Working Papers

The Rock Center for Corporate Governance Working Paper Series on the Social Science Research Network (SSRN), contains working papers on governance and leadership topics. More research papers by Stanford Graduate School of Business Faculty may also be found here. Selected working paper abstracts are abbreviated below.

The Economic Consequences of Proxy Advisor Say-on-Pay Voting Policies
David F. Larcker,  Allan L. McCall, Gaizka Ormazabal  

Results suggest that the outsourcing of voting to proxy advisory firms appears to have the unintended economic consequence that boards of directors are induced to make choices that decrease shareholder value.

Procyclical Leverage: Bank Regulation or Fair Value Accounting?  (rev. October 2014)
Amir Amel-Zadeh, Mary E. Barth, and Wayne R. Landsman 

Researchers analyze how banks’ responses to asset gains and losses can result in procyclical leverage. The analysis reveals that absent differences in regulatory risk weights across assets, leverage cannot be procyclical.

No News is Good News: Voluntary Disclosure in the Face of Litigation (rev. September 2014)
Ivan Marinovic and Felipe Varas  

Paper studies dynamic disclosure when the firm value evolves stochastically over time. The presence of litigation risk, arising from the failure to disclose unfavorable information, not only prompts bad news disclosures but also crowds out good news disclosures. 

Does the Revolving Door Affect the SEC’s Enforcement Outcomes? (rev. September 2014)
Ed deHaan, Simi Kedia, Kevin Koh, and Shivaram Rajgopal 

Study investigates the consequences of the “revolving door” for trial lawyers at the SEC’s enforcement division.

Do Short-Sellers Profit from Mutual Funds? Evidence from Daily Trades (September 2014)
Salman Arif, Azi Ben-Rephael, and Charles M.C. Lee 

Using high resolution data, researchers show that short-sellers (SSs) systematically profit from mutual fund (MF) flows.

The Credibility of Performance Feedback in Tournaments (September 2014)
Ivan Marinovic

Researcher studies the effect of performance feedback on tournament outcomes, when a possibly dishonest principal may manipulate the agents' expectations to stimulate their effort.

A Theory of Hard and Soft Information (September 2014)
Ivan Marinovic

Paper studies a model of optimal disclosure via two competing communication channels, hard information whose value has been verified and soft disclosures (e.g., forecasts, unaudited statements, press releases).

Shell Games: Are Chinese Reverse Merger Firms Inherently Toxic? (rev. September 2014)
Charles M.C. Lee, Kevin K. Li and Ran Zhang

Researchers examine the financial health and performance of reverse mergers (RMs) that became active on U.S. stock markets between 2001 and 2010, particularly those from China (around 85% of all foreign RMs).

The Valuation of Management Control Systems in Start-Up Companies: International Field-Based Evidence, European Accounting Review Forthcoming (September 2014)
Tony Davila, George Foster and Ning Jia  

New paper provides new evidence for debate concerning merits of formal control in start-up companies.

Does Diversity Lead to Diverse Opinions? Evidence from Languages and Stock Markets (rev. September 2014)
Yen-Cheng Chang, Harrison G. Hong, Larissa Tiedens, and Bin Zhao 

Households in [Chinese] provinces with more linguistic diversity have more diverse opinions as measured by greater trading of and disagreement on stock message boards about local stocks. Linguistic diversity is also correlated with small private enterprise diversity.

The Information Content of Insider Trades around Government Intervention during the Financial Crisis (August 2014)
Alan D. Jagolinzer, David F. Larcker, Gaizka Ormazabal, and Daniel J. Taylor

Study finds compelling evidence that insiders had a greater appreciation (than the market) of the extent to which government intervention would affect the financial system and firm valuation, and traded to exploit this information advantage. 

Unprofitable Affiliates and Income Shifting Behavior (rev July 2014)
Lisa De Simone, and Jeri K. Seidman

Study suggests that multinational firms with an unprofitable affiliate use tax-motivated shift-to-loss transfer pricing strategies.

Failure is an Option: Failure Barriers and New Firm Performance (rev. July 2014)
Robert Eberhart, Charles E. Eesley, and Kathleen M. Eisenhardt

Researchers find that legal reforms that reduce failure barriers encourage “better”, not just “more”, entrepreneurs to found ventures.

Quadrophobia: Strategic Rounding of EPS Data (rev. July 2014)
Nadya Malenko, and Joseph Grundfest

Quadrophobia is pervasive and persistent, and predicts future restatements, SEC enforcement actions, and class action litigation. Quadrophobia, even if the result of proper accounting practices, thus appears correlated with a propensity to engage in other problematic accounting practices.

