Free Cash Flow (FCF) agency conflicts exist when managers divert cash flow for private benefits. We identify the impact of unobservable FCF conflicts on firm policy using a structural approach. Measurement equations are constructed based on observable managerial choices: payout policy changes and personal portfolio decisions around exogenous tax rate changes. We find that FCF agency conflicts cause (i) under-leverage, leading to higher corporate taxes and (ii) under-investment in PP&E, leading to slower firm growth. Capital markets recognize FCF conflicts and discount such firms. Finally, firms with (i) large institutional holdings or (ii) better-aligned executive compensation, suffer less from FCF agency conflicts.

Agency Costs of Free Cash Flow

The information content of dividends

COVID-19 and business failures: The paradoxes of experience, scale, and scope for theory and practice

Enterprise Risk Management (ERM) is the discipline by which enterprises monitor, analyze, and control risks from across the enterprise, with the goal of identifying underlying correlations and thus optimizing the risk-taking behavior in a portfolio context. This study analyzes the valuation implications of ERM Maturity. We use data from the industry leading Risk and Insurance Management Society Risk Maturity Model over the period from 2006 to 2011, which scores firms on a five-point maturity scale. Our results suggest that firms that have reached mature levels of ERM are exhibiting a higher firm value, as measured by Tobin's Q. We find a statistically significant positive relation to the magnitude of 25 percent. Upon decomposition of the maturity score, we find that the most important aspects of ERM from a valuation perspective relate to the level of top–down executive engagement and the resultant cascade of ERM culture throughout the firm. Firms that have successfully integrated the ERM process into both their strategic activities and everyday practices display superior ability in uncovering risk dependencies and correlations across the entire enterprise and as a consequence enhanced value when undertaking the ERM maturity journey ceteris paribus.

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The Valuation Implications of Enterprise Risk Management Maturity

This paper examines whether and to what extent CEO personal traits (hubris, in particular) affect firm environmental innovation. Using the overarching theoretical framework of upper-echelons theory, the paper builds on the insights from the corporate strategy, innovation, and corporate social responsibility literatures. We also examine the moderating role of firm-specific features (e.g. organizational slack) and the external environment (e.g. market uncertainty) in this context. Based on a sample of UK companies operating in sensitive industries, we find that CEO hubris facilitates the engagement in green innovative projects. We also find that CEO hubris does not have a uniform effect: its effect on environmental innovation increases with the organizational slack, but weakens with the extent of environmental uncertainty. Our findings suggest that availability of resources per se is not enough to produce environmental innovation. Instead, it requires a stable external environment that enables the CEO with a hubristic personality to make a correct use of them.

Big Egos Can Be Green: A Study of CEO Hubris and Environmental Innovation

Exploiting the increase in personal tax rates due to the American Taxpayer Relief Act and Healthcare Act, we identify tax-minded executives who exhibit a preference for personal tax savings. We find that 2,281 top executives strategically realized their built-in capital gains prior to the tax hikes to save nearly $741 million in personal taxes in 2012. These executives also save their shareholders taxes and save their firms cash taxes. Specifically, their firms distributed $8 billion in special and accelerated dividends in 2012, which saved shareholders nearly $700 million in taxes. Further, each tax-minded executive reduces a firm’s long-run cash effective tax rate by 0.43%.

Tax-Minded Executives and Corporate Tax Strategies: Evidence from the 2013 Tax Hikes

We provide evidence that dividends signal sustainable earnings generated by assets-in-place for firms with weak investment opportunities. In the cross-section, both dividend levels and changes contain more earnings information among firms with weaker investment opportunities. Intertemporally, when aggregate investment opportunities in the economy are worse, dividend changes convey more earnings information. In contrast, dividends have a more negative association with investment spending for firms with strong growth options, as funding investment is a higher priority for those firms. Collectively, our findings suggest that dividends serve as a counter-signal, whereby additional information about investment opportunities give rise to signaling that is non-monotonic in firm quality.

Investment as the Opportunity Cost of Dividend Signaling

I use a unique data set of loans to small business owners to examine whether lenders face negative externalities when they share private information with borrowers. When lenders grant debt forgiveness to borrowers, borrowers communicate that information to other borrowers, who are then more likely to strategically default on their own obligations. This strategic default contagion is economically large. When the lender doubles debt forgiveness, contagion causes the default rate to increase by 10.9% on average. Using an exogenous shock to the lender’s forgiveness policy, I further show that as the lender learns about the extent of borrower communication it tightens its debt forgiveness and origination policies to reduce information spillovers and mitigate the default contagion. Collectively, these results provide new evidence on the strategic interactions between a firm and its customers in a dynamic information environment.

Sharing private information with customers: Strategic default and lender learning

We examine whistleblowers’ and firms’ behaviors under cash-for-information whistleblower programs using lawsuits filed under the False Claims Act. Within the sample of lawsuits filed with the regulator, whistleblowers report internally in only 50% of the cases before contacting regulators, and only 30% of the cases are settled, raising the concern that cash-for-information programs trigger many meritless allegations. However, whistleblowers are less likely to report internally when firms’ governance is weaker, and such firms are less likely to initiate internal investigations or refrain from retaliating against whistleblowers. Finally, whistleblowers seem adequately compensated under cash-for-information programs and do not face as severe career consequences as documented in prior research.

Gerardo Pérez Cavazos

Papers

Agency Costs of Free Cash Flow

Tax-Minded Executives and Corporate Tax Strategies: Evidence from the 2013 Tax Hikes

Investment as the Opportunity Cost of Dividend Signaling

Sharing private information with customers: Strategic default and lender learning

Cash-for-Information Whistleblower Programs: Cure or Curse?