Common Ownership and Creative Destruction: Evidence from U.S. Consumers
Review of Finance, forthcoming
How does common ownership affect creative destruction? What are the underlying mechanisms? Do the effects of increased common ownership vary among different customer segments? Using product-level data, we show that, on average, firms with greater common ownership introduce new products at a faster rate and discontinue existing products at a similar pace. The observed economic impacts intensify over time, reflecting the gradual nature of knowledge spillovers and the learning curve. Subsequent to an increase in common ownership, portfolio firms tend to both add and drop products that are dissimilar to those of their rival firms, with the net effect of decreasing between-firm product dissimilarity. We also find that the effects are more relevant for product modules with greater technological likeness, lower barriers to market entry, and greater numbers of product market players. Product variety is substantially greater in product lines catering to higher-income households. Overall, the result highlights the procompetitive effects of increased common ownership.
Capital, Ideas, and the Costs of Financial Frictions
Pablo Ottonello & Thomas Winberry
NBER Working Paper, January 2024
We study the role of financial frictions in determining the allocation of investment and innovation. Empirically, we find that firms are investment-intensive when they have low net worth but become innovation-intensive as they accumulate more net worth. To interpret these findings, we develop an endogenous growth model with heterogeneous firms and financial frictions. In our model, low net worth firms are investment-intensive because their returns to capital are high. Financial frictions slow the rate at which firms exhaust the returns to capital and shift towards innovation. Calibrating to the US economy, we find that the resulting lower growth implies large GDP losses even though capital misallocation is small. In other words, financial markets effectively fund the implementation of existing ideas, but do not adequately fund the discovery of new ideas. If innovation has positive spillovers, a planner would not only raise innovation but also lower investment expenditures among constrained firms.
The Role of High-Skilled Foreign Accounting Labor in Shaping U.S. Startup Outcomes
Daniel Aobdia, Robert Carnes & Kevin Munch
University of Florida Working Paper, January 2024
We investigate the impact of high-skilled foreign accounting workers on U.S. startup firms. Using the H-1B visa lottery setting, we find that startups randomly awarded access to hire high-skilled foreign accounting workers are more likely to secure funding and successfully exit the private market. IPO outcomes are more likely when startups can hire foreign workers with higher salaries and executive titles, and in tighter local labor markets. Consistent with these workers aiding market participants, we find that IPO startups demand high-skilled foreign accounting workers at a higher rate during their prospectus years. Additionally, IPO startups have lower analyst forecast errors and dispersion, and are less likely to misstate their financial statements. Collectively, our findings indicate that H-1B accounting workers help improve startup outcomes. As the accounting profession struggles to find workers, we provide evidence of how a source of talent serves an economically important sector of the U.S. economy.
The Effect of Takeover Protection in Quiet Life and Bonding Firms
Eliezer Fich, Jarrad Harford & Adam Yore
Journal of Financial and Quantitative Analysis, forthcoming
Antitakeover measures are controversial because the evidence on their net effect on shareholders is mixed. We propose that, for many firms, the potential bonding benefits outweigh the agency costs of the quiet life, explaining the mixed results. We study business combination and poison pill laws as exogenous shocks to takeover vulnerability and use shareholder valuation of internal slack as an indicator of the net effect of takeover protection. Firms susceptible to quiet life agency problems exhibit a decrease in the market-assessed value of internal slack. Conversely, cash appreciates at companies where takeover protection bonds commitments with major counterparties.
ETF and corporate reporting
In Ji Jang & Namho Kang
Financial Review, forthcoming
When ownership by ETFs is high, the penalty to missing earnings expectation is smaller by 43%. The smaller penalty is not due to underreaction but is attributed to the long investment horizon of ETFs. Consequently, firms with high ETF ownership engage in earnings and expectation managements less frequently and are less likely to reduce discretionary spending to marginally meet or beat. Using Russell 1000/2000 index reconstitution as an identification, we corroborate the main results. Amid conflicting evidence for the effect of ETFs on market efficiency, our finding highlights their positive effect on corporate reporting.
What Do Shareholders Want? Consumer Welfare and the Objective of the Firm
Keith Marzilli Ericson
NBER Working Paper, January 2024
Shareholders want a firm's objective function to place some weight on consumer welfare, motivated by both self-interested and altruistic motivations. Firms have a unique technology for improving consumer welfare: lowering inefficient price markups, which increases consumer welfare more than it lowers profits. Optimal pricing formulas can be adapted to account for shareholders' marginal rate of substitution between profits and consumer welfare. Calibrations from preference parameters show many shareholders should place non-trivial weights on consumer welfare. A survey experiment on a representative sample elicits how shareholders would vote on resolutions giving strategic guidance to firms on what objective to pursue. Only 7% would vote for pure profit maximization. The median individual is indifferent between $0.44 in profits or $1 in consumer surplus, with those owning stocks preferring a lower weight on consumer welfare than non-stockholders.
Why did shareholder liability disappear?
David Bogle et al.
Journal of Financial Economics, February 2024
Why did shareholder liability disappear? We address this question by looking at its use by British insurance companies until its complete disappearance. We explore three possible explanations for its demise: (1) regulation and government-provided policyholder protection meant that it was no longer required; (2) it had become de facto limited; and (3) shareholders saw an opportunity to expunge something they disliked when insurance companies grew in size. Using hand-collected archival data, our findings suggest investors attached a risk premium to companies with shareholder liability, and it was phased out as insurance companies expanded, which meant that they were better able to pool risks.
Rank-and-file accounting employee compensation and financial reporting quality
Christopher Armstrong et al.
Journal of Accounting and Economics, forthcoming
We use a proprietary database with detailed, employee-specific compensation contract information for rank-and-file corporate accountants who are directly involved in the financial reporting process to assess their influence on their firms' financial reporting quality. Theory predicts that paying above-market wages can both attract employees with more human capital and subsequently encourage better performance. Consistent with audit committees structuring accountants' compensation so as to mitigate financial misreporting that might otherwise occur, we find that firms with relatively well-paid accountants tend to issue higher-quality financial reports. Moreover, this relationship is more pronounced when firms' senior executives have stronger contractual incentives to misreport and when the audit committee is more independent from management.