Associate Editors

We are pleased to welcome the following Associate Editors to the RCFS team:

Jan Bena (University of British Columbia)
Marco Di Maggio (Harvard Business School)
Michelle Lowry (Drexel University)
Kelly Shue (Yale School of Management)
Tracy Wang (University of Minnesota)

Their terms begin today, November 1, 2021.

Call for Papers: UBC Winter Finance Conference 2022

The Call for Papers for the UBC Winter Finance Conference 2022 conference is now available. The conference, which features a dual submission option with RAPS and RCFS, will take place March 4-6, 2022. The RAPS sponsoring editors are Jeffrey Pontiff and Zhiguo He, and the RCFS sponsoring editor is Andrew Ellul. The submission deadline is November 22, 2021. For more details, please see the Call for Papers.

Paper Spotlight: Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 U.S. Elections

Stefano Ramelli

Alexander F. Wagner

Alexandre Ziegler

Richard J. Zeckhauser








Recent survey evidence shows that the list of institutional investors paying close attention to environmental issues, with a consequent impact on their investment decisions, is increasing. A central factor that ought to be considered is the role of government regulation, especially the uncertainty surrounding it, and subsequent response of firms to those regulations against the background of a worsening environmental scenario. This is the dimension that Stefano Ramelli, Alexander F. Wagner, Alexandre Ziegler, and Richard J. Zeckhauser, investigate in their paper Investor Rewards to Climate Responsibility: Stock-Price Responses to the Opposite Shocks of the 2016 and 2020 U.S. Elections. The authors argue that analysis of firms’ climate-related performance so far ignore the fact that firms differ with respect to both current environmental footprint and to climate responsibility. The latter, which includes firms’ future-oriented strategies and voluntary initiatives on the road to transitioning to a low-carbon economy, is the dimension mostly overlooked so far and the paper’s major contribution. The authors treat these two dimensions of the challenge separately and do so by exploiting stock price reactions to the shock to climate policy following the 2016 U.S. election, and the opposite shock from the 2020 election. These two political shocks provide a good laboratory to analyze the interconnections between climate regulation, firms’ climate-related performance, and firm value. The authors find that, while investors reacted to the 2016 election by rewarding carbon-intensive firms, investors also rewarded companies that showed stronger commitment to the environmental transition and climate strategies. How should one interpret these findings? The authors provide what they call the “boomerang hypothesis” as an explanation, where long-term investors expected the roll-back of climate regulation over the Trump administration to be transitory in nature and a blip against a backdrop of tightening environmental regulations as the corporate world grapples with how to achieve more ambitious greenhouse gas emissions. The evidence is consistent with the view that the Trump Administration’s expected environmental hostility may have led to higher, not lower, demand for climate-responsible firms by long-term investors.

Spotlight by Andrew Ellul
Photos courtesy of Stefano Ramelli, Alexander F. Wagner, Alexandre Ziegler, and Richard J. Zeckhauser
First published August 17, 2021

Paper Spotlight: Public Firm Borrowers of the U.S. Paycheck Protection Program

Samuel Rosen

Anna Cororaton

The Paycheck Protection Program (PPP), with over $500 billion distributed over a few months in 2020, was one of the largest stimulus programs in U.S. history. The program was created to help “small businesses” survive the COVID-19 shock. However, in a forthcoming RCFS paper, “Public Firm Borrowers of the U.S. Paycheck Protection Program,” Anna Cororaton and Samuel Rosen document that nearly half of U.S. public firms were eligible for the Paycheck Protection Program (PPP) in 2020 and almost half of those eligible public firms chose to borrow! Nonetheless, loans to public firms comprised a very small fraction of total PPP funds (<0.3%). Even though most public borrowers of the PPP loans were smaller with less cash, higher leverage, and fewer investment opportunities, 13.5% of them ended up returning their loans facing public backlash. In addition, their firm values declined upon PPP loan announcement, and they grew slower in 2020 relative to nonborrowers. Overall, authors show that concerns of reputational harm and negative signaling appear to affect public firms’ participation in government funding.

Spotlight by Isil Erel
Photos courtesy of 
Anna Cororaton and Samuel Rosen

Paper Spotlight: Effect of the Equity Capital Ratio on the Relationship between Competition and Bank Risk-Taking Behavior

Jia Hao

Kuncheng Zheng

Risk taking by banks has been discussed extensively by researchers and policy makers for many years, even preceding the Great Recession. Literature has focused on two mechanisms that alter banks’ risk-taking behavior: higher regulatory capital ratios and higher competition due to bank deregulation. But, how does a bank’s equity capital ratio interact with banking competition in their impact on risk taking? In a forthcoming RCFS paper, “Effect of the Equity Capital Ratio on the Relationship between Competition and Bank Risk-Taking Behavior,” Jia Hao and  Kuncheng Zheng explore the answer to this important question and provide interesting findings. While competition in the banking market mitigates banks’ risk-taking behavior on average, banks’ ex- ante equity capital ratio can alter this relationship. Authors show that increased competition leads to relatively larger reductions in risk taking–especially in their lending portfolios–only by banks with low ex-ante equity capital ratios. This difference between high- and low-capital banks in risk-taking behavior cannot be explained by pre-existing trends, geographical location, or other bank characteristics, such as size, that may influence bank risk-taking. Overall, this paper shows us that a bank’s capital ratio has not only a direct effect but also an indirect effect on its risk taking. Therefore, this indirect effect should be considered in using capital requirements to mitigate risk taking by banks.

Spotlight by Isil Erel
Photos courtesy of
 Jia Hao and Kuncheng Zheng
First published July 2, 2021

Paper Spotlight: Private Equity and the Resolution of Financial Distress

Edith S. Hotchkiss

David C. Smith

Per Strömberg








Leveraged buyouts by private equity funds have been a constant, and growing, phenomenon in corporate finance over the last two decades and their importance is likely to increase in the post-COVID world. Empirical literature on this subject has explored various angles, but one unanswered question is whether the high leverage used in private equity (PE) buyout transactions contributes to the disproportionately high default rates among buyout targets. In the paper “Private Equity and the Resolution of Financial Distress,” Edith S. Hotchkiss, Per Strömberg and David C. Smith investigate how PE ownership correlates with the probability of default and resolution of financial distress, a relationship that is, theoretically speaking, unclear. One can argue that actions that boost the short-term returns to PE owners, increasing leverage to pay large dividends as an example, could drain liquidity and put PE-owned firms at higher default risk. But there is an opposite argument to be made as well: PE sponsors could help avoid defaults or resolve financial distress, thus preserving firm value, because of their expertise and skill. The authors find a series of interesting results that will help the literature understand better this relationship. First, they find that PE-backed firms have higher leverage and default at higher rates than other companies borrowing in leverage loan markets. This said, conditional on contemporaneous leverage, default rates are not significantly higher for PE-owned firms. These results suggest that it is leverage, rather than PE-backing specifically, that could be the key driver of default probabilities. Second, among leveraged borrowers that experience a default, PE-backed firms restructure more quickly and are less likely to be liquidated. Third, PE owners are more likely to retain control post-restructuring than other pre-default owners, often by infusing capital as firms approach distress. Overall these results suggest a very nuanced view of PE investors and their potential impact on subsequent target firms’ default: while PE investors contribute to more defaults due to the high leverage they put on companies’ balance sheets, such cost is reduced by the PE investors’ intrinsic abilities and skills in dealing with and managing financial distress.

Spotlight by Andrew Ellul
Photos courtesy of Edith S. Hotchkiss, David C. Smith, and Per Strömberg