Creditor Control of Corporate Acquisitions – with David Becher and Greg Nini. 2022. Review of Financial Studies 35(4): 1897-1932.

We examine the impact of creditor control rights on corporate acquisitions. Nearly 75% of loan agreements include restrictions that limit borrower acquisition decisions throughout the life of the contract. Following a financial covenant violation, creditors use their bargaining power to tighten these restrictions and limit acquisition activity, particularly deals expected to earn negative announcement returns. Firms that do announce an acquisition after violating a financial covenant earn 1.8% higher stock returns, on average, and do not pursue less risky deals. We conclude that creditors use contractual rights and the renegotiation process to limit value-destroying acquisitions driven by managerial agency problems.


Losing Control? The 20-Year Decline in Loan Covenant Violations – with Greg Nini and David Smith

Revise and Resubmit at the Journal of Finance
The annual proportion of U.S. public firms that report a financial covenant violation fell nearly 70% between 1997 and 2016. To understand this trend, we develop a model of covenant design that shows the optimal threshold varies with covenants’ ability to discriminate between distressed and non-distressed borrowers and with the relative costs associated with screening incorrectly. We document a steady improvement in covenants’ ability to identify distressed borrowers. However, the dramatic fall in violations is best attributed to an increased willingness to forego early detection of marginally distressed borrowers in exchange for fewer inconsequential violations, particularly since 2008-09.

Shareholder Litigation Risk and the Information Environment: Revisiting Evidence from Two Natural Experiments – with Audra Boone and Eliezer Fich

A court case that reduced the threat of securities class action litigation led to less frequent voluntary disclosure, but did not significantly affect the level of information asymmetry. Conversely, state laws that reduced the threat of derivative litigation led to more frequent voluntary disclosure, but increased the level of information asymmetry. We reconcile these differences by highlighting that securities class action lawsuits address disclosure decisions while derivative lawsuits address both disclosure and operating decisions, and show that changes in firms’ real operations is the economic mechanism driving the association between derivative litigation risk and corporate information environments.

Where have all the IPOs Gone? Trade Liberalization and the Changing Nature of US Corporations

I show that a tariff policy change that increased trade with China led to a decline in U.S. public listing rates and elevated industry concentration. Consistent with heterogeneous firm models of trade, the shock impeded the entry and performance of small domestic manufacturers but did not adversely impact large multinationals. In addition, stock price reactions to the policy change and threat of reversal imply that trade liberalization creates or destroys value depending on firm size. These findings suggest that recent trends in the U.S. public equity market are driven, in part, by fundamental changes in the global competitive landscape.

Corporate Discrimination, Competition, and Shareholder Wealth – with Casey Dougal and Irena Hutton

We study novel data on the universe of employment discrimination lawsuits filed in federal court against U.S. public corporations between 1992 and 2018. Shareholder value drops by $30 million, on average, in the three days surrounding a discrimination lawsuit filing. However, we find no evidence that discrimination rates are related to product market competition, financial resources, governance, or CEO turnover. Instead, workplace discrimination is highly persistent and correlates with slow-moving proxies of firm culture, such as headquarter location. These results suggest that corporate discrimination is largely determined by the beliefs and preferences of employees, rather than a firm’s economic environment.

Does Regulatory Exposure Create M&A Synergies? – with Eliezer Fich and Joseph Kalmenovitz

We study the impact of regulation on acquisition investment, using a novel firm-level measure of exposure to all federal regulations. Highly regulated companies issue more acquisition bids, invest more in those transactions, and earn higher M&A announcement returns. Moreover, highly regulated acquirers exhibit better long-term performance, greater M&A synergies, and a significant reduction in their regulatory exposure after merger completion. The benefits are stronger in deals with small transaction values and in those involving private targets. Overall, our findings uncover a new link between M&A and regulation, highlighting synergy opportunities which materially affect corporate investment choices.