First Look

Abstract—Financial literacy and cognitive capabilities are convincingly linked to the quality of financial decision-making. Yet, there is little evidence that education intended to improve financial decision-making is successful. Using plausibly exogenous variation in exposure to state-mandated personal finance and mathematics high school courses, affecting millions of students, this paper answers the question "Can good financial behavior be taught in high school?" It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes. Instead, we find additional mathematics training leads to greater financial market participation, investment income, and better credit management, including fewer foreclosures.

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Abstract—I document that public U.S. firms hold twice as much cash as large privately held firms, a surprising finding that is robust to three alternative identification strategies: matching, within-firm variation, and instrumental variable. Public firms' greater access to capital accounts for about one-quarter of the difference. The remainder can be explained by differences in the extent to which public and private firms engage in market timing in response to misvaluation shocks. I show that the risk of misvaluation induces public firms to raise capital and accumulate cash reserves when they perceive their equity to be overvalued, resulting in greater demand for precautionary cash holdings.

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Abstract—We survey the literature on payout policy, with a particular emphasis on developments in the last two decades. Of the traditional motives of why firms pay out (agency, signaling, and taxes), the cross-sectional empirical evidence is most persuasive in favor of agency considerations. Studies centered on the May 2003 dividend tax cut confirm that differences in the taxation of dividends and capital gains have only a second-order impact on setting payout policy. None of the three traditional explanations can account for secular changes in how payouts are made over the last 30 years, during which repurchases have replaced dividends as the prime vehicle for corporate payouts. Other payout motives such as changes in compensation practices and management incentives are better able to explain the observed variation in payout patterns over time than the traditional motives. The most recent evidence suggests that further insights can be gained from viewing payout decisions as an integral part of a firm's larger financial ecosystem, with important implications for financing, investment, and risk management.

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Abstract—We theoretically and empirically investigate the repercussions of credit market misvaluation for a firm's borrowing and investment decisions. Using an ex-post measure of the accuracy of credit ratings to capture debt market misvaluation, we find evidence that firms take advantage of inaccuracies by issuing more debt and increasing leverage. The result goes beyond a wealth transfer and has real investment implications: approximately 75% of the debt issuance funds increased capital expenditures and cash acquisitions. In the cross section, misvaluation affects financially constrained firms the most, supporting the theoretical prediction that debt overvaluation loosens financial constraints.

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Abstract—Scholars and practitioners alike now recognize that a firm's capacity to assimilate and use know-how from external sources-what Cohen and Levinthal (1990) called "absorptive capacity"-plays a central role in innovation performance. In recent years, a common strategy pursued by companies to increase their absorptive capacity has been to locate new R&D facilities in close geographic proximity to technology "hotspots" like Cambridge, Massachusetts, or the San Francisco Bay Area. Such a strategy is predicated on the assumption that geographic proximity facilitates absorption. Unfortunately, more than two decades after the publication of Cohen and Levinthal's landmark piece on absorptive capacity, precious little is known about how different organizational strategies and managerial practices-including location choices-actually impact a firm's ability to exploit external sources of know-how. A key barrier to empirical progress on this front has been a lack of direct measures of absorption. In this paper, we develop a novel measure of absorptive capacity that attempts to directly track the influence of external sources of know-how on the internal R&D activities of individual laboratories. We then use this measure to examine laboratory level differences in absorptive capacity and the degree to which a lab's geographic proximity to a given knowledge base influences its absorptive capacity. To identify patterns of absorption, we exploit a quasi-natural experiment that has occurred in the pharmaceutical industry over the past two decades. Since 1989, a number of major pharmaceutical companies (Merck, Novartis, Pfizer, etc.) have chosen to locate new laboratories in one or more major life science hotspots (Massachusetts, the San Francisco Bay Area, and San Diego County). Because these are de novo green-field labs, we have an unusual opportunity to study how the capabilities of the lab evolved over time and whether those capabilities were influenced by the technological activities of the surrounding local scientific and technological ecosystems. Our sample includes 39 R&D laboratories (at varying degrees of distance from three major life sciences hotspots-Massachusetts, San Diego County, and the San Francisco Bay Area). Our findings indicate that geographic proximity is a significant predictor of how much know-how a lab absorbs from a given hotspot. The importance of geographic proximity is also shown to be increasing over time. However, our results also show significant residual variance at both the individual laboratory and company levels, suggesting an important role of managerial practices and policies in driving absorption. The latter finding was consistent with our field interviews of R&D executives from laboratories involved in our study. The study provides further evidence of the geographically bounded nature of knowledge.

