The role of internal capital markets during financial crises: Evidence from Korean chaebols
Junyong Lee, Kyounghun Lee, Frederick Dongchuhl Oh, Jungheon Park

We examine the effective contribution of internal capital markets (ICMs) within business groups during financial crises, focusing on Korean chaebols. Using panel data on Korean firms, we first confirm that chaebol-affiliated firms show a lower probability of bankruptcy than stand-alone firms during crises. We also find that chaebol-affiliated firms with low bankruptcy risk are more likely to be capital providers, while firms with high growth opportunities but higher bankruptcy risks tend to be receivers in ICMs. Moreover, this capital reallocation contributes to improving post-crisis group-level performance. Overall, our study highlights the importance and effectiveness of ICMs for Korean business groups during financial crises.
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Import competition and stock price crash risk
Mansoor Afzali, Gonul Colak, Khalela Francis

We investigate how globalization-induced import competition affects stock price crash risk. Import competition increases price pressure and reduces profit margins, prompting managers to withhold negative information, resulting in higher crash risk. Based on a sample of US manufacturing firms from 1974 to 2019, we find that firms whose products face declining shipping costs experience increased stock price crash risk. To address endogeneity, we employ a difference-in-differences design centered on China’s 2000 Permanent Normal Trade Relations (PNTR) status. Our findings indicate that a stock’s tail risk depends not only on firm and managerial characteristics but also on heterogeneous exposure to macroeconomic trends such as globalization.
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Does legal protection of trade secrets reduce the cost of debt? Evidence from the inevitable disclosure doctrine
Haiyan Jiang, Carl Hsin-han Shen, Qing (Clara) Zhou

We examine the effect of the inevitable disclosure doctrine (IDD) on cost of debt. Our difference-in-differences analyses reveal that the IDD significantly reduces the loan spread for borrowers in adopting states. To elucidate the mechanisms of such finding, we find that the IDD’s effect is weaker in industries with high management turnover but stronger for long-term loans. Moreover, cross-sectional tests reveal that the effect is weaker for firms facing high industry competition, internal control weakness, and information asymmetry. IDD also mitigates loan covenant tightness. These findings elucidate the implications of IDD on corporate borrowing costs.
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Daily entry and exit triggers for open market repurchases
Christine Brown, Sean Pinder

Using publicly available daily data, we analyse the daily decision repurchasing firms make to enter or exit the market during open market repurchase programs. Firms enter the market to repurchase after a stock price downturn and maintain their presence in the market while stock returns remain negative. The lower the preceding overnight return, the greater the number of stocks repurchased. Firms exit the market when overnight returns become positive. Firms repurchase stocks at an average price below the volume-weighted-average-price with lower overnight stock returns associated with higher repurchase prices, a result which provides direct evidence of price support. In addition, firms predominantly repurchase on successive days, as part of a strategy to support the price in a downward trending market. Nevertheless, firms achieve significant purchase discounts when prices rise or fall significantly, consistent with (short-term) market timing.
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Do carbon prices affect stock prices?
Patrick Bolton, Adrian Lam, Mirabelle Muûls

We explore how carbon pricing affects corporate financial performance during Phase 3 of the European Union Emissions Trading Scheme (EU ETS). We find that the relationship between carbon prices and stock prices depends critically on the proportion of verified emissions covered by freely allocated ETS allowances: For firms with a greater shortfall in emissions allowances (a greater permit coverage), an increase in daily carbon prices is associated with a decrease (increase) in contemporaneous stock prices. We provide additional evidence that firms with a significant permit shortfall reduce verified emissions in the EU, with no apparent carbon-leakage.
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New evidence on the economic motives for bank mergers
Robert Loveland, Kevin Okoeguale

This study uses a comprehensive sample of mergers and acquisitions to reexamine the economic motives for bank mergers. We find that banks with good growth opportunities, high profitability, and high asset utilization rates use mergers to diversify geography and business activity. Banks with low profitability and poor asset utilization rates use focusing mergers to rationalize operations. We also analyze the sources of value creation. We find that local and focusing mergers and distant and diversifying mergers both create significantly positive value. Moreover, any differences in returns between focusing and diversifying deals are driven by firm, industry, and deal characteristics.
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A closed-form pricing solution for options on assets with pricing error
Louis R. Piccotti

This article examines the effects that pricing errors in the underlying asset have on options prices and their Greeks. Pricing errors can be viewed as random proportional transaction costs. When pricing errors are information-unrelated, options prices are unambiguously higher than the Black-Scholes case and increasing in the pricing error variance. Hedging volatility is higher and the optimal exercise price for American put options is decreased. The option implied risk-neutral density and option Greeks are materially affected, which leads to suboptimal risk management and hedging when pricing errors are not accounted for. Simulation and data evidence validate the theoretical results.
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The impact of subordinate executives’ comparative confidence and competence on corporate risk-taking
Md Raihan Uddin Chowdhury, Abdullah-Al Masum, Feixue Xie

