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Published Papers Who Writes the News? Corporate Press Releases During Merger Negotiations (with Kenneth Ahern) Journal of Finance, forthcoming Abstract: Firms have an incentive to manage media coverage to influence their stock price during important corporate events. Using comprehensive data on media coverage and merger negotiations, we find that bidders in stock mergers originate substantially more news stories after the start of merger negotiations, but before the public announcement. This strategy generates a short-lived run-up in bidders’ stock prices during the period when the stock exchange ratio is determined, which substantially impacts the takeover price. Our results demonstrate that the timing and content of financial media coverage may be biased by firms seeking to manipulate their stock price. [Full Text]
Divisional Managers and Internal Capital Markets (with Ran Duchin) Journal of Finance, forthcoming Abstract: Using hand-collected data on divisional managers at S&P 500 firms, we study their role in internal capital budgeting. Divisional managers with social connections to the CEO receive more capital. Connections to the CEO outweigh measures of managers’ formal influence, such as seniority and board membership, and affect both managerial appointments and capital allocations. The effect of connections on investment efficiency depends on the tradeoff between agency and information asymmetry. Under weak governance, connections reduce investment efficiency and firm value via favoritism. Under high information asymmetry, connections increase efficiency and value via information transfer. [Full Text]
The Politics of Government Investment (with Ran Duchin) Journal of Financial Economics, 106 (1), October 2012, 24-48 Abstract: This paper investigates the relation between corporate political connections and government investment. We study various forms of political influence, ranging from passive connections between firms and politicians, such as those based on politicians’ voting districts, to active forms, such as lobbying, campaign contributions, and employment of connected directors. Using hand-collected data on firm applications for capital under the Troubled Asset Relief Program (TARP), we find that politically connected firms are more likely to be funded, controlling for other characteristics. Yet investments in politically connected firms underperform those in unconnected firms. Overall, we show that connections between firms and regulators are associated with distortions in investment efficiency. [Full Text]
Working Papers Safer Ratios, Riskier Portfolios: Banks' Response to Government Aid (with Ran Duchin) Abstract: We study the effect of government assistance on bank risk taking. Using hand-collected data on bank applications for government investment funds, we investigate the effect of both application approvals and denials. To distinguish banks’ risk taking behavior from changes in economic conditions, we control for the volume and quality of credit demand based on micro-level data on home mortgages and corporate loans. Our difference-indifference analysis indicates that banks make riskier loans and shift investment portfolios toward riskier securities after being approved for government assistance. However, this shift in risk occurs mostly within the same asset class and, therefore, remains undetected by the closely-monitored capitalization levels, which indicate an improved capital position at approved banks. Consequently, these banks appear safer according to regulatory ratios, but show a significant increase in measures of volatility and default risk. [Full Text]
Winners in the Spotlight: Media Coverage of Fund Holdings as a Driver of Flows (with David Solomon and Eugene Soltes) Abstract: We show that media coverage of mutual fund holdings affects how investors allocate money across funds. Fund holdings with high past returns attract extra flows only if these stocks were recently featured in the media. In contrast, holdings that were not covered in major newspapers do not affect flows. We present evidence that media coverage tends to contribute to investors’ chasing of past returns rather than facilitate the processing of useful information in fund portfolios. Fund managers exploit this behavior by purchasing media-covered past winners at reporting dates, a strategy most prevalent among poorly performing funds. Our evidence suggests that media coverage can exacerbate investor biases and that it is the primary mechanism that makes window dressing effective. [Full Text]
In the Mood for a Loan: The Causal Effect of Sentiment on Credit Origination (with Sumit Agarwal and Ran Duchin) Abstract: We study how loan officers’ mood affects their decisions on mortgage applications. Motivated by psychological evidence, we use three mood proxies: (1) outcomes of key sporting events such as the Super Bowl, (2) outcomes of the American Idol competition, and (3) days around major holidays. Our identification exploits the variation in daily loan approvals in each county, while observing the volume and quality of reviewed applications. Positive sentiment events are associated with a 4.5% higher loan approval rate in affected counties, and negative sentiment events have the opposite effect of a smaller magnitude and weaker statistical significance. The effect is stronger for marginal quality applications, where loan officers have more discretion. The extra loans approved on high-sentiment days experience higher defaults. Overall, our evidence suggests that mood fluctuations affect decisions of financial experts and generate long-lasting real effects.
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