Shareholder activism, director labor market, corporate boards
I provide evidence that activist investors improve the operation of the director labor market and profit from its imperfections. It is proposed that effective activists can match directors to targeted firms where they can improve performance because of their experience. I show that long-term returns are significantly higher when a director is appointed to the target, especially when they have prior experience that makes them a good fit. Understanding that complex turnaround campaigns are only launched when a matched director is available provides insights into the collective action problem of disengaged investors, inherent in the regular director nomination process.
I develop and validate a new method to identify activism campaigns based on investor characteristics revealed in regulatory filings. Only a subset of shareholders that signal an intent to change the firm's control are activist investors. Misclassification may lead to inconsistencies in findings because campaigns are commonly identified through a subjective evaluation of filings that often include boilerplate language only. Professional investment manager status, portfolio size and a track record of proxy solicitations are important determinants of board and CEO turnover, common channels for influencing control. Learning about activist characteristics provides an insight into their role as owners.
Large shareholders: Insiders kept out of the loop?
I examine insider trading by blockholders and compare their performance to executives and directors. Large shareholders are meant to be important monitors, yet my findings reveal that they are less informed because their trades earn significantly lower returns compared to executives when they purchase their company's stock. Using trading data extracted directly from trading reports allows for a classification of investor types to examine heterogeneity in trading patterns. This method also highlights that commercial databases may misclassify insiders that fall into multiple categories. I show that market timing by insiders emphasized in prior literature is driven by relative changes in stock prices, not valuation.
Firms that age well: life cycles and default risk
with Jiri Svec and Danika Wright
The evolution of firms is not necessarily uniform. Exploring how this affects credit risk models, we find that firm life cycle provides additional explanatory power not captured by age. Firm age has an ambiguous effect on default risk and its impact during periods of high volatility is insignificant. Unobserved firm heterogeneity is an important determinant of credit default swap spreads and, when accounted for, riskier growth firms command a lower spread compared to mature firms that commonly benefit from the lowest spreads. Firms that age well by maintaining a growth profile are rewarded with lower cost of capital.
Time to acquire: Regulatory burden and M&A activity
with Usha Creedy and Danika Wright
Firms go public to make acquisitions, but private firms benefit from lower regulatory cost. Investment by newly public firms may be limited if managers need to focus on compliance instead of growth. Exploiting a 2012 US policy reform, we show that when regulatory cost is lower, firms make more acquisitions, do so more quickly after listing, and also increase other forms of investment. Examining potential unintended consequences of reduced regulation, we find that opportunistic bidding arising from higher information asymmetry does not explain these results. We inform the ongoing policy debate on broadening the scale and scope of regulatory relief.
Work in progress
Insiders responding to the outside world: Business confidence during the macroeconomic shocks
Disagreement on boards
Unconstrained human capital
Matching observations across multiple datasets for corporate governance research carries with it some well-known and other less known challenges. This paper highlights best practices for carrying out merging the widely used BoardEx, CRSP and Compustat databases accessed via Wharton Research Data Services (WRDS), utilizing their respective company and security identifiers. A companion Github repository of the associated SAS code is made available to assist researchers in consistently applying the discussed matching techniques.
This paper provides guidance on the appropriate calculation of financial ratios for capital markets-based empirical research in finance and accounting. Practical examples are provided employing the widely-used Compustat database, and all calculated ratios are made available for download in a dataset. A companion Github repository of the associated SAS code is offered to assist researchers in consistently calculating key financial ratios.