The value of social capital in small business lending: Evidence from the Small Business Administration program
Huu Nhan Duong, Thu Ha Nguyen, Van Hoang Vu

We explore how social capital influences small business lending under the Small Business Administration (SBA) program. We find that banks reduce loan spreads for SBA borrowers located in counties with high social capital. This effect is stronger among SBA Express lenders or when lenders face higher information asymmetry, but weaker during periods of more government assistance and SBA guarantee. Firms located in higher social capital counties are also less likely to default on their loans. Overall, our findings highlight the role of social capital—as an important source of soft information— in the pricing and performance of small business loans.
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Dependence matters! Investor sentiment and stock returns: A sliced inverse regression approach
Lingyu He, Jing Shi, Yizhi Wang, Qiaoqiao Zhu

We construct a new investor sentiment index by exploiting the information of the sentiment proxies with the sliced inverse regression approach. We show that the new index is a strong negative predictor of future aggregate stock returns in both in-sample and out-of-sample tests. Further evidence indicates that the new sentiment index generates large utility gains for a mean-variance investor who optimally allocates between equities and risk-free assets. In addition, we show that this sentiment index exhibits the strongest return predictability for portfolios sorted on size, value, momentum, and industry.
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The impact of horizontal mergers on suppliers’ cash holdings
James E. Upson, Chao Wei

We examine the impact of customer horizontal mergers on suppliers’ cash holdings. We show that suppliers strategically reduce their cash holdings after the merger to counteract the increased bargaining power of merged customers. This effect is more pronounced when the supplier relies on customers and less when the supplier operates in a concentrated industry. Consistent with the bargaining power hypothesis of cash holdings, we find that cash-reducing suppliers experience higher postmerger cash-flow margins. Finally, we show that suppliers are more likely to use cash reserves to finance their research and development investments to credibly reduce liquidity.
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The discount for lack of marketability term structure
John D. Finnerty

I empirically estimate a discount for lack of marketability (DLOM) term structure for restriction periods up to 10 years. I model the multi-year DLOM by annually compounding the 1-year DLOM plus a term premium over the restriction period. I fit the model to a sample of 5,333 private equity placement implied DLOMs between 1985 and 2017. I estimate different DLOM term structures for the last and earlier pre-initial public offering (IPO) private equity transactions. DLOM term structures exhibit level, slope, and curvature shifts similar to an interest rate term structure.
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IPO proceeds deployment and firm performance
Mark R. Huson, Chong Meng

Newly public incumbents (NPIs) experience negative price reactions to industry followers’ initial public offerings (IPOs). We find that deploying IPO proceeds rapidly amplifies the negative impact of peer IPOs. These effects are larger for unprofitable NPIs and smaller for NPIs with better capital market access. Our findings underscore the importance of maintaining financial flexibility over the pursuit of a first-mover advantage in shaping NPIs’ performance.
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Information absorption in stocks with short-selling constraints
Ioannis V. Floros, Ajai K. Singh, Katsushi Suzuki

We use a Japanese dataset with unique regulatory features to examine information absorption in stocks with short-selling constraints. Japanese stock exchanges place short-sales restrictions on a specific subset of stocks and have distinctive regulations pertaining to seasoned equity offerings (SEOs). In sharp contrast to the United States, no offer-related information is released on the Japanese SEO issue date. We observe a significant price reaction on the issue date only for short- sales restricted stocks, manifested when additional shares are introduced. We posit that the phenomenon is attributable to short-sales restrictions causing a delayed reaction to the stale publicly available information, to which the market has already reacted at its announcement.
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Does local economic freedom matter for the cost of corporate borrowing from the banking sector? Evidence from the US states
Thanh Cong Nguyen, Theodora Bermpei, Antonios Nikolaos Kalyvas

Using data on large loans to US firms, we show that higher economic freedom in borrowers’ headquarters states reduces the cost of bank credit. A one standard deviation increase in economic freedom lowers loan spreads by 12.38 basis points ($1.5 million interest savings for the average loan). We also provide evidence supporting the economic mechanism by which lenders view economic freedom as enhancing borrowers’ ability to capitalize on investment and growth opportunities. The main drivers of this effect are freedom from government spending and taxation, while labor market freedom particularly benefits smaller firms and those in high economic growth potential states. Furthermore, higher economic freedom is linked to longer loan maturities, reduced fees, and looser general covenants.
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Academic CEOs and corporate innovation
George J. Jiang, Wenquan Li, Yaohua Li, He Wang

In this article, we examine the impact of academic CEOs (i.e., CEOs with academic experience) on corporate innovation. We find that firms managed by academic CEOs have strong aspirations for innovation and generate more patents with higher citations. We employ exogenous CEO turnover to alleviate endogeneity concerns. In addition, whereas corporate innovation gradually increases following the entry of new academic CEOs, there is a clear decrease in innovation output after the departure of academic CEOs. This net effect concentrates in innovation-intensive industries. Moreover, academic CEOs enhance innovation by leveraging their network with academic community and ability to secure government funding.
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The Psychological Cost of Debt: Evidence from Islamic Housing Mortgages
Saad Azmat, Isabel Harbaugh Macdonald

