Governance and Finance
In recent decades, corporate governance no longer focuses on maximizing shareholder value but on balancing all stakeholders' interests. Corporate governance is then viewed more broadly as the nexus of rules, practices, and processes that determine the objective of a firm. Absent good governance, shareholders might realise inferior returns, creditors might lose interest payments, business partners might suffer from contract breaches, and employees might lose their future career opportunities (e. g., managers that used to work for Enron). High-quality governance ensures that all stakeholders' capital is effectively managed. Firms benefit from good governance in various ways, such as a higher valuation, a lower cost of capital, better talent attraction, and higher customer loyalty, for example.
The research group “Governance and Finance” studies traditional and modern views of corporate governance in financial markets and contributes to the literature in two ways. First, it contributes to understanding the effectiveness of different governance mechanisms' roles in talent selection, incentive, and retention. Individuals carry out corporate objectives, and good governance must ensure that the most qualified talent is allocated to the optimal position, exerts optimal effort, and stays with the firm. For example, the most important duty of the board of directors is to select, incentive, and retain the most talented/suitable CEO.
Second, this group also investigates how various forces in credit market impact corporate governance. Various stakeholders seek to influence corporate strategy differently with recent advances in the financial market. For example, the rise of common ownership might reduce firms' incentives to compete, the increase of active ownership might suddenly switch firms' investment strategies (i. e., shareholder activism), and the participation of shareholders in the credit market provides opportunities to internalise the shareholder-creditor conflicts. This group's research seeks to advance the knowledge of different stakeholders' methods and their effectiveness in influencing governance objects.
Workpackage 1: Talent Selection, Incentive, and Retention
Workpackage 2: Stakeholders and Governance
Research Cluster
Financial Resilience and RegulationYour contact
- Department Financial Markets
Refereed Publications
Corporate Social Responsibility and Profit Shifting
in: European Accounting Review, forthcoming
Abstract
This paper examines the relation between corporate social responsibility (CSR) performance and tax–motivated income shifting. Using a profit–shifting measure estimated from multinational enterprises (MNEs) data, we find that parent firms with higher CSR scores shift significantly more profits to their low-tax foreign subsidiaries. Overall, our evidence suggests that MNEs engaging in CSR activities acquire legitimacy and moral capital that temper negative responses by stakeholders and thus have greater scope and chance to engage in unethical profit-shifting activities, consistent with the legitimacy theory.
The Corporate Investment Benefits of Mutual Fund Dual Holdings
in: Journal of Financial and Quantitative Analysis, forthcoming
Abstract
Mutual fund families increasingly hold bonds and stocks from the same firm. We present evidence that dual ownership allows firms to increase valuable investments and refinance by issuing bonds with lower yields and fewer restrictive covenants, especially when firms face financial distress. Dual holders also prevent overinvestment by firms with entrenched managers. Overall, our results suggest that mutual fund families internalize the agency conflicts of their portfolio companies, highlighting the positive governance externalities of intra-family cooperation.
Creditor-control Rights and the Nonsynchronicity of Global CDS Markets
in: Review of Corporate Finance Studies, No. 1, 2025
Abstract
<p>We analyze how creditor rights affect the nonsynchronicity of global corporate credit default swap spreads (CDS-NS). CDS-NS is negatively related to the country-level creditor-control rights, especially to the “restrictions on reorganization” component, where creditor-shareholder conflicts are high. The effect is concentrated in firms with high investment intensity, asset growth, information opacity, and risk. Pro-creditor bankruptcy reforms led to a decline in CDS-NS, indicating lower firm-specific idiosyncratic information being priced in credit markets. A strategic-disclosure incentive among debtors avoiding creditor intervention seems more dominant than the disciplining effect, suggesting how strengthening creditor rights affects power rebalancing between creditors and shareholders.</p>
The Effects of Antitrust Laws on Horizontal Mergers: International Evidence
in: Journal of Financial and Quantitative Analysis, No. 7, 2024
Abstract
This study examines how antitrust law adoptions affect horizontal merger and acquisition (M&A) outcomes. Using the staggered introduction of competition laws in 20 countries, we find antitrust regulation decreases acquirers’ five-day cumulative abnormal returns surrounding horizontal merger announcements. A decrease in deal value, target book assets, and industry peers' announcement returns are consistent with the market power hypothesis. Exploiting antitrust law adoptions addresses a downward bias to an estimated effect of antitrust enforcement (Baker (2003)). The potential bias from heterogeneous treatment effects does not nullify our results. Overall, antitrust policies seem to deter post-merger monopolistic gains, potentially improving customer welfare.
