Abstract. This paper examines the importance of organizational form for firm performance. I exploit plausibly exogenous variation in organizational form that resulted from the implementation of the Public Utility Holding Company Act (PUHCA) of 1935. PUHCA, through the so-called “death sentence” clause (DSC) stipulated that holding companies (HC) could only retain businesses as long as their assets were geographically integrated and their organizational structures were simplified. Using hand-collected data, my main findings are five. First, PUHCA led to a drastic simplification of corporate ownership: over 40% of firms ceased to be group firms and the number of layers of corporate ownership was significantly reduced. Second, following the DSC, firms that in 1935 were part of regionally fragmented groups, were three times more likely to be independent in 1955 than those regionally integrated. Third, using measures of regional fragmentation as instrumental variables, I show that standalone firms are more productive and profitable, grow faster, and pay more dividends than firms affiliated to HCs. Fourth, I find evidence that is consistent with the idea that HCs were likely to extract rents from consumers and minority investors. Lastly, consistent with superior HC tax arbitrage capabilities, standalone firms are less aggressive at capturing the tax benefits of debt. In sum, the evidence casts doubt on the idea that HCs are superior organizational structures, and also challenges the notion that PUHCA’s divestment requirements led to the “death” of the industry as anticipated by its critics.
with Fred Panier and Pablo Villanueva.
Abstract. This paper shows that capital structure significantly responds to changing tax incentives. To identify the effect of taxes, we exploit the introduction of a novel tax provision (the notional interest deduction, or NID) as an arguably exogenous source of variation to the cost of using equity financing. The NID, introduced in Belgium in 2006, drastically reduces the tax-driven distortions that favor the use of debt financing by allowing firms to deduct from their taxable income a notional interest charge that is a function of equity. Our main findings are four. First, the NID led to a significant increase in the share of equity in the capital structure. Second, both incumbent and new firms increase their equity ratios after the NID is introduced. Third, the largest responses to these changing tax incentives are found among large and new firms. Fourth, the increase in equity ratios is explained by higher equity levels and not by a reduction in other liabilities. The results are robust to using data from neighboring countries as a control group, as well as, relying on a battery of tests aimed at isolating the effect of other potential confounding variables. Overall, the evidence demonstrates that tax policies designed to encourage the use of equity financing are likely to lead to more capitalized firms.
Revise and Resubmit, Journal of Finance.
with M. Bennedsen and Daniel Wolfenzon
Abstract. This paper shows that CEOs meaningfully affect firm performance. Using variation in CEO exposure resulting from the number of days a CEO is hospitalized, we provide estimates of the effect of CEOs on firm policies, holding firm and CEO matches constant. We have four main findings. First, CEOs have an economically and statistically significant effect on profitability, revenue, and investment outcomes. Firms whose CEOs are hospitalized underperform when their chief executives are sick but otherwise exhibit similar performance relative to other firms. Second, we find robust CEO effects for relatively young and highly educated CEOs, and for CEOs in rapidly growing environments, settings where the value of CEOs actions are arguably highest. Third, we show that CEOs are unique: the hospitalization of other senior executives does not have similar effects on performance. Fourth, consistent with the idea that hospitalizations meaningfully affect CEO potential at the firm level, we find that even relatively short hospitalizations lead to significant increases in turnover probabilities. Overall, our findings demonstrate that CEOs are a key determinant of firm performance, and that the value of CEO succession and contingency plans is likely to be substantial.
Revise and Resubmit, Journal of Finance.
Competition and Private Benefits of Control, with Maria Guadalupe
Abstract. This paper investigates the impact of competition on private benefits of control (PBC). To test for the effect of competition on private benefits, we use two indexes that measure the level of product and input market anti-competitive regulations. We estimate PBC using the voting premia between shares with differential voting rights. Using a panel dataset of 586 firms in 16 countries, our main findings are three. First, within-country increases in the intensity of competition lead to lower estimates of private benefits of control. Second, competition significantly reduces the dispersion in private benefits. Third, the reduction in the level and dispersion of PBC that result from competition are particularly prominent in weak-rule-of-law countries, in manufacturing industries and in less-profitable firms. Overall, our results suggest that product market competition can help in curbing private benefits of control.
Revise and Resubmit, The Review of Financial Studies.
Abstract. Empirical studies on the importance of control rights on efficiency are hindered by actual –presumably efficient– ownership patterns. Finding settings where the right owner does not own the right asset and where ownership arbitrarily changes is challenging. In this paper I aim at overcoming these problems by investigating the elimination of foreign majority ownership restrictions in Mexico. Specifically, I study the performance of affiliates of multinational corporations for which (1) ownership restrictions appeared to bind before they were lifted, and (2) parent ownership increased from minority to majority as the reform was implemented. Using detailed plant-level information, I find that multinational control leads to large improvements in total factor productivity, particularly in industries that rely on technological innovations from their parent companies. Control is also associated with higher investment –particularly in technology intensive forms of production–, and with an improvement in the skill profile of the labor force. Overall, I interpret the evidence as supportive of the property rights theory of the firm.
