PUBLISHED PAPERS
In this paper, we study the effect of land titling on investment in human capital. We first develop a theoretical model of the investment in the presence of property rights to agricultural land and then test the predictions of the model regarding the schooling decisions of households using data from Mexico’s PROCEDE land titling program. Using the staggered introduction of land titling, we find that ownership tilted the balance in favor of investment in human capital in the form of schooling. Titling decreased the hazard rate of dropping out of school by 14% for children between the ages of 6 and 18. Additionally, including the effects of the contemporaneous conditional cash transfer program further reduced the hazard rate of dropping out by 34%. We find that these results hold even when the head of the household changes or migrates. Titling has a significant effect on female children but not on extremely poor families.
This paper examines the relation between counter-stereotypical female role models and women’s labor supply and occupational choices. Using hand-collected data from Gallup surveys that cover more than 50 years, we create a direct measure of counter-stereotypical female role models based on the fraction of local survey respondents who state that they admire famous women in business, politics, or science. We show that admiring counter-stereotypical female role models is associated with more women participating in the labor market, working in male-dominated and STEM industries, and taking managerial positions, which eventually alleviates the gender pay gap.
This paper examines whether people’s mood and optimism affect economic activity. We consider two sets of exogenous proxies for optimism that are unrelated to the economic environment: (1) weather (average temperature and cloud cover) and (2) sports and political optimism. We show that economic recessions are weaker and expansions are stronger in the United States where local individuals are more optimistic. Further, local optimism has a stronger impact on state-level business cycles of smaller states and regions with low levels of risk sharing. In contrast, the incremental effects of local optimism are weaker in states where people are younger, more educated and sophisticated, and socially more connected. States with larger concentration of minority and urban population also exhibit lower sensitivity to variations in mood and optimism. Alternative explanations based on the state’s industrial composition, tax environment, migration, seasonal affective disorder (SAD), oil shocks, and direct economic impact of weather cannot explain these findings.
This study examines whether mood affects the aggregate state-level macroeconomy through its impact on firm-level decisions. Using sky cloud cover as a proxy for mood, we show that mood affects the economic expectations of small business managers. After relatively sunnier periods, managers have more optimistic expectations, and the component of their expectations related to mood influences hiring and investment decisions. Consequently, mood affects state-level job creation and new business starts, especially during periods of greater economic uncertainty. These results suggest that mood-induced economic expectations influence firm-level managerial decisions and state-level macroeconomic fluctuations.
We use stock market data to test the cross-sectional implications of theories of sovereign default and provide a market-based estimate of sovereign default costs. We find that the stock prices of firms vulnerable to financial intermediation disruption, or firms more exposed to the government, are particularly sensitive to changes in sovereign credit spreads. This is consistent with theories in which default is costly because it disrupts financial intermediation and damages the government’s reputation. Estimation of a structural valuation model indicates that the market prices stocks as if sovereign default has large effects on vulnerable stocks, translating to a 12% destruction of the value of their productive assets.
We use the Sarbanes–Oxley Act of 2002 (SOX) as a quasi-natural experiment to examine the link between product market competition and internal governance mechanisms. Consistent with the notion that competition plays an important role in aligning incentives within the firm, SOX has led to a larger improvement in the operation of firms in concentrated industries than in non concentrated industries. Furthermore, within concentrated industries, the effect is especially pronounced among firms with weaker governance mechanisms prior to SOX. We corroborate these findings using two additional regulatory changes in the United States and abroad. Overall, our results indicate that corporate governance is more important when firms face less product market competition.
We perform an out-of-sample test of the Sell in May effect studied by Bouman and Jacobsen (American Economic Review, 2002). Reducing equity exposure starting in May and levering it up starting in November persists as a profitable market timing strategy. On average, stock returns are about 10 percentage points higher in November-April half-year periods than in May-October half-year periods. We also find the Sell in May effect is pervasive in financial markets.
