Author: gowans.1

What Drives Global Lending Syndication? Effects of Cross-Country Capital Regulation Gaps

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Abstract: We examine how cross-country differences in capital regulations shape the structure of global lending syndicates. Using globally syndicated loans extended by banks from 44 countries, we find that strictly regulated banks participate more in syndicates originated by lead lenders facing less stringent capital regulations. This finding is consistent with the explanation that strictly regulated banks seek risky deals outside the border and loosely regulated banks have an advantage to procure such deals. Accordingly, lending syndicates involving loosely regulated lead arrangers and strictly regulated participants extend loans to riskier borrowers, charge higher spreads, and incur higher default rates. The effect of regulatory differences is mitigated when participants are subject to higher accounting standards, and amplified when the participant and lead banks share prior syndicate relations. Finally, we show that global syndication exposes both participants and lead arrangers to greater systemic risk.

Authors: Janet Gao, Yeejin Jang

Date: August 21, 2019

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Corporate Culture and Mergers and Acquisitions: Evidence from Machine Learning

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Abstract: This paper presents new large sample evidence on the role of corporate culture in mergers and acquisitions (M&As) and how corporate culture evolves over time. Our starting point is the most often-mentioned values by the S&P 500 firms on their corporate Web sites (Guiso, Sapienza, and Zingales 2015): innovation, integrity, quality, respect, and teamwork. Using the latest machine learning technique and earnings conference call transcripts, we obtain corporate cultural values for a large sample of firms over the period 2003–2017. We find that firms score high on the cultural value of innovation are more likely to be acquirers, whereas firms score high on the cultural values of quality and respect are less likely to be acquirers. In terms of merger pairing, we find that firms closer in cultural values, particularly, of innovation, quality, or teamwork, are more likely to do a deal together, whereas firms further apart in cultural values are less likely to do the same. Moreover, we show that firm-pairs sharing the dominant culture of teamwork take a shorter time to complete an announced deal and are associated with fewer post-merger integration challenges, whereas firm-pairs dominant in different cultural values of quality versus teamwork are associated with poor stock market performance and more post-merger integration challenges and retention issues. Finally, we show that post-merger, acquirer cultural values are positively associated with pre-merger target firms’ cultural values, suggesting acculturation. We conclude that corporate culture plays an important role in M&As and corporate culture itself is also shaped by M&As.

Author: Kai Li, Feng Mai, Rui Shen, Xinyan Yan

Date: April 2018; Last revised: April 26, 2020

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Coordinated Engagements

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Abstract: We study the nature of and outcomes from coordinated engagements by a prominent international network of shareholder activists cooperating to influence firms on environmental and social issues. We find a two-tier engagement strategy, combining lead active investors with supporting investors, is effective in successfully achieving the stated engagement goals and subsequently improving target performance. An activist is more likely to lead the collaborative dialogue when its stake in the target firm is higher and when the target is domestic. Success rates are elevated when the lead investors are domestic, supporting investors are international, and the investor coalition is influential.

Authors: Elroy Dimson, Oğuzhan Karakaş, Xi Li

Date: December 24, 2018; Last revised: October 27, 2019

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The Role of Financial Conditions in Portfolio Choices: The Case of Insurers

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Abstract: Many institutional investors depend on the returns they generate to fund their operations and liabilities. How do these investors’ financial conditions affect the management of their portfolios? We address this issue using the insurance industry because insurers are large investors for which detailed portfolio data are available, and can face financial shocks from exogenous weather-related events. Results suggest that more constrained insurers have smaller portfolio weights on riskier and illiquid assets, and have lower realized returns. Among corporate bonds, for which we can control for regulatory treatment, results suggest that more constrained insurers have smaller portfolio weights on riskier corporate bonds. Following operating losses, P&C insurers decrease allocations to riskier corporate bonds. The effect of losses on allocations is likely to be causal since it holds when instrumenting for P&C losses with weather shocks. The change in allocations following losses is larger for more constrained insurers and during the financial crisis, suggesting that the shift toward safer securities is driven by concerns about financial flexibility. The results highlight the importance of financial flexibility to fund operations in institutional investors’ portfolio decisions.

Authors: Shan Ge, Michael S. Weisbach

Date: May 31, 2019; Last revised: February 21, 2020

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Resilience to a Cyber-Attack on the Automobile Industry: A Computable General Equilibrium Approach

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Abstract: The overall objective of this research is to improve risk management for cyber-threats among both private and public sectors through better understanding of the economic consequence of cyber-attacks and the benefits of various cyber resilience tactics in reducing these consequences. This is carried out in 3 stages: 1) estimation of direct effectiveness and costs of post-attack cyber resilience tactics; 2) adaptation of a state-of-the-art economic impact modeling approach to estimate cyber-attack consequences and resilience potential at both the microeconomic and macroeconomic levels; and 3) an empirical assessment of cyber-resilience in the U.S. Automobile Industry using the economic model to provide insights for decision makers to enhance resilience to cyber-attacks.

Authors: Adam Rose, Zhenhua Chen

Date: November 17, 2017

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On the Tension between Product Performance and Confidentiality Protection

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Abstract: The general consensus of the academic literature on product development is that it is best to be centrally located in the network of firms in the industry. This allows faster access to more and better information and knowledge. The degree to which a firm is centrally located in a network (i.e., its network centrality) has been shown to relate to various positives outcomes, including increased product development speed and better products. The product development literature also argues that the degree to which a focal firm’s partners are NOT directly tied to each other can enhance the novelty of products developed by the network. The outsourcing and offshoring of activities has led to a world in which product development work has become increasingly distributed. Further, the increasing digitization of work has led to a world in which the digital assets exchanged between product development partners are increasingly important. The main thrust of our research was to understand whether, in the context of the development of a digital product, the established benefits of network centrality may not have a downside. Specifically, does network centrality relate to an increased risk of a confidentiality breach?

Authors: Yingchao Lan, John Gray, Aravind Chandrasekera, and Brett Massimino

Date: October 15, 2018

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