Are managers too myopic, relative to what shareholders would want? In a forthcoming RCFS paper, “Short-termism, Managerial Talent, and Firm Value,” Richard Thakor provides a theoretical model in which the answer is “no,” with a surprising twist: In the model, managers prefer long-term projects, because it allows talented managers to earn higher rents. However, to reduce managerial rents, the firm may induce a manager to invest in a short-term project, even though the long-term project has a higher NPV. In equilibrium, therefore, the firm may have a short-term orientation despite rather than because of the manager’s preferences. An interesting empirical implication is that short-termism will be observed in well-governed firms. The paper also considers competition for managers. Here, the results depend crucially on whether managerial skill is observable to the market. When skill is unobserved, one way for talented managers to reveal their type is by succeeding in a short-term project. Thus, in the initial period, firms that incentivize short-term projects attract talented managers. These tend to be small- and medium-sized firms. Once talent has been revealed, the best managers are hired away by large firms, which also invest in long-term projects.
Spotlight by Uday Rajan
Photo courtesy of Richard Thakor
The final day to submit papers to the RCFS Winter Conference is December 1, 2020. The conference, which features a dual submission option with RCFS, will take place virtually on February 13 and 14, 2021. The sponsoring editors are Andrew Ellul, Isil Erel, Camelia Kuhnen, and Uday Rajan. The submission deadline for Registered Reports on Discrimination, Disparities, and Diversity in Finance is December 21, 2020.
The Call for Papers for the ECGI Corporations and COVID-19 conference is now available. The conference, which features a dual submission option with RCFS and RFS, will have an online workshop on June 17, 2021, and a conference at the University of Oxford on June 2, 2022. The RCFS sponsoring editor is Andrew Ellul and the RFS sponsoring editors are Itay Goldstein and Holger Mueller. The submission deadline is April 9, 2021. For more details, please see the ECGI website.
Paige Parker Ouimet
We are living through a pandemic-induced recession that has slashed many firms’ cash flows with a consequent negative impact on both employment and wage levels. Firms, fighting for survival, will be pressed to cut costs, and wages are an important budget line for the vast majority of firms. At the same time, workers are important assets for firms’ survival and prosperity. What are the effects of paying higher wages on firm performance during economic uncertain times? Higher wages can impact negatively firm profitability but can also incentivize workers and maximize employee productivity. Paige Parker Ouimet and Elena Simintzi address this question in the paper “Wages and Firm Performance: Evidence from the 2008 Financial Crisis.” Paige and Elena use data from a sample of unionized firms operating in the United Kingdom during the Great Recession of 2008 and exploit differences in the timing of long-term wage agreements entered into by the sample firms. Firms that entered in such agreements just before the onset of the crisis paid higher wages, but did not reduce employment during the crisis. Surprisingly, despite facing higher payroll expenditures during such uncertain times, these firms experienced higher net labor productivity and profits per employee following the crisis. These results suggest that motivating employees in a crisis is a valuable asset that improves firms’ prospects.
Spotlight by Andrew Ellul
Photos courtesy of Paige Parker Ouimet and Elena Simintzi
First published August 10, 2020
“Efficient Programs to Support Businesses during Crises” by Thomas Philippon
The position of Part-Time Data Collection Assistant has been filled. Thank you to everyone who submitted a resume.
In the new entry on the RCFS blog, the RCFS editorial team discusses the new special issue of RCFS on the COVID-19 pandemic crisis and corporate finance. Editors Andrew Ellul, Isil Erel, and Uday Rajan talk about why they decided to publish a special issue on COVID, and the themes they decided to tackle in the issue, including financing of firms, equity shortfall and zombie lending, and firm characteristics and stock prices. Read the full post on the blog.
Alexander F. Wagner
The market reactions to the 2019 novel Coronavirus event, a truly exogenous shock, can help our understanding of how real economic shocks and financial policies drive firm value. In “Feverish Stock Price Reactions to COVID-19,” Stefano Ramelli and Alexander F. Wagner find strong causal evidence for the role of international trade and global value chains for corporate value. Initially, internationally-oriented firms, especially those more exposed to China, underperformed. As the virus spread to Europe and the U.S., corporate debt and cash holdings emerged as important value drivers, relevant even after the Fed intervened in the bond market. Interestingly, the content and tone of analysts’ conference calls mirror these developments over time. Overall, the results illustrate how the anticipated real effects from the health crisis, a rare disaster, were amplified through financial channels. This paper published in the November 2020 Special Issue on the COVID-19 Pandemic Crisis and Corporate Finance.
Spotlight by Andrew Ellul
Photos courtesy of Stefano Ramelli & Alexander F. Wagner
First published June 18, 2020
The COVID-19 pandemic, with its heavy toll on human lives, unemployment, and financial distress, should be considered as an important acid test for firms’ professed investments in their responsibility toward society. It is during such times that we can better understand how to interpret the Environmental, Social, and Governance (ESG) scores, standard proxies for firms’ corporate social responsibility, and what is really driving them. The paper “Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash,” by Rui Albuquerque, Yrjo Koskinen, Shuai Yang, and Chendi Zhang, has this objective. The authors show that U.S. firms with higher Environmental and Social (ES) scores were more resilient during the COVID-19 induced stock market crash: these stocks suffered lower stock price declines and lower volatility compared to other firms. The authors then investigate how ES policies build resiliency and look at theories of customer and investor loyalty. Firms with high customer and investor loyalty experienced the strongest stock price performance. Customer loyalty translated into higher operating profit margins of firms with high ES scores, even at a time when the economy as a whole was suffering through the first stages of a contraction. Overall, the results in the paper lend support to the view that consumer and investor loyalty play important roles in making high ES firms more resilient during stressful times.
Spotlight by Andrew Ellul
Photos courtesy of Rui Albuquerque, Yrjo Koskinen, Shuai Yang, and Chendi Zhang
First published August 3, 2020
The submission period for SFS Cavalcade North America 2021 is now open. To submit, please visit SFS Cavalcade North America 2021. The deadline for submissions is December 10, 2020.
Dual Submission: The Cavalcade features a dual submission option with the Review of Asset Pricing Studies and the Review of Corporate Finance Studies.
Reminder for doctoral students: For papers in which ALL co-authors are doctoral students, the submission fee is waived.