Paper Spotlight: Institutional Investors and Hedge Fund Activism

Xianjue Wang

Laura Starks

Simi Kedia

The relationship between hedge fund activists and institutional shareholders in firms targeted by activists could be fraught with conflicting interests, making it a very important question to explore. In the paper “Institutional Investors and Hedge Fund Activism,” Simi Kedia, Laura Starks, and Xianjue Wang study how differences among institutional investors impact their willingness to support hedge fund activists, the impact on the campaign’s success, and potential value created from hedge fund activism. Simi, Laura, and Xianjue find that “activism-friendly institutional ownership” is associated with a much greater likelihood, than other types of institutional ownership, with the propensity of a firm being targeted. This result is suggestive of an assortative match between hedge fund activists and the firm’s ownership base. The paper also finds that pre-event activism-friendly ownership is associated with significantly higher long-term stock returns and operating performance of the target firm. These results help us understand how a firm’s ownership, specifically the type of institution, matters for the success of failure of campaigns. They are consistent with a role for the activism-friendly institutions in creating the right environment for hedge fund activists to push for changes in firm decisions and the subsequent impact on firm value. This paper is coming soon to advance access.

Spotlight by Andrew Ellul
Photos courtesy of Simi Kedia, Laura Starks, and Xianjue Wang

Paper Spotlight: The COVID-19 Shock and Equity Shortfall: Firm Level Evidence from Italy

Elena Carletti

Marco Pagano

Loriana Pelizzon







Marti Subrahmanyam

Tommaso Oliviero

Having learned from the financial crisis, policymakers the world over have reacted to the COVID-19 lockdowns by providing a lot of liquidity, in the form of debt, to the business sector. However, the longer it takes to make a full recovery, the greater is the danger that firms may find themselves not just illiquid in the short-run, but insolvent in the long-run. That is, liquidity shortfalls may turn into equity shortfalls. In the paper “The COVID-19 Shock and Equity Shortfall: Firm Level Evidence from Italy,” the authors Elena Carletti, Tommaso Oliviero, Marco Pagano, Loriana Pelizzon, and Marti G. Subrahmanyam quantify the size of the expected equity shortfalls for a sample of almost 81,000 Italian firms. The results are sobering. The authors forecast that COVID-related profit reductions will lead to about 17% of the firms in their sample having negative net worth in a year. These firms employ 8.8% of the workers in the sample.  Overall, reductions in equity may amount to 10% of 2018 GDP. Of course, forecasts are necessarily noisy at this stage, and the long-term effects of COVID on the corporate sector will only be known with time. Nevertheless, the results highlight the need for policymakers to support firms through equity injections in addition to liquidity. Given the heterogeneous effect of COVID on different sectors, an important challenge will be determining which firms to support.

Spotlight by Uday Rajan
Photos courtesy of Elena Carletti, Tommaso Oliviero, Marco Pagano, Loriana Pelizzon, and Marti G. Subrahmanyam

Paper Spotlight: The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID

Sascha Steffen

Viral V. Acharya

Governments all over the world have responded to the COVID-19 outbreak by closing down significant parts of their economies, leading to a liquidity crisis for many firms. Default risk increased because firms’ stream of cash flows took a hit, and with it firms’ rollover risk. How did firms behave in their bid to shore up their precarious liquidity positions? In the paper “The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID,” Viral Acharya and Sascha Steffen use a novel dataset of daily credit line drawdowns at the firm-loan-level and find evidence consistent with a “dash for cash” of BBB-rated firms. This was particularly true of firms that had similar credit quality to non-investment-grade rated ones. The risk of becoming a fallen angel, i.e. losing investment grade status, played a very significant role. These firms managed to convert committed credit lines into cash which, in turn, placed pressure on banks’ balance sheets. While these results show that banks’ financial health improved markedly in the decade after the 2008 financial crisis, they also shed light on the pressure brought to bear on banks from the accelerated drawdowns of credit lines and provisions for possible future credit losses. There is an important message from the paper: Regulators should keep a very close eye on banks’ financial health and either require or nudge them to do everything possible to conserve capital by, for example, withholding dividend payments or stopping share repurchases.

Spotlight by Andrew Ellul
Photos courtesy of Viral V. Acharya and Sascha Steffen

Paper Spotlight: Corporate Innovation and Returns

Jan Bena

Lorenzo Garlappi

Here is an interesting fact that spans corporate finance and asset pricing: among U.S. public firms, innovation is mostly concentrated in a very small group of large corporations, and innovation “leaders” experience lower systematic risk than the “laggards.” Jan Bena and Lorenzo Garlappi, in their paper “Corporate Innovation and Returns,” investigate this fact by, first, proposing a winner-takes-all patent-race model, and then empirically showing that a firm’s expected return decreases in its innovation and increases in that of its rivals. When firms’ investments cannot be reversed, and major innovation breakthroughs are idiosyncratic events, the winner-takes-all nature of innovation means that leader firm’s decision to invest will end up eroding the laggard firm’s innovation option value. The laggard will thus become riskier. Jan and Lorenzo empirically test the model’s predictions and show that there is a negative effect of the share of innovation output on firms’ beta. This implies that there is a significant impact arising from the strategic interaction among firms competing in innovation on expected returns. One interesting implication of these results is that the pattern of within-industry heterogeneity of equity betas discovered in this paper challenges the commonly followed practice of using industry peer betas to estimate firms’ cost of capital.

Spotlight by Andrew Ellul
Photos courtesy of Jan Bena and Lorenzo Garlappi

Paper Spotlight: Wages and Firm Performance: Evidence from the 2008 Financial Crisis

Paige Parker Ouimet

Elena Simintzi

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. This paper is coming soon to advance access.

Spotlight by Andrew Ellul
Photos courtesy of Paige Parker Ouimet and Elena Simintzi

Paper Spotlight: Resiliency of Environmental and Social Stocks: An Analysis of the Exogenous COVID-19 Market Crash

Rui Albuquerque

Yrjo Koskinen

Shuai Yang

Chendi Zhang








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

Free Access to Papers about COVID-19

Our publisher, Oxford University Press, has pledged to make content related to COVID-19 freely accessible online. The Review of Asset Pricing Studies and The Review of Corporate Finance Studies have forthcoming special issues on COVID-19. These papers will be freely accessible online as part of OUP’s collection. You can read these papers as they become available on advance access (RAPS) and advance access (RCFS).