Measuring Income Mobility (June 2014)
Lisa De Simone, Lillian F. Mills, and Bridget Stomberg 

New study contributes to understanding of the risk-reward trade-off of multi-jurisdictional tax avoidance.

Search Based Peer Firms: Aggregating Investor Perceptions through Internet Co-Searches (rev. June 2014, Journal of Financial Economics (JFE), Forthcoming)
Charles M.C. Lee, Paul Ma, Charles C. Y. Wang

Results highlight the potential of the collective wisdom of investors ― extracted from co-search patterns ― in addressing long-standing benchmarking problems in finance.

Attracting Early Stage Investors: Evidence from a Randomized Field Experiment (rev. June 2014)
Shai Bernstein, Arthur G. Korteweg, and Kevin Laws

The average investor responds strongly to information about the founding team, but not to information about either firm traction or existing lead investors. This is in contrast to the least experienced investors, who respond to all categories of information. Results suggest that information about human assets is causally important for the funding of early-stage firms.

CEO Preferences and Acquisitions (rev. June 2014, Journal of Finance, forthcoming)
Dirk Jenter and Katharina Lewellen 

Using retirement age as proxy for CEOs’ private merger costs, researchers find strong evidence that target CEOs’ preferences affect merger activity. The likelihood of receiving a successful takeover bid is sharply higher when target CEOs are close to age 65.

Outsourcing Shareholder Voting to Proxy Advisory Firms (rev. June 2014)
David F. Larcker, Allan L. McCall and Gaizka Ormazabal

Paper examines the economic consequences of institutional investors outsourcing research and voting decisions on matters submitted to a vote of public company shareholders, to proxy advisory firms. 

The Compelling Case for Stronger and More Effective Leverage Regulation in Banking (rev. June 2014)
Anat R. Admati 

Study results are particularly relevant to banking and highlight the benefit and importance of capital regulation to constrain inefficient excessive borrowing.

The Leverage Ratchet Effect (rev. May 2014)
Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, and Paul C. Pfleiderer  

Society stands to benefit substantially if banks and other financial institutions were required to rely much more on money obtained by owners or shareholders (equity) thus reducing their leverage, than current and proposed regulations allow.

Strategic Risk Shifting and the Idiosyncratic Volatility Puzzle (rev. May 2014)
Zhiyao Chen, Ilya A. Strebulaev,  Yuhang Xing, and Xiaoyan Zhang

Researchers investigate whether the risk-shifting problem between equity and debt holders (Jensen and Meckling, 1976) can explain the puzzling negative relation between idiosyncratic volatility and future stock returns documented by Ang, Hodrick, Xing, and Zhang (2006).

Corporate Governance, Incentives, and Tax Avoidance  (rev. May 2014)
Chris A. Armstrong, Jennifer L. Blouin, Alan D. Jagolinzer, and David F. Larcker

This paper examines the link between corporate governance, managerial incentives, and tax avoidance.

CEO Turnover and Relative Performance Evaluation (rev. April 2014) 
Dirk Jenter and Fadi Kanaan  

CEOs are significantly more likely to be dismissed from their jobs after bad industry and, to a lesser extent, after bad market performance. A decline in industry performance from the 90th to the 10th percentile doubles the probability of a forced CEO turnover. 

The Timing and Frequency of Corporate Disclosures (rev. April 2014)
Ivan Marinovic and Felipe Varas  

We show that in the presence of litigation risk a higher intensity of public news may increase disclosure; whereas in its absence it would reduce it. Surprisingly, a higher litigation risk may make the manager better off by inducing savings on disclosure costs.

Skill and Luck in Private Equity Performance (April 2014)
Arthur G. Korteweg, and Morten Sorensen

Researchers evaluate the performance of private equity (“PE”) funds, using a variance decomposition model to separate skill from luck.

Capital Structure and Systematic Risk (April 2014)
Michael Schwert, and Ilya A. Strebulaev

Systematic risk is an important determinant of corporate capital structure. A one standard deviation increase in asset beta corresponds to a decrease in leverage of 13%, controlling for total asset volatility.

Financing as a Supply Chain: The Capital Structure of Banks and Borrowers (rev. April 2014)
Will Gornall and Ilya A. Strebulaev  

New research from Stanford suggests stricter capital regulation is needed to prevent another financial crisis.