How do borrowers prioritize financial versus psychological costs of holding debt? We explore these trade-offs using repayment data for 3,705 borrowers with an Islamic housing mortgage in Pakistan. The product allows borrowers to make early payments. Around 40% of borrowers in our sample make early payments, leading to an average cost of PKR 247,707 ($2,890 USD). We develop a new model of consumer hedonics to explain these results, and rule out religion, commitment devices, and cost misunderstanding as complete explanations. These findings suggest that there is a psychological benefit to decreasing debt, even if an account is not closed fully.
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Spillover effects of creditor rights on corporate payout policy
Najah Attig, Paul Brockman, Mohammad Rahaman

We use exogenous changes in creditor rights from staggered enactments of anti-recharacterization laws to show that enhanced creditor rights lead to economically significant increases in dividend payments. This impact is more pronounced for firms that are financially constrained, poorly governed, informationally opaque, and prone to agency problems. Our detailed loan-contract results show that stronger creditor rights provide greater access to credit markets, and it is through this channel that firms are able to redirect more funds toward shareholder payouts. Overall, our findings suggest that improving the rights of one stakeholder can create positive spillover effects for other stakeholders.
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The predictive power of option prices for stock returns and nonfundamental shocks
Asli Eksi, Saurabh Roy

Option prices can predict stock returns. Previous studies suggest that this is because option traders have private information about the fundamentals of the stock. We show another reason is that option traders can anticipate the reversal of nonfundamental shocks to stock price. We use S&P 500 index inclusion as an example of a nonfundamental shock. We document that index inclusion increases the implied volatility skew of added stocks, which then predicts the reversal of the stock price shock in the following months.
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Does linguistic complexity of annual reports affect corporate leasing decision?
Danlin Chi, Hasibul Chowdhury, Nicolas Eugster, Jiayi Zheng

Using a sample of 94,697 US firm-year observations from 1994 to 2017, we document that annual report complexity is positively and significantly associated with a firm’s operating lease ratio. In addition, we find that financially constrained and weakly governed firms with complex financial reports lease more. Finally, by employing a difference-in-differences method with the Plain Writing Act 2010 and a regression discontinuity design with eXtensible Business Reporting Language (XBRL) adoption, we find that the positive association is highly likely to be causal. Overall, our study shows that firms with linguistically complex annual reports strategically choose to use leasing as an alternative source of funding.
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The causal impact of short-sale constraints on the idiosyncratic volatility puzzle
Yufeng Han, Angela Morgan, Jack Wolf, Weike Xu

We investigate the causal impact of short-sale constraints on the idiosyncratic volatility (IVOL) puzzle, where high-IVOL stocks yield lower future returns. We leverage two opposing exogenous shocks to short-sale constraints: (1) 2005 Regulation SHO, which relaxes constraints for pilot stocks, and (2) 2003 Jobs and Growth Tax Relief Reconciliation Act (JGTRRA), which tightens constraints during dividend record months. We find that short-sale constraints significantly affect IVOL pricing: Regulation SHO weakens the IVOL effect for pilot stocks, whereas JGTRRA strengthens it after dividend record months. These findings underscore the importance of short-sale constraints in understanding the IVOL puzzle.
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Bond covenants and the speed of corporate capital structure adjustment: Evidence from China
Xueying Zhang, Duowen Wu, Thomas Walker, Aoran Zhang

We investigate the effect of bond covenants on the speed of corporate capital structure adjustment. Based on manually collected bond covenant information from publicly listed Chinese firms between 2007 and 2019, we construct an index that measures the intensity of corporate bond covenants. Our results show that the greater the covenant intensity index of a firm’s debt covenants, the faster the capital structure adjustment. Option covenants, restrictive asset transfer covenants, restrictive investment covenants, and event-driven covenants all have a positive and significant association with the speed of capital structure adjustment, whereas no such effect is observed for financing covenants and repayment arrangement covenants. Furthermore, we examine the direction of adjustment and adjustment method, and demonstrate that bond covenants promote an upward adjustment in a firm’s capital structure by increasing debt financing. An analysis of heterogeneity effects reveals that the positive relation between the intensity of bond covenants and speed of capital structure adjustment is more pronounced in state-owned companies and companies headquartered in areas with higher legal standards. Finally, we show that information transparency, internal control, and environmental, social, and governance (ESG) performance are channels through which bond covenants affect the speed of capital structure adjustment.
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Do product market threats affect the leasing decision?
Hasibul Chowdhury, Khoa Hoang, Shofiqur Rahman, Jiayi Zheng

We examine the impact of product market threats on firms’ leasing decisions. Using fluidity as a measure of these threats, our analysis shows that product market threats significantly increase firms’ reliance on leases. This effect is more pronounced for firms with greater financial constraints, cash-flow volatility, predation and obsolescence risk, information asymmetries, and weak corporate governance. We also show that the economic benefits of leasing to counter competitive threats are substantial and diverse, including capturing growth, maintaining profitability, and mitigating inefficient capital allocation. These findings suggest that firms strategically use leasing as a defense mechanism against product market threats.
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