“How do Capital Requirements Affect Loan Rates? Evidence from High Volatility Commercial Real Estate” by David P. Glancy and Robert J. Kurtzman
“Golden Handcuffs and Corporate Innovation: Evidence from Defined Benefit Pension Plans” by Huu Nhan Duong, Bin Qiu, and S. Ghon Rhee
“Effect of the Equity Capital Ratio on the Relationship between Competition and Bank Risk-taking Behavior” by Kuncheng Zheng and Jia Hao
A panel honoring Craig W. Holden will be held at SFS Cavalcade 2021 on May 25 at 1:15pm. The panel speakers are Stacey Jacobsen (SMU), Avanidhar (Subra) Subrahmanyam (UCLA), and Charles Trzcinka (Indiana University).
It is not just managers that can have a short-term orientation—the forthcoming theoretical paper “Competition for Flow and Short-Termism in Activism,” by Mike Burkart and Amil Dasgupta, shows that activist funds too can focus on the short term. In the model, activists add value by preventing wastage by the manager. To signal their type to their own investors, they take a short-term action such as boosting leverage to make a high payout. However, in the long term, a debt overhang problem can arise, resulting in a positive NPV project being forgone in some states. A similar dilemma comes up with other actions that boost the firm in the short term at the expense of long-term performance, such as reducing R&D expenditure. Actions by activist funds therefore exacerbate the exposure of the firm to the business cycle, with interventions in good times leading to investor payouts, and subsequent economic downturns placing the firm under greater stress. This pattern has been observed recently with some private equity financed firms, and the model applies well to hedge funds as well. The paper highlights that while activist funds have a valuable role to play in corporate governance, they may introduce their own frictions into the process, by acting as short-term investors.
Spotlight by Uday Rajan
Photos courtesy of Mike Burkart and Amil Dasgupta
First published December 11, 2020
Craig W. Holden
We are deeply saddened by the passing of our colleague and friend, Craig Holden. Craig was the Gregg T. and Judith A. Summerville Chair of Finance at the Kelley School of Business at Indiana University and the current Department Chair. He was a prolific scholar and advisor to many students. In his role as SFS Secretary/Treasurer, which he began in 2012, Craig was a tremendous contributor to the SFS and its journals. He was a champion of international research collaboration, online publication, and was instrumental in improvements that changed how we interact with papers online. Most recently, when the 2020 Cavalcade was going to be canceled due to COVID-19, Craig volunteered to host the entire event virtually with the Kelley School. With only a few weeks of lead time, he managed to design an online conference format that was a great success and serves as a model for many other conferences. Craig was a wonderful colleague who cared greatly for his coworkers, his students, and for the profession. He spoke fondly of his family, of the Kelley School of Business, and of UCLA, where he earned his PhD. The SFS is better for his involvement these past nine years, and we will miss him greatly.
RCFS has a submission option for papers that were previously reviewed by other journals. The goal of such review process is to help the editors arrive at a quick and informed decision on a paper based on feedback received by the authors from previous submissions. A paper is eligible for this optional review process if it was previously submitted to a few select journals; please see Prior Review Policy for details. If you choose this option, you will be asked to upload the reviews from previous submissions of your paper to other journals. All material and correspondence sent to RCFS will be treated as private and confidential.
Steven Chong Xiao
There is a growing literature on the stock price of a firm influencing the actions of the firm’s managers. To what extent do managers at other firms rely on the information in the stock price of a given firm? The forthcoming paper “Stock Market Information and Innovative Investment in the Supply Chain,” by Lantian Liang, Ryan Williams, and Steven Chong Xiao, addresses this question by looking at how suppliers react to changes in the market value of customers. Specifically, the authors examine the effect of changes in Tobin’s q of a customer in a given year on investment in innovation at a supplier in the future. The two measures of innovative activity they consider are based on (i) R&D investment by the supplier the following year, and (ii) the number of patents filed by the supplier over the following two years. A one-standard-deviation in Tobin’s q at a customer is followed by an over 7.5% increase in each of their measures of future innovation at the supplier. These correlations are consistent with the supplier reacting to changes in the market value of the customer (to be fair, they are also consistent with the supplier and the stock market reacting to a common source of information about the customer). The authors also use CARs when a customer announces a new product as an explanatory variable, and find that a one-standard-deviation in the customer CAR increases the number of customer-related patents at a supplier in the future by a similar order of magnitude. These results enhance our understanding of how the stock price of a firm may communicate information to parties that transact with the firm.
Spotlight by Uday Rajan
Photos courtesy of Lantian Liang, Ryan Williams, and Steven Chong Xiao
RCFS’s March issue, 10(1), has published online. The Editor’s Choice paper is “Institutional Investors and Hedge Fund Activism” by Simi Kedia, Laura T. Starks, and Xianjue Wang. This issue also features two papers related to the COVID-19 pandemic: “Efficient Programs to Support Businesses During and After Lockdowns ” by Thomas Philippon and “Crisis Poison Pills” by Ofer Eldar and Michael D. Wittry.
Michael D. Wittry
The stock market stress caused by the onset of the COVID-19 outbreak generated an ideal situation for cash-rich activists to buy strategic equity positions in target firms. Distinguishing low stock valuations due to bad management decisions, potentially necessitating an activist campaign, from the systematic blow due to the pandemic’s economic impact, may have been too difficult under the circumstances we observed in the early months. Some of these activist campaigns may end up destroying firm value through the unnecessary disruption of management activities. The question that arises is how management responds to deter such activists. One such action can be the adoption of poison pills, once a common feature of firms’ governance structures, that have mostly disappeared in the recent past. In the paper “Crisis Poison Pills,” Ofer Eldar and Michael D. Wittry investigate this question starting from the observation that over 70 pills were adopted by U.S. firms following the outbreak. Ofer and Michael find that these “crisis pills” have lower triggers, shorter durations, and are mostly aimed at deterring accumulations of equity stakes by activist investors. The paper investigates the stock market response and finds a positive stock price reaction associated with the adoption of these crisis pills specifically designed to deter disruptive stock acquisitions by activist investors. The authors are very careful in not making any causal inferences because firms choose this route to address their idiosyncratic challenges. This said, these results suggest a more nuanced view of the impact arising from the adoption of poison pills depending on market conditions: the decisions to adopt crisis pills aimed at staving off activist campaigns that could have been disruptive were not perceived by the market as hurting firm value.
Spotlight by Andrew Ellul
Photos courtesy of Ofer Eldar and Michael D. Wittry
First published December 30, 2020
“Skilled Labor Risk and Corporate Policies” by Yue Qiu and Tracy Yue Wang