Risk-Adjusting the Returns to Venture Capital (March 2014)
Arthur G. Korteweg, and Stefan Nagel

Performance evaluation of venture-capital (VC) payoffs is challenging because payoffs are infrequent, skewed, realized over endogenously varying time horizons, and cross-sectionally dependent. We show that standard stochastic discount factor (SDF) methods can be adapted to handle these issues.

Aggregate Investment and Investor Sentiment (Rev. March 2014)
Salman Arif, and Charles M.C. Lee

Researchers examine the relation between aggregate investment, future equity returns, and investor sentiment.

The Impact of Venture Capital Monitoring: Evidence from a Natural Experiment (Rev. February 2014)
Shai Bernstein, Xavier Giroud, and Richard R. Townsend

Study examines whether venture capitalists contribute to the innovation and success of their portfolio companies, or merely select companies that are already poised to innovate and succeed.

Central Clearing and Collateral Demand (January 2014)
Darrell Duffie, Martin Scheicher and Guillaume Vuillemey   

Researchers use an extensive data set of bilateral exposures on credit default swap (CDS) to estimate the impact on collateral demand of new margin and clearing practices and regulations.

Cashing-In Credibility (January 2014)
Ivan Marinovic and Felipe Varas 

Paper studies a dynamic communication game in which the seller of an asset, whose credibility is unknown to the market, reports changes in the asset value during multiple periods before selling the asset.

Competition for Talent Under Performance Manipulation: CEOs on Steroids (Revision: January 2014)
Ivan Marinovic and Paul Povel 

Studies how competition for talent affects CEO compensation, taking into consideration that CEO decisions and CEO skills or talent are not observable, and CEOs can manipulate performance as measured by outsiders.

Dynamic Information Asymmetry, Financing, and Investment Decisions (Rev January 2014)
Ilya A. Strebulaev, Haoxiang Zhu, and Pavel Zryumov  

Researchers reexamine the classic yet static information-asymmetry model of Myers and Majluf (1984) in a fully dynamic market.

Right on Schedule: CEO Option Grants and Opportunism (December 5, 2013)
Robert Daines, Grant Richard McQueen,and Robert J. Schonlau 

In the wake of the backdating scandal, many firms began awarding options at the same time each year. These scheduled option grants eliminate backdating, but create other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to obtain options with lower strike prices. We provide evidence that CEOs respond to this incentive and document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants.

The Operational Consequences of Private Equity Buyouts: Evidence from the Restaurant Industry (Revised December 2013)
Shai Bernstein, and Albert Sheen

Do private equity firms affect portfolio company operations? Or are changes a mere artifact of initial investment selection? We document significant operational changes in 101 restaurant chain buyouts between 2002 and 2012 using health inspection records for over 50,000 stores in Florida.

In Short Supply: Equity Overvaluation and Short Selling (November 2013)
Messod Daniel Beneish, Charles M.C. Lee, and Craig Nichols

Researchers examine the relation between short sale constraints and equity overvaluation. 

Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Socially Expensive (November 2013)
Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig and Paul C. Pfleiderer 

Study concludes that bank equity is not socially expensive, and that high leverage at the levels allowed, for example, by the Basel III agreement is not necessary for banks to perform all their socially valuable functions and likely makes banking inefficient. Better capitalized banks suffer fewer distortions in lending decisions and would perform better.

Conservatism and Aggregation: The Effect on Cost of Equity Capital and the Efficiency of Debt Contracts (rev. November 2013)
Anne Beyer

This paper studies the joint effect of conservatism and aggregation in two settings. The paper shows the maximum capital that can be raised by a debt contract which implements efficient post-contractual decisions is higher in the conservative than in the fair value regime. 

Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive (November 2013 revision)
Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig and Paul C. Pfleiderer 

We conclude that bank equity is not socially expensive, and that high leverage at the levels allowed by, for example, by the Basel III agreement is not necessary for banks to perform all their socially valuable functions and likely makes banking inefficient.

Crowdsourcing Peer Firms: Evidence from EDGAR Search Traffic (September 2013)
Charles M.C. Lee, Paul Ma, Charles C. Y. Wang

Using Internet traffic patterns from the Securities and Exchange Commission Electronic Data-Gathering, Analysis, and Retrieval (EDGAR) website, researchers show that firms appearing in chronologically adjacent searches by the same individual are fundamentally similar on multiple dimensions. Results highlight the usefulness of EDGAR data, as well as the latent intelligence in search traffic patterns.

Market-Based Bank Capital Regulation (September 2013)
Jeremy Bulow and Paul Klemperer

We design a robust regulatory system such that (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals (because the simplicity and clarity of such rules prevents gaming by firms, and forbearance by regulators, as well as because of the efficiency role of prices). 