Our findings reveal that subordinate executives with higher comparative confidence and competence in overseeing CEO actions drive greater corporate risk-taking, notably through strategic investments and financing activities that enhance firm value. These include capital expenditures, research and development (R&D), intangible assets, advertising, and financing via cash, equity, and leverage, which collectively account for about 46.68% of return on assets volatility and 27.75% of cash flow volatility. The impact is particularly strong in competitive and complex business environments but diminishes with higher executive age and tenure.
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Selling to buy: Asset sales, acquisition financing, and value creation
Christos Mavrovitis (Mavis), Nathan P. McNamee, Nickolaos G. Travlos

In line with increased liquidity offered by asset sales, our findings show that firms selling large assets prior to acquisitions are more likely to use cash as payment method. Additionally, we find that in subsequent cash acquisitions, firms using cash stemming from asset sales experience higher announcement abnormal returns compared to firms using cash from other sources of funds, such as internally generated cash flows, debt financing, and equity issuance, which are linked to agency costs and information asymmetry effects. The higher wealth effects suggest that funds from asset sales are inflicted with relatively lower adverse valuation effects that are associated with other sources of funds.
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From tension to trust: The role of corporate culture in easing labor relations
Xu Niu

This article presents the first extensive empirical exploration into how corporate culture impacts labor relations. The study finds that a strong corporate culture correlates with improved labor relations across multiple dimensions: firms with a strong corporate culture experience a decreased likelihood of employees filing charges of unfair labor practices, achieve higher ratings on employee satisfaction surveys, exhibit a lower likelihood of unionization, and show reduced employee efforts towards unionization through National Labor Relations Board (NLRB) elections. These findings are robust and appear to be unaffected by endogeneity, but rather indicate a probable causal relationship where a strong corporate culture plays a critical role in enhancing labor relations.
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Active ingredients: How actively managed holdings shape target date fund performance and costs
D. Eli Sherrill, Kate Upton

This paper examines the impact of active funds held by target date funds (TDFs). Results indicate holding more funds with active management benefits TDF performance, on average. The benefit is driven by domestic equity holdings for TDFs that are far from the target date and domestic income holdings for TDFs that are near or past the target date. Time to target and market conditions impact TDF choice of activeness. TDFs benefit from embracing their family’s core competency of active/passive management, and the largest families’ TDFs outperform. Finally, holding more active funds is associated with higher TDF expense ratios.
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Managerial Opportunism and Corporate Investment Efficiency
David Javakhadze, Anita Pennathur, Brian Silverstein

Our study investigates how managerial opportunism, measured by executives’ insider trading, affects corporate investment efficiency and performance. We find that such opportunism undermines investment efficiency, with distortions in financial reporting quality serving as a channel of influence. Furthermore, our analysis reveals that this impact varies depending on the strength of governance structures. We also observe a negative association between managerial opportunism and accounting performance metrics, as well as risk-adjusted stock returns. Our findings are robust across various model specifications and measurements, emphasizing the significance of managerial opportunism as a personality trait in corporate decision-making.
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CEO-employee pay ratio disclosure and dividend policy
Rajib Chowdhury, John A. Doukas

We examine whether and how the magnitude of the CEO pay ratio affects dividend policy in the context of inequality-averse investors. Our results demonstrate a positive association between the two and remain robust to endogeneity concerns. We find that the CEO pay ratios positively affect dividends irrespective of whether CEO compensation contracts motivate risk-averse or risk-taking policy choices. This non-diverse effect on dividend policy across CEOs with different pay structures contradicts previous studies and highlights the wealth effect resulting from the SEC mandate. Further analyses reveal a negative effect of the pay ratio on cash holdings and investment inefficiency.
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Do earnouts create the right incentives? Earnings management around earnout-based acquisitions
António Pedro Coelho, Gilberto Loureiro

We investigate whether acquiring firms with earnout agreements engage in earnings management during the earnout period. Using a sample of completed deals between 1998 and 2017, we find that acquirers manage their earnings downward during the earnout period to avoid or reduce the earnout payment to the target. This earnings manipulation is more likely to be performed through real activities than accruals. We find evidence that earnings manipulation does indeed lead to lower earnout payments. Our findings also suggest that earnout deals predominantly paid in cash are most likely to create the incentives for downward earnings manipulation through real activities.
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