Working Papers
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, increase the number of employees and establishments in 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.
Geographic Overlap, Agglomeration Externalities and Post-Merger Restructuring
With Jarrad Harford (University of Washington) and Yiming Qian (University of Connecticut).
Presentations: NHH CCF Conference (2023); MFA (2024); FMA-Europe (2024); Eighth Annual Mergers and Acquisitions Research Centre Conference (2024); FMA-Asia/Pacific (2024); EFA (2024)
Abstract: We study how agglomeration forces influence the post-merger restructuring of the combined firm through the channel of the geographic overlap of acquirer and target establishments. We hypothesize and find that the geographic effect differs for horizontal and vertical mergers, and depends on the strength of (co)agglomeration externalities. In horizontal mergers, having the acquirer and target establishments in the same city reduces the likelihood of the target establishment being kept or sold, but increases the likelihood of closure. Closure is consistent with the hypothesis that horizontal mergers aim to reduce production redundancy or contain local competition. In vertical mergers, the target establishments are less likely to be sold when the acquirer establishment is located in the same city, indicating that firms benefit from geographically proximate inputs for production. Using proxies to capture three dimensions of (co)agglomeration: input sharing, knowledge spillover, and labor pooling, we find that the acquirer is more likely to keep target establishments in proximate cities when (co)agglomeration benefits are high. This holds for both horizontal and vertical mergers. When examining the post-merger performance of the kept target establishments, we find those that benefit from agglomeration externalities in horizontal mergers show a significant increase in productivity.
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: We show that firms preserve inflated credit ratings through tax planning that improves capital and earnings. Rating inflation leads to greater tax avoidance, and this effect is stronger when firms engage in risky projects, consistent with rating inflation allowing high-risk firms to pool with low-risk firms, and when managers have greater career concerns. When ratings are high but accurate, firms do not avoid more taxes, consistent with rating inflation uniquely affecting a firm’s tax planning. Tax avoidance reduces the likelihood of a rating downgrade over a three-year horizon, indicating that risky firms can successfully maintain inflated ratings with tax planning.
Shrink to Greatness? Evidence from Incentives Tied to Accounting Rates of Return
With Lingling Wang (University of Connecticut).
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.
Import Competition and Investment in Corporate Lobbying
With Ying Xing (University of Connecticut). Draft available upon request.
Presentations: NHH Norwegian School of Economics (2024)
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 negative relationship between investment in lobbying and import competition in the US that persists three years into the future. Our results suggest firms prefer to cut investment in lobbying and invest more in innovation to maintain their competitive advantage in response to increased competition. Reduced investment in lobbying does coincide with a worse regulatory environment for the firm. This supports the argument that corporate lobbying provides value to the firm.
The Value in Learning: Deconfounding Rival Responses to Cybersecurity Breaches
With Bharadwaj Kannan (Colorado State University) and Costanza Meneghetti (Colorado State University). Draft available upon request.
Presentations: NHH CCF Conference (2024)
Abstract: Is learning from rival firms valuable? We exploit a data set of plausibly exogenous cybersecurity data breaches to show that learning from an industry breach creates value. This result is driven by peer firms who have access not only to considerable resources but also have a strong incentive to take advantage of a weakened rival. To understand whether firms commit to learning, we test an “incentive” and an “investment” channel. We find that peer firms commit to learning after an industry breach by adjusting their CEO’s pay structure to ensure commitment, reduce cash holding to lower the risk of a future attack, and invest in intangible capital. Overall, our results suggest that learning from peers is valuable as long as firms credibly commit to the learning process.
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.