Does Working from Home Work? Evidence from a Chinese Experiment  (March 2013)
Nicholas Bloom, James Liang, Donald John Roberts and Zhichun Ying

Study highlights the benefits of allowing employees to work from home.

Linguistic Diversity and Stock Trading Volume  (March 2013)
Yen-Cheng Chang, Harrison G. Hong, Larissa Tiedens and Bin Zhao

2013 Abstract: We test the hypothesis that the linguistic diversity of a stock’s investor base leads to more trading. Trading might be due to beliefs differing across languages or investor exposure to multiple languages leading to more trading ideas

Does Debt Discipline Bankers? An Academic Myth About Bank Indebtedness  (February 2013)
Anat Admati, and Martin Hellwig

Paper examines the plausibility and relevance of claims in banking theory that fragility of bank funding is useful because it imposes discipline on bank managers.

Effects on Comparability and Capital Market Benefits of Voluntary Adoption of IFRS by US Firms: Insights from Voluntary Adoption of IFRS by Non-US Firms (January 2013)
Mary Barth, Wayne R. Landsman, Mark H. Lang, and Christopher D. Williams

This study determines whether voluntary adoption of IFRS is associated with increased comparability of accounting amounts and attendant capital market benefits.

Does Going Public Affect Innovation? (October 2012)
Shai Bernstein

This paper investigates the effects of going public on innovation. Using a data set consisting of innovative …firms that …filed for an initial public offering (IPO), The researcher compares the long-run innovation of …firms that completed their filing and went public with that of …firms that withdrew their filing and remained private.

Debt Overhang and Capital Regulation (March 2012)
Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig and Paul C. Pfleiderer

We analyze shareholders’ incentives to change the leverage of a firm that has already borrowed substantially. As a result of debt overhang, shareholders have incentives to resist reductions in leverage that make the remaining debt safer. This resistance is present even without any government subsidies of debt, but it is exacerbated by such subsidies. 

Women in the Boardroom: Symbols or Substance? (March 2012)
Charles A. O'Reilly III and Brian G.M. Main

The central argument for increasing the number of women on corporate boards of directors has been the so-called “business case for diversity” which proposes that women and minorities add valuable new perspectives that result in enhanced corporate performance. Unfortunately, the empirical evidence for this claim is mixed, leading some researchers to suggest that women outsiders are appointed for symbolic rather than substantive reasons.

Market Making Under the Proposed Volcker Rule (January 16, 2012)  
Darrell Duffie

This paper discusses implications for the quality and safety of financial markets of proposed rules implementing the market-making provisions of section 13 of the Bank Holding Company Act, commonly known as the “Volcker Rule. 

Policy Issues in the Design of Tri-Party Repo Markets (Revision: July 2011) 
Darrell Duffie, Adam Copeland, Antoine Martin, and Susan McLaughlin

This paper provides an overview of the nature and impetus of reforms to the U.S. tri-party repo market, one of the most critical components of the financial system. Authors review some key systemic weaknesses of this market that were revealed during the financial crisis of 2007-2009. 

Systemic Risk Exposures: A 10-by-10-by-10 Approach (July 2011) 
Darrell Duffie; National Bureau of Economic Research, Systemic Risk Measurement Initiative 

Presents and discusses a “10-by-10-by-10” network-based approach to monitoring systemic financial risk. Under this approach, a regulator would analyze the exposures of a core group of systemically important financial firms to a list of stressful scenarios, say 10 in number. 

Does a Central Clearing Counterparty Reduce Counterparty Risk?
Darrell Duffie and Haoxiang Zhu 
A plan by global financial regulators to fix the mess created by the misuse of credit default swaps is flawed, says Darrell Duffie, professor of finance at the Stanford Graduate School of Business.

Related: A Central Clearing House Doesn't Reduce CDS Risk, Stanford GSB News, April 2009

Performance-Based Incentives for Internal Monitors (February 2010)
Chris Armstrong, Alan D. Jagolinzer and David F. Larcker 

This study examines the use of performance-based incentives for internal monitors (general counsel and chief internal auditor) and whether these incentives impair monitors’ independence by aligning their interests with the interests of those being monitored. 

Managerial Incentives and Value Creation: Evidence from Private Equity (November 2009) 
Paul Oyer and Phillip Leslie

Paper analyzes the differences between companies owned by private equity (PE) investors and similar public companies. Researchers document that PE-owned companies provide higher managerial incentives to their top management: CEOs have almost twice as much equity, 10% lower salary, and more cash compensation than their counterparts at comparable public corporations.