Publications

Shielding Firm Value: Employment Protection and Process Innovation

(joint with Hernan Ortiz-Molina and Elena Simintzi), September 2021, Journal of Financial Economics, accepted.

Following state-level legal changes that increase labor dismissal costs, firms increase their innovation in new processes that facilitate the adoption of cost-saving production methods, especially in industries with a large share of labor costs in total costs. Firms with high innovation ability exhibit larger increases in process innovation and capital labor ratios—an effect driven by both increases in capital investment and decreases in employment. By facilitating the adjustment of the input mix when conditions in input markets change, innovation ability allows firms to mitigate value losses and is a key driver of their performance.

The International Propagation of Economic Downturns Through Multinational Companies: The Real Economy Channel

(joint with Serdar Dinc and Isil Erel), August 2021, Journal of Financial Economics, forthcoming.

We study how non-financial multinational companies propagate economic declines from their subsidiaries located in countries experiencing an economic downturn to subsidiaries in countries not experiencing one. We find that investment is 18% lower in subsidiaries of these parents relative to the same-industry, same-country subsidiaries of parents that are headquartered in the same parent country but do not have a subsidiary in a country experiencing an economic downturn. The employment growth rate in the affected subsidiaries is zero or negative while it is 1.4% in the subsidiaries of unaffected parents. The aggregate industry-level sales and employment are also negatively impacted in the countries of the affected subsidiaries.

Corporate Innovation and Returns

(joint with Lorenzo Garlappi), August 2020, Review of Corporate Finance Studies, Volume 9, Issue 2, p. 340–383.

Among U.S. public firms, technological innovation is concentrated in a small set of large players, with innovation “leaders” having considerably lower systematic risk than “laggards.” To under- stand this fact, we build a winner-takes-all patent-race model and show that a firm’s expected return decreases in its innovation output and increases in that of its rivals. Using a comprehensive firm-level panel of information on patenting activity by fields of technology in 1950-2010, we find strong support for the model’s predictions. Our results highlight that strategic interactions among firms competing in innovation are an important determinant of risk and expected returns.

Are Foreign Investors Locusts? The Long-Term Effects of Foreign Institutional Ownership

(joint with Miguel A. Ferreira, Pedro Matos, and Pedro Pires), October 2017, Journal of Financial Economics, Volume 126, Issue 1, p. 122-146.

This paper challenges the view that foreign investors lead firms to adopt a short-term orientation and forgo long-term investment. Using a comprehensive sample of publicly listed firms in 30 countries over the 2001-2010 period, we find instead that greater foreign institutional ownership fosters long-term investment in tangible, intangible, and human capital. Foreign institutional ownership also leads to significant increases in innovation output. We identify these effects by exploiting the exogenous variation in foreign institutional ownership that follows the addition of a firm to the MSCI indices. Our results suggest that foreign institutions exert a disciplinary role on entrenched corporate insiders worldwide.

Competition and Ownership Structure of Closely-Held Firms

(joint with Ting Xu), May 2017, Review of Financial Studies, Volume 30, Issue 5, p. 1583-1626.

We study how product market competition affects firms’ ownership structures using a large sample of closely-held firms in 18 European countries. We show that firms operating in more competitive environments have lower inside ownership and that the stakes of their outside shareholders are more dispersed. Competition diminishes inside shareholders’ control of the firm and increases the dispersion of control rights among outside shareholders. Our findings suggest that, by changing corporate ownership structure, competition reduces incentive misalignment among shareholders, leading to better firm performance and gains in economic efficiency.

Heterogeneous Innovations, Firm Creation and Destruction, and Asset Prices

(joint with Lorenzo Garlappi and Patrick Grüning), June 2016, Review of Asset Pricing Studies, Volume 6, Issue 1, p. 46-87.

