Working Papers
Shrink to Greatness? Evidence from Incentives Tied to Accounting Rates of Return
With Lingling Wang (University of Connecticut). Revise & Resubmit Review of Corporate Finance Studies
Presentations: AAA Spark Meeting (2023)*; AAA Annual Meeting (2023)
Abstract: Accounting rates of return (ARRs), like ROA or ROIC, have become one of the most adopted performance metrics in executive compensation. Unlike level-based metrics, executives can improve ARRs by either boosting earnings or reducing assets/investment. Our study reveals that firms that tie CEO pay to ARRs achieve significantly better accounting rates of return by shrinking the denominator, e.g., trimming fixed assets and cutting investments. These actions, however, do not improve asset efficiency and are followed by weaker sales growth. Firms seem to weigh the effort required to cut assets against improving earnings, opting for shrinking strategies when costs are lower.
Paid Family Leave Laws and Firm Resource Allocation
Solo-authored.
Awards: EFMA-WRDS 2023 Best Conference Research Award
Presentations: University of Connecticut (2022); University of North Dakota (2022); NHH Norwegian School of Economics (2023); EFMA Annual Meeting (2023); FMA Annual Meeting ( 2023); EALE Conference (2024)
Abstract: Using the adoption of state-level Paid Family Leave (PFL) laws as an exogenous shock to local labor markets, I examine how firms reallocate labor internally and adjust aggregate investment. Consistent with a reduction in labor market frictions, I find firms reallocate labor towards treated establishments, are more likely to keep establishments in the treated states, and reduce total investment in capital expenditures. The change in investment policy supports the substitutability of labor and capital in a firm’s production function. Collectively, the evidence supports the argument that the adoption of a PFL program attracts business activity to the state.
Agglomeration and Post-Merger Restructuring
With Jarrad Harford (University of Washington) and Yiming Qian (University of Connecticut).
Coverage: ECGI Blog
Presentations: NHH CCF Conference (2023); MFA (2024); FMA-Europe (2024); Eighth Annual Mergers and Acquisitions Research Centre Conference (2024); FMA-Asia/Pacific (2024); EuropeanFA (2024); AFA (2025)
Abstract: We show that while horizontal and vertical acquirers treat overlapping target establishments differently, agglomeration forces influence post-merger restructuring in both types of mergers. Using proxies to capture three dimensions of (co)agglomeration: input sharing, knowledge spillover, and labor pooling, we find that acquirers are more likely to keep geographically proximate target establishments when (co)agglomeration benefits are high. Retained establishments benefiting the most from agglomeration externalities in horizontal mergers show a significant increase in productivity. In addition to explaining how acquirers restructure the firm post-acquisition, our findings show how agglomeration externalities are reinforced and expanded by establishment-level decisions made following mergers.
Risk, Reward, and Ratings: How Firms Use Tax Avoidance to Sustain Inflated Credit Ratings
With Sean Flynn (Cornell University), Todd Kravet (University of Connecticut), and Trent Krupa (University of Arkansas).
Presentations: University of Washington – Terry Shevlin Retirement Conference (2023)*; University of Connecticut (2023)*; NHH Norwegian School of Economics (2023); ATA Midyear Meeting (2024)*
Abstract: Theory suggests that managers will increase risky investment when credit ratings are inflated. This results in a “feedback effect” whereby risky firms are subsequently revealed as low quality and receive a credit rating downgrade. We provide novel evidence that managers attempt to obscure their risk profile and maintain inflated credit ratings through tax avoidance that improves capital and earnings. This effect is stronger when firms engage in risky projects, and when managers have greater career concerns, consistent with managers engaging in tax avoidance to support the firm’s inflated rating while waiting for the payoffs of long-term risky investments. Tax avoidance reduces the likelihood of a rating downgrade over a three-year horizon, indicating that tax avoidance can enable high-risk firms to continue to pool with low-risk firms. When ratings are high but accurate, managers do not increase tax avoidance, consistent with rating inflation changing the risk-reward tradeoff from tax avoidance. Our results add to our understanding of the economic effects of rating inflation and the tools used by managers to avoid the negative consequences associated with subsequent ratings downgrades.
