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Working Papers

The Rock Center for Corporate Governance working paper series provides drafts of authoritative research by Stanford GSB faculty members on corporate governance and leadership topics.

Aggregate Investment and Investor Sentiment

November 24, 2014 | Salman Arif and Charles M.C. Lee
Researchers examine the relation between aggregate investment, future equity returns, and investor sentiment.

Outsourcing Shareholder Voting to Proxy Advisory Firms

October 30, 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.

Skill and Luck in Private Equity Performance

October 29, 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.

Strategic Risk Shifting and the Idiosyncratic Volatility Puzzle

October 29, 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).

Measuring Income Mobility

October 23, 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.

Procyclical Leverage: Bank Regulation or Fair Value Accounting?

October 9, 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

September 5, 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?

September 22, 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 16, 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 17, 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 17, 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: The Long Term Performance of Chinese Reverse Merger Firms

September 16, 2014 | Charles M.C. Lee, Kevin K. Li, and Ran Zhang
(The Accounting Review, forthcoming) 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

September 11, 2014 | Tony Davila, George Foster, and Ning Jia
(European Accounting Review, forthcoming) New paper provides new evidence for debate concerning merits of formal control in start-up companies.

Market-Based Bank Capital Regulation

September 10, 2014 | 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 Diversity Lead to Diverse Opinions? Evidence from Languages and Stock Markets

September 7, 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 Timing and Frequency of Corporate Disclosures

September 5, 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.

The Information Content of Insider Trades around Government Intervention during the Financial Crisis

August 14, 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

July 16, 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.

Crowdsourcing Peer Firms: Evidence from EDGAR Search Traffic

July 2, 2014 | Charles M.C. Lee and 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.

Failure is an Option: Failure Barriers and New Firm Performance

July 1, 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

July 2, 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.

Search Based Peer Firms: Aggregating Investor Perceptions through Internet Co-Searches

July 2, 2014 | Charles M.C. Lee, Paul Ma, Charles C. Y. Wang
(Journal of Financial Economics, forthcoming) 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

June 25, 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

June 5, 2014 | Dirk Jenter and Katharina Lewellen
(Journal of Finance, forthcoming) 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.

The Compelling Case for Stronger and More Effective Leverage Regulation in Banking

September 28, 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

May 30, 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.

Corporate Governance, Incentives, and Tax Avoidance

May 13, 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

April 15, 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.

Capital Structure and Systematic Risk

April 6, 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

April 4, 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 1, 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.

The Impact of Venture Capital Monitoring: Evidence from a Natural Experiment

February 23, 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 31, 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 24, 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

January 13, 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

January 26, 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

July 15, 2014 | 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

December 8, 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 15, 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

October 22, 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

March 23, 2012 | 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.

Does Working from Home Work? Evidence from a Chinese Experiment

March 9, 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 14, 2013 | Yen-Cheng Chang, Harrison G. Hong, Larissa Tiedens, and Bin Zhao
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 18, 2013 | Anat R. 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 3, 2013 | Mary E. 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 14, 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 23, 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

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
 28, 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?

April 27, 2011 | 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.

Performance-Based Incentives for Internal Monitors

February 15, 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.