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Abstract—Himachal Pradesh has surged ahead of other Indian states in implementing universal primary education. Through a combination of field research methods, this paper connects these achievements to bureaucratic norms, unwritten rules within the state that guide the behavior of public officials and structure their relations with civic agencies outside the state. Bureaucratic norms are a critical component of state capacity that shape when and how public agencies implement policies effectively on behalf of marginalized citizens.

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Abstract—Community-based initiatives that work to empower the poor and promote their participation have gained strong support among scholars and practitioners of development. Yet the questionable assumptions about culture and development that inform these initiatives render it unclear as to whether and how community participation can be promoted in practice, especially in settings that depart from the ideal conceptions of community. Through a detailed case study of the UNICEF-IKEA Bal Adhikar Pariyojana (BAP), a grassroots initiative that seeks to advance child rights in India, this paper examines how traditionally disempowered community members learn to mobilize collectively around child education and health in the least likely setting of rural Uttar Pradesh. Building on the recent literature on culture and public action, and relying on extensive field research, village-level comparisons, and interviews with key stakeholders, this paper traces the process by which BAP fieldworkers and community members make strategic use of the cultural understandings, norms, and identities that govern family, gender, and caste relations to build new community-based networks that promote the rights of children. Yet there are serious drawbacks to these cultural strategies when attempting to scale up participation directed at an unresponsive state. To maintain ties with different caste groups, BAP takes an apolitical posture and does not actively build the capacity of communities to mobilize politically and make demands on state agencies. The findings suggest that cultural strategies for promoting community participation in rural India need to be understood within a broader political context of poor local governance and caste politics.

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Abstract—Under increased pressure to report environmental impacts, some firms selectively disclose relatively benign impacts, creating an impression of transparency while masking their true performance. We identify key company- and country-level factors that, by intensifying scrutiny on firms and diffusing global norms to their headquarters' countries, limit firms' use of selective disclosure. We test our hypotheses using a novel panel dataset of 4,750 public companies across many industries and headquartered in 45 countries during 2004-2007. Results show that firms that are more environmentally damaging, particularly those in countries where they are more exposed to scrutiny and global norms, are less likely to engage in selective disclosure. We discuss contributions to the literature that spans institutional theory and strategic management and to the literature on information disclosure.

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Abstract—This paper introduces the impact of debt misvaluation on merger and acquisition activity. Debt misvaluation helps explain the shifting dominance of financial acquirers (private equity firms) relative to strategic acquirers (operating companies). The effects of overvalued debt might seem limited since both acquirer types and target firms can access the debt markets. However, fundamental differences in governance and project co-insurance between the two types of acquirer interact with debt misvaluation, resulting in variation in how assets are owned that depends on debt market conditions. We find support for our theory in merger data using a novel measure of debt misvaluation.

Download working paper: http://www.people.hbs.edu/mrhodeskropf/Financial_Buyers_v51.pdf

Abstract—Are rents, or excess profits, good for development? Using industry-level manufacturing data, this paper demonstrates a negative effect of rents, measured by the mark-up ratio, on productivity growth. The negative effect is strongest in poor countries, suggesting that high profits stymie economic development rather than enable it. Consistent with the rent-seeking mechanism of our model, we find that high rents are associated with a slower reduction in tariffs. A country's average mark-up in manufacturing is a strong negative predictor of future economic growth, indicating that we may be measuring a phenomenon of the broader business environment.

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Abstract—In this paper, I examine the relation between Integrated Reporting (IR) and the composition of a firm's investor base. I hypothesize and find that firms that practice IR have a more long-term oriented investor base with more dedicated and fewer transient investors. This result is more pronounced for firms with high growth opportunities, not controlled by a family, operating in "sin" industries, and exhibiting more stable IR practice over time. I find that the results are robust to the inclusion of firm fixed effects, controls for the quantity of sustainability disclosure, and alternative ways of measuring IR. Moreover, I show that investor activism on environmental or social issues or a large number of concerns about a firm's environmental or social impact leads a firm to practice more IR and that this investor or crisis-induced IR affects the composition of a firm's investor base.

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