We study the implications of the creative destruction lifecycle of innovation for asset prices. We develop a general equilibrium model of endogenous firm creation and destruction where 'incremental' innovations by incumbents and 'radical' innovations by entrants drive productivity improvements. Micro-founded incentives of firms to innovate lead to the joint equilibrium determination of time-varying economic growth and countercyclical economic uncertainty. The model quantitatively matches key properties of consumption and asset prices, as well as novel stylized facts on the process of creative destruction in the U.S. economy obtained using a comprehensive sample of patents over the 1975-2013 period. We show that the interplay between incumbents' and entrants' innovations, which is at the core of creative destruction, is an important determinant of risks that are priced in financial markets.

Corporate Innovations and Mergers and Acquisitions

(joint with Kai Li), October 2014, Journal of Finance, Volume 69, Issue 5, p. 1923-1960.

Using a large and unique patent-merger dataset over the period 1984 to 2006, we show that companies with large patent portfolios and low R&D expenses are acquirers, while companies with high R&D expenses and slow growth in patent output are target firms. Further, technological overlap between any two firms has a positive effect on transaction incidence, and this effect is reduced for firm pairs that overlap in product markets. We also show that acquirers with prior technological linkage to their target firms produce more patents afterwards. We conclude that synergies obtained from combining innovation capabilities are important drivers of acquisitions.

Pyramidal Ownership and the Creation of New Firms

(joint with Hernan Ortiz-Molina), May 2013, Journal of Financial Economics, Volume 108, Issue 3, p. 798-821.

We study the role of pyramidal ownership structures in the creation of new firms. Our results suggest that pyramids arise because they provide a financing advantage in setting up new firms when the pledgeability of cash flows to outside financiers is limited. Parent companies supply inside funds to new firms which, due to large investment requirements and low pledgeable cash flows, cannot raise enough external financing. The financing advantage of pyramidal structures is pervasive in many countries, exists regardless of whether new firms are set up by business groups or by smaller organizations, and is an important underpinning of entrepreneurial activity.

Financial Development and the Allocation of External Finance

(joint with Peter Ondko), January 2012, Journal of Empirical Finance, Volume 19, Issue 1, p. 1-25 (lead article).

We examine whether financial markets development facilitates the efficient allocation of resources. Using European micro-level data for 1996-2005, we show that firms in industries with growth opportunities use more external finance in financially more developed countries. This result is particularly strong for firms that are more likely to be financially constrained and dependent on domestic financial markets, such as small and young firms. Our findings are robust to controlling for technological determinants of external finance needs and to using different proxies for growth opportunities. Interestingly, the explanatory power of the measures of technological determinants identified in prior work decreases significantly once growth opportunities are controlled for.

Financial Development and Corporate Growth in the EU Single Market

(joint with Štěpán Jurajda), July 2011, Economica, Volume 78, Issue 311, p. 401-428.

The establishment of the EU-15 ‘single market’ in 1993 brought about a high degree of similarity in firms’ growth opportunities across countries, while substantial diversity existed in the development of national financial markets. We compare within-industry growth rates of similar ‘single market’ firms facing financial systems of different depth and institutional quality as of 1993. Moving from the least to the most developed financial market within the EU-15 boosts firms’ annual value-added growth by about three percentage points. Our results also suggest that the growth gap due to initially underdeveloped financial systems was closed by 2003.

Rent Extraction by Large Shareholders: Evidence Using Dividend Policy in the Czech Republic

(joint with Jan Hanousek), May 2008, Czech Journal of Economics and Finance, Volume 58, Issue 3-4, p. 106-130.

Using cross-sectional analysis of corporate dividend policy we show that large shareholders extract rents from firms and expropriate minority shareholders in the weak corporate governance environment of an emerging economy. By comparing dividends paid across varying corporate ownership structures – concentration, type, and domicile of ownership – we quantify these effects and reveal that they are substantial. We find that the target payout ratio for firms with majority ownership is low, but that the presence of a significant minority shareholder increases the target payout ratio and hence precludes a majority owner from extracting rent. In contrast to other studies from developed markets, our unique dataset from the Czech Republic for the period 1996–2003 permits us to take account of endogeneity of ownership.