First Look

Working Papers

Fiduciary Duties and Equity‐Debtholder Conflicts

Abstract

We use an important legal event as a natural experiment to examine the effect of management fiduciary duties on equity‐debt conflicts. A 1991 Delaware bankruptcy ruling changed the nature of corporate directors' fiduciary duties in firms incorporated in that state. This change limited managers' incentives to take actions favoring equity over debt for firms in the vicinity of financial distress. We show that this ruling increased the likelihood of equity issues, increased investment, and reduced firm risk, consistent with a decrease in debt-equity conflicts of interest. The changes are isolated to firms relatively closer to default. The ruling was also followed by an increase in average leverage and a reduction in covenant use. Finally, we estimate the welfare implications of this change and find that firm values increased when the rules were introduced. We conclude that managerial fiduciary duties affect equity‐bondholder conflicts in a way that is economically important, has impact on ex ante capital structure choices, and affects welfare.

Download the paper: http://www.hbs.edu/research/pdf/10-070.pdf

How Firms Respond to Mandatory Information Disclosure

Abstract

We explore which organizations are particularly likely to resist, or acquiesce to, new institutional pressures that arise from mandatory information disclosure regulations. We hypothesize that when information is disclosed about organizational performance, certain organizational characteristics amplify pressures to improve. Examining organizational responses to a change in a prominent information disclosure program, we provide some of the first empirical evidence characterizing organizations' heterogeneous responses to information disclosure regulations. We find that private ownership and proximity to headquarters and corporate siblings are associated with superior performance trends following information disclosure. We also find that regional density moderates effect of establishment size on performance improvement. We find no evidence that capability transfers are associated with performance improvement. We highlight implications for institutional theory, managers, and policymakers.

Download the paper: http://www.hbs.edu/research/pdf/12-001.pdf

Issuer Quality and the Credit Cycle

Abstract

We show that the credit quality of corporate debt issuers deteriorates during credit booms, and that this deterioration forecasts low excess returns to corporate bondholders. The key insight is that changes in the pricing of credit risk disproportionately affect the financing costs faced by low quality firms, so the debt issuance of low quality firms is particularly useful for forecasting bond returns. We show that a significant decline in issuer quality is a more reliable signal of credit market overheating than rapid aggregate credit growth. We use these findings to investigate the forces driving time-variation in expected corporate bond returns.

Download the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734528

Platform Competition under Asymmetric Information

Abstract

In the context of platform competition in a two-sided market, we study how ex ante uncertainty and ex post asymmetric information concerning the value of a new technology affect the strategies of the platforms and the market outcome. We find that the incumbent dominates the market by setting the welfare-maximizing quantity when the difference in the degree of asymmetric information between buyers and sellers is significant. However, if this difference is below a certain threshold, then even the incumbent platform will distort its quantity downward. Since a monopoly incumbent would set the welfare-maximizing quantity, this result indicates that platform competition may lead to a market failure: competition results in a lower quantity and lower welfare than a monopoly. We consider two applications of the model. First, we consider multi-homing. We find that multi-homing solves the market failure resulting from asymmetric information. However, if platforms can impose exclusive dealing, then they will do so, which results in market inefficiency. Second, the model provides a new argument for why it is usually entrants, not incumbents, who bring major technological innovations to the market.

Download the paper: http://www.hbs.edu/research/pdf/11-080.pdf

The International Politics of IFRS Harmonization

Abstract

The globalization of accounting standards as seen through the proliferation of IFRS worldwide is one of the most important developments in corporate governance over the last decade. I offer an analysis of the international political dynamics of countries' IFRS harmonization decisions. The analysis is based on a field study of three jurisdictions in particular: Canada, China, and India. Across these jurisdictions, I first describe unique elements of domestic political economies that are shaping IFRS policies. Then, I inductively isolate two principal dimensions that can be used to characterize these jurisdictions' IFRS responses: proximity to existing political powers at the IASB; and own potential political power at the IASB. Based on how countries are classified along these dimensions, I offer predictions, ceteris paribus, on countries' IFRS harmonization strategies. The analysis and framework in this paper can help broaden the understanding of accounting's globalization.

Download the paper: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1875682