Non-Standard Errors
in: Journal of Finance, No. 3, 2024
Abstract
In statistics, samples are drawn from a population in a datagenerating process (DGP). Standard errors measure the uncertainty in sample estimates of population parameters. In science, evidence is generated to test hypotheses in an evidencegenerating process (EGP). We claim that EGP variation across researchers adds uncertainty: non-standard errors. To study them, we let 164 teams test six hypotheses on the same sample. We find that non-standard errors are sizeable, on par with standard errors. Their size (i) co-varies only weakly with team merits, reproducibility, or peer rating, (ii) declines significantly after peer-feedback, and (iii) is underestimated by participants.
Working Papers
From Shares to Machines: How Common Ownership Drives Automation
in: IWH Discussion Papers, No. 23, 2024
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Poison Bonds
in: IWH Discussion Papers, No. 3, 2024
Abstract
This paper documents the rise of “poison bonds”, which are corporate bonds that allow bondholders to demand immediate repayment in a change-of-control event. The share of poison bonds among new issues has grown substantially in recent years, from below 20% in the 90s to over 60% since mid-2000s. This increase is predominantly driven by investment-grade issues. We provide causal evidence that the pressure to eliminate poison pills has led firms to issue poison bonds as an alternative. Our analysis suggests that this practice entrenches incumbent managers and destroys shareholder value. Holding a portfolio of firms that remove poison pills but promptly issue poison bonds results in negative abnormal returns of −7.3% per year. Our findings have important implications for the agency theory of debt: (i) more debt may not discipline the management; and (ii) even without financial distress, managerial entrenchment can lead to agency conflicts between shareholders and creditors.
The Reverse Revolving Door in the Supervision of European Banks
in: IWH Discussion Papers, No. 25, 2023
Abstract
We show that around one third of executive directors on the boards of national supervisory authorities (NSA) in European banking have an employment history in the financial industry. The appointment of executives without a finance background associates with negative valuation effects. Appointments of former bankers, in turn, spark positive stock market reactions. This „proximity premium“ of supervised banks is a more likely driver of positive valuation effects than superior financial expertise or intrinsic skills of former executives from the financial industry. Prior to the inception of the European Single Supervisory Mechanism, the presence of former financial industry executives on the board of NSA associates with lower regulatory capital and faster growth of banks, pointing to a more lenient supervisory style.
Poison Bonds
in: SSRN Discussion Paper, 2023
Abstract
This paper documents the rise of "poison bonds", which are corporate bonds that allow bondholders to demand immediate repayment in a change-of-control event. The share of poison bonds among new issues has grown substantially in recent years, from below 20% in the 90s to over 60% after 2005. This increase is predominantly driven by investment-grade issues. We provide causal evidence that the pressure to eliminate poison pills has led firms to issue poison bonds as an alternative. Further analyses suggest that this practice entrenches incumbent managers, coincidentally benefits bondholders, but destroys shareholder value. Holding a portfolio of firms that remove poison pills but promptly issue poison bonds results in negative abnormal returns of -7.3% per year. Our findings have important implications for understanding the agency benefits and costs of debt: (1) more debt does not necessarily discipline the management; and (2) even without financial distress, managerial entrenchment can lead to conflicts between shareholders and creditors.
Trading away Incentives
in: IWH Discussion Papers, No. 23, 2022
Abstract
Equity pay has been the primary component of managerial compensation packages at US public firms since the early 1990s. Using a comprehensive sample of top executives from 1992-2020, we estimate to what extent they trade firm equity held in their portfolios to neutralize increments in ownership due to annual equity pay. Executives accommodate ownership increases linked to options awards. Conversely, increases in stock holdings linked to option exercises and restricted stock grants are largely neutralized through comparable sales of unrestricted shares. Variation in stock trading responses across executives hardly appears to respond to diversification motives. From a theoretical standpoint, these results challenge (i) the common, generally implicit assumption that managers cannot undo their incentive packages, (ii) the standard modeling practice of treating different equity pay items homogeneously, and (iii) the often taken for granted crucial role of diversification motives in managers’ portfolio choices.