Abstract. I investigate whether firms’ dividend policy is determined by the preferences of their large shareholders. Using exogenous variation from personal income tax rates I show that dividend payouts increased (decreased) in years when dividends were less (more) tax-disadvantaged relative to capital gains, but only for firms whose large shareholders were affected by these tax reforms. Furthermore, using ex-dividend day stock price analysis I find that dividend valuation increased when dividends were less tax-disadvantaged, but only for firms with individual large shareholders. These results show that personal income tax rates affect dividend decisions, and provide strong evidence of the existence of tax clienteles.
Do CEOs Matter? with M. Bennedsen, and D. Wolfenzon
Abstract. Estimating the value of top managerial talent is a topic of research that has attracted widespread attention from academics and practitioners, but testing the effect of chief executive officers (CEOs) on firm outcomes is challenging. In this paper, we test for the impact of CEOs on performance by assessing the effect of (1) CEO deaths and (2) deaths of CEOs’ immediate family members (spouses, parents, children, etc.). Using a unique dataset from Denmark, we find that CEOs’ (but not board members’) deaths and deaths in CEOs’ families are strongly correlated with declines in firm operating profitability, investment, and sales growth. Our CEO shock-outcome analysis allows us to identify the personal shocks that are the most (least) meaningful for CEOs. We show that CEO, firm, and industry characteristics affect the impact of these shocks. Overall, our findings demonstrate that managers are a key determinant of firm performance.
Abstract. I use data from CEO successions to examine the impact of inherited control on firms’ performance. I find that firms where incoming CEOs are related by blood or marriage to a founder or a large shareholder of the corporation undergo large declines in return on assets and market-to-book ratios that are not experienced by firms that promote unrelated CEOs. Consistent with wasteful nepotism I find that declines in performance are particularly prominent in firms that appoint family CEOs who did not attend “selective” colleges. Overall, the evidence indicates that nepotism hurts firms’ performance by limiting the scope of labor market competition. (American Economic Review, December 2006, Vol. 96, No. 5, pp. 1559-1588). Reprinted in Pindado J. and I. Requejo Eds. Governance in Family Firms, Elgar Publishing Ltd, 2012, Chapter 19.
with Morten Bennedsen, Kasper Nielsen and Daniel Wolfenzon
Abstract. This paper uses a unique dataset from Denmark to investigate the impact of family characteristics in corporate decision making and the consequences of these decisions on firm performance. We focus on the decision to appoint either a family or external chief executive officer (CEO). The paper uses variation in CEO succession decisions that result from the gender of a departing CEO’s firstborn child. This is a plausible instrumental variable (IV), as male first-child firms are more likely to pass on control to a family CEO than are female first-child firms, but the gender of the first child is unlikely to affect firms’ outcomes. We find that family successions have a large negative causal impact on firm performance: operating profitability on assets falls by at least four percentage points around CEO transitions. Our IV estimates are significantly larger than those obtained using ordinary least squares. Furthermore, we show that family-CEO underperformance is particularly large in fast-growing industries, industries with highly skilled labor force and relatively large firms. Overall, our empirical results demonstrate that professional, non-family CEOs provide extremely valuable services to the organizations they head. (Quarterly Journal of Economics, May 2007, Vol. 122 No. 2, 647-691. Reprinted in Pindado J. and I. Requejo Eds. Governance in Family Firms, Elgar Publishing Ltd, 2012, Chapter 18.
The Governance of Family Firms, with Morten Bennedsen and Daniel Wolfenzon
Abstract. The paper highlights that the main governance issue facing family firms is balancing the benefits associated to having a controlling family with the challenges this structure imposes on minority shareholders. Common governance mechanisms are less likely to be effective whenever control and decision-rights are concentrated around a family. The chapter emphasizes the crucial role of family governance on the allocation of resources and reviews recent studies that seek to understand the impact of family characteristics on firm decisions and performance. The chapter also discusses some of the important topics for future research (in R. Anderson and K. Baker (Eds), Corporate Governance, 2010, (Wiley & Sons).
Risk Management and Firm Value: Evidence from Weather Derivatives, with Hayong Yun
Abstract. This paper shows that active risk management policies lead to an increase in firm value. To identify the causal effect of hedging and to overcome endogeneity concerns, we exploit the introduction of weather derivatives as an exogenous shock to firms’ ability to hedge weather risks. This innovation disproportionately benefits weather sensitive firms, irrespective of their future investment opportunities. Using this natural experiment and data from energy utilities, we find that derivatives lead to higher valuations, investments and leverage. Overall, our results demonstrate that risk-management has real consequences on firm outcomes (The Journal of Finance, Vol. 68, Issue 5, October 2013, pp. 2143–2176).
Received the Brattle Group First Prize, Journal of Finance, awarded to the best corporate finance paper published in the Journal in 2013. Awarded January 2014.
“Do Government Employees Really Shirk More on the Job than Private Sector Employees? Effort Provision in Response to Personal Shocks,” with M. Bennedsen, M. Tsoutsoura, and D. Wolfenzon.
“The Impact of Financing on Investment and Employment” with F. Panier and P. Villanueva.
“Disappearing Family CEOs.”
“Bequeathing the Family Firm,” with M. Bennedsen, M. Tsoutsoura, and D. Wolfenzon.
“Informality and Firm Outcomes: Evidence from Mexico.”
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