Corporate Relations

Kevin Lewis

March 14, 2023

The strategic use of corporate philanthropy: Evidence from bank donations
Seungho Choi, Raphael Jonghyeon Park & Simon Xu
Review of Finance, forthcoming


This paper examines the strategic nature of banks' charitable giving by studying bank donations to local nonprofit organizations. Relying on the application of antitrust rules in bank mergers as an exogenous shock to local deposit market competition, we find that local competition affects banks' local donation decisions. Using county-level natural disaster shocks, we show that banks with disaster exposure reallocate donations away from non-shocked counties where they operate branches and toward shocked counties. The reallocation of donations represents an exogenous increase in the local share of donations in non-shocked counties for banks with no disaster exposure and leads to an increase in the local deposit market shares of such banks. Furthermore, banks can potentially earn greater profits from making donations and tend to donate to nonprofits that have the most social impact. Overall, our evidence suggests that banks participate in corporate philanthropy strategically to enhance performance.

How Resilient Are Firms' Financial Reporting Processes?
Ed deHaan et al.
Management Science, forthcoming 


The timely flow of financial information is critical for efficient capital market functioning, yet we have little understanding of firms' and auditors' collective abilities to maintain timely financial reporting when under duress. We use COVID as a stress test case to examine whether reporting systems can withstand systemic increases in complex economic events and coordination challenges. Despite COVID-related challenges persisting through 2020 and beyond, we document surprisingly modest average delays in financial reports during COVID and only in Q1-2020. Reporting timeliness reverts to pre-COVID levels no later than Q2-2020. We find no evidence of meaningful declines in actual reporting quality during COVID, but we do find some evidence consistent with declines in perceived reporting quality. Overall, our findings indicate that current financial reporting processes are remarkably robust and provide insights about financial reporting more broadly. In particular, given that nearly all firms were able to weather the unprecedented disruptions caused by COVID, our findings imply that most material reporting delays observed outside of COVID are likely a result of either a firm's strategic choices or exceptionally fragile reporting processes.

Does Socially Responsible Investing Change Firm Behavior?
Davidson Heath et al.
Review of Finance, forthcoming


Using micro-level data, we examine the behavior of socially responsible investment (SRI) funds. SRI funds select firms with lower pollution, more board diversity, higher employee satisfaction, and better workplace safety. Yet both in the cross-section and using an exogenous shock to SRI capital, we find SRI funds do not significantly change firm behavior. Moreover, we find little evidence they try to impact firm behavior using shareholder proposals. Our results suggest SRI funds are not greenwashing, but they are impact washing; they invest in a portfolio of firms with better environmental and social conduct, but do not follow through on their promise of impact.

CEO Compensation Incentives and Playing It Safe: Evidence from FAS 123R
Nicholas Carline, Oksana Pryshchepa & Bo Wang
Journal of Financial and Quantitative Analysis, forthcoming 


This paper uses FAS 123R regulation to examine how reduction in CEO compensation incentives affects managerial `playing-it-safe' behavior. Using proxies reflecting deliberate managerial efforts to change firm risk, difference-in-difference tests show that affected firms drastically reduce both systematic and idiosyncratic risks, leading to an 8% decline in total firm risk. These reductions in risk are achieved by shifting to safer, but low-Q, segments while closing the riskier ones, without significant changes in investment levels. Our findings suggest that decrease in risk-taking incentives provided by option compensation, when not compensated for by alternative incentives or governance mechanisms, exacerbates risk-related agency problem.

CEO political orientation, risk taking, and firm performance: Evidence from the U.S. property-liability insurance industry
Sangyong Han & Kwangmin Jung
Economics of Governance, March 2023, Pages 1-39 


We examine how CEOs' political orientation can affect risk-taking behavior and firm performance in U.S. property-liability insurance companies. Using information on political donations made by CEOs to measure their political identity, we document a strong relationship between CEOs' political conservatism and risk-averse behavior in insurers' decision-making. We find that the more Republican leaning (or more politically conservative) a CEO is, the less risk a property-liability insurer tends to take in the capital market and underwriting business. We also provide evidence that insurers managed by Republican-oriented CEOs are more likely to achieve better financial profitability. The overall findings lead to the conclusion that property-liability insurers with politically conservative CEOs tend to have lower variability in their asset investments and underwriting business but are more likely to generate sufficient corporate value to satisfy their shareholders and policyholders. Unlike other relevant studies, our research attempts to address impacts of corporate governance and potential causality issues and shows that an insurer with a politically conservative CEO and more board members having multiple directorships is likely to take more risks. Our findings can offer important implications for property-liability insurers' leadership in managing corporate risks and core business activities.

Timing is key: When does the market react to unionization efforts?
Bastian Hofmann & Eline Schoonjans
Finance Research Letters, forthcoming 


We estimate short-term capital-market effects of unionization efforts at publicly-listed firms and their subsidiaries in the United States between 2011 and 2019. Our short-horizon event study reports significant negative average cumulative abnormal returns at the public announcement of successful union election certifications. Our results suggest that, on average, the market perceives successful unionization as detrimental to future firm performance, expects unionization efforts, and mainly reacts when all uncertainty is resolved at the publicly-announced certification. Finally, we show that shareholders' expectations regarding unionization efforts differ for firms with recurrent and rare election cases.

Trust, Transparency, and Complexity
Richard Thakor & Robert Merton
Review of Financial Studies, forthcoming 


This paper develops a theory that generates an equilibrium relationship between product complexity, transparency, and trust in firms. Complexity, transparency, and the evolution of trust are all endogenous, and equilibrium transparency is nonmonotonic. The least-trusted firms choose the lowest product complexity, remain opaque, and substitute ex ante third-party verification for information disclosure and trust. Firms with an intermediate level of trust choose an intermediate level of complexity and transparency through disclosure, with more trusted firms choosing greater complexity and lower transparency. The most-trusted firms choose maximum complexity while remaining opaque, eschewing both verification and disclosure.

Patent Trolls And The Market For Acquisitions
Arash Dayani
Journal of Financial and Quantitative Analysis, forthcoming


I study the effect of patent-infringement claims by patent trolls on acquisitions of small firms. Exploiting staggered adoption of state anti-patent troll laws, I find that the laws have two effects. First, the number of acquisitions of small firms declines after these laws are adopted. Second, the anti-troll laws increase the acquisition price for acquirers. The market reflects the increased cost of acquisition as measured by lower acquisition announcement returns. Large firms increase R&D after the adoption of state laws, replacing external innovation. Using a sample of acquisitions that are plausibly unaffected by the laws, I disentangle alternative explanations.


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