Review of Corporate Finance Studies

“When Does Higher Firm Leverage Lead to Higher Employee Pay?” by Timothy Dore and Rebecca Zarutskie

The 2023 RCFS Winter Conference is now accepting submissions. Please see the Call for Papers and the Call for Proposals on “Corporate Market Power: Drivers and Financial Consequences” for more details. The conference, which features a dual submission option with RCFS, will take place February 18-19, 2023, at the Royal Sonesta in San Juan, Puerto Rico.

The sponsoring editors are Andrew Ellul, Isil Erel, Camelia Kuhnen, and Robert Marquez. The submission deadline is November 10, 2022, for papers and November 30, 2022, for registered reports.

The August issue of RCFS has published! It is a Special Issue on “Discrimination, Disparity, and Diversity in Finance.”

The Editor’s Choice paper is:

Does Homeownership Reduce Wealth Disparities for Low-Income and Minority Households?
Ashleigh Eldemire, Kimberly F. Luchtenberg, and Matthew M. Wynter

The introduction is:

“Discrimination, Disparities, and Diversity in Finance”
Andrew Ellul, Isil Erel, Camelia Kuhnen, Uday Rajan, editors

“Managerial Entrenchment and the Market for Talent” by Fabio Feriozzi

Jillian Grennan

Donor-advised funds (DAFs), important vehicles for philanthropic giving in the United States, have grown significantly in the recent past and continue to do so. DAFs are different from traditional charities because of the inherent flexibility contained in their structures. Of particular importance is the possibility given to donors to “give now, decide later.” In the RCFS paper “Social Change through Financial Innovation: Evidence from Donor-Advised Funds,” Jillian Grennan uses a novel dataset on the universe of 4,209 unique DAF sponsors from 2013 to 2018 to explore how DAF characteristics are associated with social progress. She shows that a number of features can explain why DAFs have grown so much in the recent past: access to modern financial technology tools; focus on diversity, equity, and inclusion in their grant making; and the possibility of liquidity transformation for noncash gifts. Overall, these features reduce important frictions in charity giving, thus reducing financial constraints in this sector. Grennan also finds that some of these features are associated with potential social benefits. A notable example is the positive effect of innovative DAFs on the value-weighted share of grant dollars channeled to charities in high-inequality areas. There is also a positive impact of innovative DAFs on funding for the most efficient charities, and during times of greater need. Overall, these results on DAFs constitute the first type of systematic evidence about such vehicles, and they can help us understand whether such vehicles can promote social change through efficient philanthropic funding.

Spotlight by Isil Erel
Photo courtesy of Jillian Grennan

Renée Adams

Michelle Lowry

The reasons that can explain the very important issue of gender disparities in labor market outcomes are still quite nebulous. To remove such disparities we need first to understand the sources of women’s differential labor market outcomes. Differences in human capital have been found lacking in explaining observed differences. Recent developments in the literature point to three potential factors: gender differences in preferences, structure of work that can differentially impact men versus women, and bias. Research on women’s labor outcomes typically only address one explanation at a time, resulting in very limited conclusions. Most of the differential outcomes arise within occupations rather than between occupations, calling for an investigation focused on one occupation.

These limitations are addressed by Renée Adams and Michelle Lowry in their paper “What’s Good for Women Is Good for Science: Evidence from the American Finance Association.” In this work, the authors investigate the importance of multiple factors simultaneously in explaining why females’ and males’ work experiences differ and cast in a within-occupation analyses. To do so, the authors develop a survey with the American Finance Association (AFA) to assess the professional culture in finance academia.

Focusing on within-occupation effects, the authors find no observable gender differences of significance in preferences. This is a surprising result because conventional narratives have always referred to this dimension as a potential explanation. Any preferences that may exist cannot explain women’s worse career experiences. There is an important role that institutions and policy can play in addressing gender discrimination: addressing poor individual experiences, and improving culture, for example by encouraging unconscious bias training. These findings within the academic environment have implications for the broader finance industry.

Spotlight by Andrew Ellul
Photos courtesy of Renée Adams and Michelle Lowry
First published May 9, 2022

Giorgio Albareto

Maddalena Galardo

Paolo Emilio Mistrulli

Bianca Sorvillo

As migration across countries and continents has continued to rise, societies must ask whether these new members of their communities are suffering from lower access to finance due to a trust gap arising from cultural differences. There is ample evidence showing that cultural differences have an important effect on economic outcomes, and they do so through two different channels. First, there could be a dislike toward counterparties who have a different cultural background, akin to taste-based discrimination. Second, cultural differences could give rise to informational frictions, reminiscent of statistical discrimination. Identifying and disentangling these two channels empirically is very hard.

In “Culture, Lending Relationships, and the Cost of Credit,” Giorgio Albareto, Maddalena Galardo, Paolo Emilio Mistrulli, and Bianca Sorvillo study how cultural differences affect the functioning of credit markets. Specifically, they investigate whether migrants to Italy pay more for credit than natives after controlling for several factors that could otherwise have an impact on credit supply. Using granular data, the authors find that, on average, migrants pay 36 basis points more for credit relative to natives. There is cross-sectional heterogeneity across different migrant groups: migrants from Asia pay the highest rates, while migrants from other European Union countries pay the lowest ones. While interesting, these results on their own cannot help us conclude whether the mechanism generating them is taste-based or statistical discrimination. To do so, the authors track the interest rates charged to subsequent loans as the borrower-lender relationship matures over time. In a long-term relationship, a lender should be able to obtain both soft and hard information about the borrower. However, if loan officers practice taste-based discrimination against borrowers with a culturally different background than their own, interest rate differentials on repeat loans would not be affected by the additional information collected by a lender. The results are more consistent with statistical discrimination: the interest rate differential between migrants and natives narrows as the borrower-lender relationship evolves over time.

Spotlight by Andrew Ellul
Photos courtesy of Giorgio Albareto, Maddalena Galardo, Paolo Emilio Mistrulli, and Bianca Sorvillo