Import Competition and Investment in Corporate Lobbying
With Ying Xing (University of Connecticut).
Presentations: NHH Norwegian School of Economics (2024); EasternFA (2025, scheduled)
Abstract: This paper studies how exogenous variation in import competition affects firm investment in corporate lobbying. Using import competition in other developed countries as an instrumental variable, we find a significant negative relationship between import competition and lobbying, with effects persisting up to three years. Our findings align with the theoretical models that predict firms reduce political investments as they adjust to a new market equilibrium driven by the increase in foreign competition. We further explore potential mechanisms driving this shift, finding that the decrease in lobbying is most pronounced in firms that are capable of rapidly adjusting investment strategies and firms that gain more value from their market power. Additionally, we find that the reduction in lobbying coincides with a worsening regulatory environment, supporting the argument that corporate lobbying provides value to the firm. Overall, our findings suggest that while firms find lobbying to be a suboptimal strategy for preserving competitive advantage under heightened import competition, it remains critical for managing regulatory risk.
The Value in Learning: Rival Responses to Cybersecurity Breaches
With Bharadwaj Kannan (Colorado State University) and Costanza Meneghetti (Colorado State University).
Presentations: NHH CCF Conference (2024); Nordic Initiative for Corporate Economics Conference (2024); FMA (2024); MFA (2025, scheduled)
Abstract: Does learning from rival firms drive growth? Using a dataset of exogenous cybersecurity breaches, we find that firms learning from industry breaches experience significantly better growth prospects and enhanced operating performance. Two mechanisms explain this: an Incentive Channel and an Investment Channel. First, firms adapt CEO compensation structures to mitigate risk-taking while still incentivizing stock price maximization. Second, they invest in human capital, particularly in sales roles, to seize opportunities created by breaches. These findings reveal that leveraging a rival’s misfortune provides tangible value, highlighting the strategic importance of learning from competitors’ challenges.
Corporate Social Responsibility in Supply Chains: Evidence from Conflict Minerals Disclosure
With Jiaying Li (NHH Norwegian School of Economics) and Karin Thorburn (NHH Norwegian School of Economics).
Abstract: We use Section 1502 of the Dodd-Frank Act, which requires disclosure of supply chain information for firms using conflict minerals in their products, as an exogenous shock to show that increased supply chain transparency encourages firms to “clean up” their supply chains. After the visibility increase, customers are 7.9% more likely to sever ties with high-reputational-risk suppliers. Our findings suggest that reputational concerns, outside options, and monitoring costs drive this behavior. We find that customers replace their old, high-risk suppliers with new, more ESG friendly suppliers, a change that translates to improved sales growth and higher firm value. In summary, our findings show that stakeholders’ ESG preferences can influence supply chain decisions when firms are required to disclose credible supply chain information.
Executive Pay Cuts: Solidarity or Bargaining? Evidence from the COVID-19 Pandemic
With Cianna Duringer (University of Connecticut), Yiming Qian (University of Connecticut), and Lingling Wang (University of Connecticut). Draft available upon request.
Presentations: Virginia Tech (2023)*
Abstract: One of the first decisions many firms take as a response to the COVID-19 pandemic is cutting executive pay, which are rare events in normal times. We collect data on executive pay cuts among Russell 3000 firms at the onset of the pandemic and provide the first evidence on the motives and implications of an executive pay cut. We examine two (non-mutually exclusive) motives for executive pay cuts: (i) solidarity – executives share pains to boost employee morale, and (ii) bargaining – executives make a gesture first to get employee concessions. We find evidence for both motives. The likelihood of executive pay cuts increases if the firm has a higher percentage of female directors, is listed among the 100 Best Company to work for, or is perceived as socially responsible. Employee satisfaction is generally higher in firms that initiated executive pay cuts. Firms are also more likely to cut executive pay when there is union presence and their employees have more outside job opportunities. Following such executive pay cuts, layoffs or furloughs are more likely to occur.
*Presentation by coauthor.
Works in Progress
The Effect of Government Subsidies on Corporate Emissions
With Trent Krupa (University of Arkansas).
Avoid the Middle: The Real Effects of Changes to the Smaller Reporting Company Definition
With Sean Flynn (Cornell University).