investigations, we find that industry peers of firms connected to investigated officials decrease in value but not performance, despite connected firms’ significant deterioration of value and performance. These results are consistent with an increase in political uncertainty. Interestingly, we document evidence of a transfer of reduced effective tax rates away from connected firms to firms headquartered in the same city, mitigating the negative impact of the increase in political uncertainty.

How does an LBO impact the target’s industry? (with Jarrad Harford and Feng Zhang)

We document the implications of an LBO for the target firm’s peers in terms of follow-on acquisitions, alliances, investment, and governance changes. LBOs tend to lead overall merger activity, predicting both more LBOs and strategic acquisitions in the industry. LBOs predict significant changes to investment outlays, strategic alliances, and anti-takeover provisions. Tests show that our evidence is most consistent with LBOs causing or signaling private information about optimal changes to the industry rather than LBO sponsors simply selecting into changing industries. Our study sheds light on LBOs’ role in merger activity as well as their motivation.