Working Papers
Abstract: Trade secret theft, and more broadly intellectual property (IP) theft, have resurfaced to the public attention amid the U.S.-China geopolitical conflict. In this paper, we document the detrimental effects of IP theft on innovation at the targeted firms whose trade secrets are stolen. Following the theft, targeted firms display a persistent drop in innovation outcomes, including the number of patents, patent value, and patent impact. These firms experience a decline in profitability, indicating that IP theft hurts their economic prospects. Importantly, the adverse effects of trade secret theft also spill over to the business partners of the targeted firms.
Abstract: We examine how changes in disclosure processing costs affect corporate innovation. Our research design employs the staggered implementation of the SEC's EDGAR system as a shock that lowered information acquisition costs and facilitated the dissemination of public companies’ regulatory filings. Difference-in-differences estimates show that treated firms reduce innovation investment following the implementation of EDGAR. In contrast, treated firms’ innovation investment cuts are met with an increase in innovation investment by their rivals. These results are more pronounced when treated firms are innovation leaders or from industries that rely on innovation secrecy. Consistent with the decrease in innovation investment by EDGAR-treated firms, we further document a decrease in their innovation output, but an improvement in their innovation quality. Overall, our results are consistent with a competition channel whereby firms subject to lower disclosure processing costs reduce investment in innovative projects whose returns negatively depend on information spillovers.
Abstract: Trade credit is an important source of firm financing, yet its rich informational content is largely unexplored in asset pricing. Using a novel trade credit data set, we explore the effects of trade credit payment timeliness on the cross section of expected stock returns. We provide evidence on two unique channels through which trade credit payment behavior relates to future stock returns -- slow diffusion of information and customer firm's vertical bargaining power. Consistent with our first channel, we find a sudden delay in a firm's payment to its suppliers predicts significantly lower future stock returns for that firm. Consistent with our second channel, we find firms that pay their bills moderately late on a persistent basis relative to terms earn substantially higher stock returns.
Semifinalist for Best Paper in Corporate Finance, Financial Management Association, 2022
Abstract: We study the impact and propagation of economic policy uncertainty (EPU) via subsidiary networks of U.S. multinational corporations (MNCs). We find that increases in host-country EPU lead to significant decreases in MNC valuations. We document heterogeneous effects across important firm- and country-level dimensions such as intangible capital intensity, financial constraints, and country institutional quality. Higher EPU in host countries is associated with a decline in the growth of local MNC subsidiary assets and employment. We find no significant average spillover effects of host-country EPU on MNC subsidiaries in other countries and some evidence of negative spillover effects among vertically linked subsidiaries.
Abstract: Using detailed U.S. data, we find that host-country financial market development attracts more subsidiary operations of multinational corporations (MNCs). The roles of credit and stock markets are distinct. Credit markets are a robust driver of the documented effect, while stock markets play a diminished and sometimes insignificant role. Consistent with these findings, we then show MNCs that operate subsidiaries in countries with more developed credit markets have higher firm-level investment, an effect that is more pronounced for firms relying on external financing sources. Overall, our results are consistent with a "credit channel", whereby developed credit markets attract MNC operations and enhance firm-level investment by improving firms’ access to external finance.
Outstanding Paper in Financial Institutions, Southern Finance Association, 2020
Reject and Resubmit, Review of Corporate Finance Studies
Abstract: Little is known about fraud in the financial services sector. Using a rich supervisory dataset, this study dissects fraud at large U.S. banking organizations. We examine the different categories of fraud and their materiality, the recovery from fraud, the time from fraud occurrence to fraud discovery and accounting. We quantify exposure to fraud and study the determinants of fraud at the banking organization level. Lastly, we document a significant effect of fraud on bank credit intermediation. Overall, our analysis provides new, detailed evidence on fraud in the U.S. financial services industry, and its costs and consequences.
Abstract: This study documents adverse operational risk externalities of financial innovation. Using supervisory data on operational losses from large U.S. bank holding companies (BHCs), we show that organizations with more financial patent innovation suffer higher operational losses per dollar of assets and more tail risk events. The association varies significantly by the types of financial patents and operational losses. It is more pronounced for institutions that have weaker risk management. We demonstrate that BHCs that engage in more financial innovation prior to or during the global financial crisis (GFC) have more severe operational losses during the GFC. Our findings have important implications for banking organization risk and supervision in an environment of intense innovation and technology adoption.
Abstract: Using supervisory data from large U.S. bank holding companies (BHCs), we document that BHCs suffer more operational losses during episodes of extreme storms. Among different operational loss types, losses due to external fraud, BHCs' failure to meet obligations to clients and faulty business practices, damage to physical assets, and business disruption drive this relation. Event study estimations corroborate our baseline findings. We further show that BHCs with past exposure to extreme storms reduce operational losses from future exposure to storms. Overall, our findings provide new evidence regarding U.S. banking organizations' exposure to climate risks with implications for risk management practices and supervisory policy.
Abstract: Using supervisory data from large U.S. bank holding companies (BHCs), we document that operational loss recovery rates decrease in macroeconomic downturns. This procyclical relationship varies by business lines and loss event types and is robust to alternative data aggregations, macroeconomic measurement horizons, and estimation methodologies. Further analysis shows that resource constraints faced by BHC risk management functions is a plausible explanation for these patterns. Our findings offer new evidence on how economic shocks transmit to banking industry losses with implications for risk management and supervision.
Abstract: This study shows that banking organization growth is associated with higher operational losses per dollar of total assets and incidence of tail risks. Event studies using M&A activity and instrumental variable regressions provide consistent evidence. The relationship between banking organization growth and operational risk varies by loss event types and balance sheet categories. We demonstrate that higher growth predicts worse operational risk realizations during the global financial crisis. These findings have implications for bank performance, risk management, and supervision in a continually growing and consolidating banking industry.
Abstract: This paper provides causal evidence that a firm's operating cost structure is an important determinant of its leverage. We design a quasi-natural experiment exploiting the implementation of Sarbanes-Oxley Act Section 404 to provide us with exogenous variation in the proportion of a company's fixed to variable costs. The results from our 2SLS estimations indicate a strong negative relation between cost inflexibility and firm debt levels: our main specification implies that a one percentage point increase in the ratio of fixed to total operating costs reduces a firm's leverage ratio by approximately 0.66 percentage points.