Working Papers

Machines Could Not Compete with Chinese Labor: Evidence from U.S. Firms' Innovation

joint with Elena Simintzi

We study how an improvement in contracting institutions due to the 1999 U.S.-China bilateral agreement affects U.S. firms' innovation. We show that U.S. firms operating in China decrease their process innovations—innovations that improve firms' own production methods—following the agreement. We obtain the same result using the inter-temporal variation in ownership restrictions on foreign investment in China across industries. These findings suggest that a better ability to source labor cheaply across borders affects the types of technologies that are being developed—less process innovation aimed at reducing production cost. More broadly, a decrease in the effective price of labor due to the removal of frictions affects corporate innovation.

Mutual Fund Disagreement and Firm Value: Passive vs. Active Voice

joint with Iris Wang

Using mutual funds’ proxy voting behavior, we construct a novel measure of shareholder disagreement between passive and active mutual funds. To create the measure, we use mutual funds’ voting decisions to capture the difference in “approval of management” between passive and active funds. We find that the disagreement among the two groups destroys firm value when the vote outcome of a proposal is not perfectly anticipated—viable. Using Federal Open Market Committee announcements with press conferences as events that create scope for investors to interpret news differently for individual firms, we show that such value-destroying effect is causal. When proposals are not viable, the presence of disagreement increases firm value. We show evidence consistent with such disagreement being a form of shareholder engagement that is interpreted in a positive way by the financial market participants.

Specialized Investments and Firms’ Boundaries: Evidence from Textual Analysis of Patents

joint with Isil Erel, Daisy Wang, and Michael S. Weisbach

Inducing firms to make specialized investments through bilateral contracts can be challenging because of potential holdup problems. Such contracting difficulties have long been argued to be an important reason for acquisitions. To evaluate the extent to which this motivation leads to mergers, we perform a textual analysis of the patents filed by the same lead inventors of the target firms before and after the mergers. We find that patents of inventors from target firms become 28.9% to 46.8% more specific to those of acquirers’ inventors following completed mergers, benchmarked against patents filed by targets and a group of counterfactual acquirers. This pattern is stronger for vertical mergers that are likely to require specialized investments. There is no change in the specificity of patents for mergers that are announced but not consummated. Overall, we provide empirical evidence that contracting issues in motivating specialized investment can be a motive for acquisitions.

Relative Pricing of Private and Public Debt: The Role of Money Creation Channel

joint with Isha Agarwal and Joyce Xuejing Guan

We examine how the money creation function of banks affects the relative cost of firm financing in the bank loan vs public bond market – the loan-bond spread. Using a sample of loans and bonds issued by the same firm with the same maturity and at the same time, we show that the loan-bond spread is lower for firms impacted by information cost shocks. We call this decline in the relative cost of bank credit induced by firm information cost shock the opacity discount and argue that it is consistent with the “money creation” hypothesis in the theory of financial intermediation according to which banks need to keep information about their assets secret to produce private money.

Owner Culture and Pay Inequality within Firms

joint with Guangli Lu and Iris Wang

We examine the effect of culture on within-firm pay inequality by studying the pay setting behaviors of closely-held firms owned by immigrants in Canada. Using matched employer-employee-owner tax filing data, we show that within-firm pay inequality varies significantly with a firm owner’s country of origin. With-firm pay inequality is higher if the owner immigrated from a more individualistic country. To further isolate the effect of culture, we investigate the change in pay inequality among “employee stayers” after a change of the firm’s owners. We find that within-firm pay inequality increases in firms taken over by owners from more individualistic countries or from countries with higher within-firm pay inequality compared to prior owners’ countries. We find similar results using a subsample of the Accommodation and Food Services sector where the production is more homogenous and the confounding effect from the unobservable production technology difference is minimal. We also find similar results when the changes of firms’ owners are driven by the deaths of owners.