This paper shows that local institutional investors are effective monitors of corporate behavior. Firms with high local ownership have better internal governance and are more profitable. These firms are also less likely to manage their earnings aggressively or backdate options and are less likely to be targets of class action lawsuits. Further, managers of such firms exhibit a lower propensity to engage in “empire building” and are less likely to “lead the quiet life”. Examining the local monitoring mechanisms, we find that local institutions are more likely to introduce shareholder proposals, increase CEO turnover, and reduce excess CEO pay.
The Sarbanes—Oxley Act (SOX) was passed in the wake of several scandals that rocked corporate America in 2001 and 2002. The objective behind SOX was to improve corporate governance by improving accounting disclosures. Compliance with Section 404 is considered by many to be the most costly requirement of SOX and has been argued to be a disproportionate burden for small firms. Consequently, firms with a public float below $75 million were granted several exemptions from compliance. We document an unintended effect of these exemptions: a weakening of corporate governance through a weakening of the market for corporate control.
We examine how residents of the United States allocate their stock portfolios internationally. We find that a large U.S. Foreign Direct Investment (FDI) position in a destination country in 1990 is associated with a relatively large stock portfolio position in that country in the 2001–2006 period. Moreover, a change in the U.S. FDI position from 1980 to 1990 helps predict the change in the U.S. Foreign Portfolio Investment position from 1994 to 2006. These results are rationalized by Van Nieuwerburgh and Veldkamp’s (2009) equilibrium model of learning and portfolio choice under an information processing constraint. FDI establishes marginal differences in the endowments of information about different countries, which later translate into differences in stock portfolio holdings. We control for cross-country differences in capital controls, proximity along different dimensions, corporate governance, and economic and capital market development. Our results also hold for the G6 countries collectively.
Corporate Governance, Norms and Practices (with Luc Laeven)
Journal of Financial Intermediation, 2009
We evaluate the impact of corporate governance on the valuation of firms in a large cross-section of countries. Unlike previous work, we differentiate between minimally accepted governance attributes that are satisfied by all firms in a given country and governance attributes that are adopted at the firm level. This approach allows us to differentiate between firm-level and country-level corporate governance, thus contributing to an ongoing debate in the literature about whether governance attributes are largely determined by country factors or firm characteristics. Despite the costs associated with improving corporate governance at the firm level, we find that many firms choose to adopt governance provisions beyond those that are adopted by all firms in the country, and that these improvements in corporate governance are positively associated with firm valuation. Firms that choose not to adopt sound governance mechanisms tend to have concentrated ownership and sizeable free cash flow, consistent with agency theories based on self-interested managers and controlling shareholders. Our results indicate that the market rewards companies that are prepared to adopt governance attributes beyond those required by laws and common corporate practices in the home country.
In response to corporate scandals in 2001 and 2002, major U.S. stock exchanges issued new board requirements to enhance board oversight. We find a significant decrease in CEO compensation for firms that were more affected by these requirements, compared with firms that were less affected, taking into account unobservable firm effects, time-varying industry effects, size, and performance. The decrease in compensation is particularly pronounced in the subset of affected firms with no outside blockholder on the board and in affected firms with low concentration of institutional investors. Our results suggest that the new board requirements affected CEO compensation decisions.
The 2001 to 2002 corporate scandals led to the Sarbanes–Oxley Act and to various amendments to the U.S. stock exchanges’ regulations. We find that the announcement of these rules has a significant effect on firm value. Firms that are less compliant with the provisions of the rules earn positive abnormal returns compared to firms that are more compliant. We also find variation in the response across firm size. Large firms that are less compliant earn positive abnormal returns but small firms that are less compliant earn negative abnormal returns, suggesting that some provisions are detrimental to small firms.
We document changes in board characteristics in public US firms between 1997 and 2003. We find significant changes in board independence, committee independence, board size, interlocking directorships, director occupation and multiple directorships. Most of the changes occur between 2000 and 2003. In general, these changes appear both in small and large firms. However, changes in board size and in multiple directorships are statistically significant in large firms only. We find weaker trends in the financial stake of independent directors and in separating CEOs from the chairman position. In 2003 many independent directors have small holdings in the firms they direct and CEOs chair around two-thirds of the boards in our sample. Together, these results shed light on the types of board structures that have recently become the norm in US public firms.