Corporate Investment and Stock Market Listing: A Puzzle?
TL;DR: In this paper, the authors investigate whether short-termism distorts the investment decisions of stock market listed firms and show that compared to private firms, public firms invest substantially less and are less responsive to changes in investment opportunities, especially in industries in which stock prices are most sensitive to earnings news.
Abstract: We investigate whether short-termism distorts the investment decisions of stock market listed firms. To do so, we compare the investment behavior of observably similar public and private firms using a new data source on private U.S. firms, assuming for identification that closely held private firms are subject to fewer short-termist pressures. Our results show that compared to private firms, public firms invest substantially less and are less responsive to changes in investment opportunities, especially in industries in which stock prices are most sensitive to earnings news. These findings are consistent with the notion that short-termist pressures distort their investment decisions.
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999 citations
TL;DR: In this paper, the authors investigate the effects of going public on innovation and reveal that the quality of internal innovation of public firms declines by 50 percent relative to firms that remained private, measured by standard patent-based metrics.
Abstract: 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), I compare the long-run innovation of firms that completed their filing and went public with that of firms that withdrew their filing and remained private. I use NASDAQ fluctuations during the book-building period as a source of exogenous variation that affects IPO completion but is unlikely to affect long-run innovation. Using this instrumental variables approach reveals a complex trade-off between public and private ownership. The quality of internal innovation of public firms declines by 50 percent relative to firms that remained private, measured by standard patent-based metrics. Public firms experience both an exodus of skilled inventors and a decline in productivity among remaining inventors. However, access to public equity markets allows firms to partially offset the decline in internally generated innovation by attracting new human capital and purchasing externally generated innovations through mergers and acquisitions.
463 citations
Posted Content•
TL;DR: This paper proposed an alternative proxy for financial constraints, based on Merton's distance-to-default measure, which successfully identifies firms whose behavior is consistent with being constrained, and found that firms classified as constrained according to five popular measures do not in fact behave as if they were constrained: they have no trouble raising debt when their demand for debt increases exogenously and they use the proceeds of equity issues to increase payouts to shareholders.
Abstract: Financial constraints are fundamental to empirical research in finance and economics. We propose two novel tests to evaluate how well measures of financial constraints actually capture constraints. We find that firms classified as constrained according to five popular measures do not in fact behave as if they were constrained: they have no trouble raising debt when their demand for debt increases exogenously and they use the proceeds of equity issues to increase payouts to shareholders. We propose an alternative proxy for financial constraints, based on Merton’s (1974) distance-to-default measure, which successfully identifies firms whose behavior is consistent with being constrained.
449 citations
TL;DR: Karolyi et al. as discussed by the authors quantified the real effects of the bank-lending channel exploiting the dramatic liquidity drought in interbank markets that followed the 2007 financial crisis as a source of variation in credit supply.
Abstract: We quantify the real effects of the bank-lending channel exploiting the dramatic liquidity drought in interbank markets that followed the 2007 financial crisis as a source of variation in credit supply. Using a large sample of matched firm–bank data from Italy, we find had the interbank market not collapsed, investment expenditure would have been more than 20% higher and would have increased by around 30 cents per additional euro of available credit at the average firm. We also find that credit shocks affect the firm's value added, employment and input purchases, and propagate through firms' trade credit chains.Received July 8, 2014; accepted April 12, 2016 by Editor Andrew Karolyi.
288 citations
TL;DR: In this article, the authors use a comprehensive sample of publicly listed firms in 30 countries over the period 2001-2010 to find that greater foreign institutional ownership fosters long-term investment in tangible, intangible, and human capital.
Abstract: This paper challenges the view that foreign investors lead firms to adopt a short-term orientation and forgo long-term investment. Using a comprehensive sample of publicly listed firms in 30 countries over the period 2001-2010, we find instead that greater foreign institutional ownership fosters long-term investment in tangible, intangible, and human capital. Foreign institutional ownership also leads to significant increases in innovation output. We identify these effects by exploiting the exogenous variation in foreign institutional ownership that follows the addition of a stock to the MSCI indexes. Our results suggest that foreign institutions exert a disciplinary role on entrenched corporate insiders worldwide.
272 citations
Cites background from "Corporate Investment and Stock Mark..."
...Asker, Farre-Mensa, and Ljungqvist (2015) show that short-termism distorts investment and innovation decisions in U.S. public firms....
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...In a cross-country study, Bernstein et al. (2017) show that industries that receive private equity investments grow faster in terms of output and employment....
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...In a cross-country study, Bernstein et al. (2017) show that industries that receive private equity investments grow faster in terms of output and employment. 9 The evidence is mixed with respect to activist hedge funds. Brav et al. (2017) show that firms targeted by activists reduce R&D expenditures but increase innovation output, while Cremers et al. (2015) find that activism decreases long-term firm value, especially among more innovative firms....
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...In a cross-country study, Bernstein et al. (2017) show that industries that receive private equity investments grow faster in terms of output and employment. 9 The evidence is mixed with respect to activist hedge funds. Brav et al. (2017) show that firms targeted by activists reduce R&D expenditures but increase innovation output, while Cremers et al....
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References
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TL;DR: In this article, the authors draw on recent progress in the theory of property rights, agency, and finance to develop a theory of ownership structure for the firm, which casts new light on and has implications for a variety of issues in the professional and popular literature.
49,666 citations
Book•
01 Jan 2001
TL;DR: This is the essential companion to Jeffrey Wooldridge's widely-used graduate text Econometric Analysis of Cross Section and Panel Data (MIT Press, 2001).
Abstract: The second edition of this acclaimed graduate text provides a unified treatment of two methods used in contemporary econometric research, cross section and data panel methods. By focusing on assumptions that can be given behavioral content, the book maintains an appropriate level of rigor while emphasizing intuitive thinking. The analysis covers both linear and nonlinear models, including models with dynamics and/or individual heterogeneity. In addition to general estimation frameworks (particular methods of moments and maximum likelihood), specific linear and nonlinear methods are covered in detail, including probit and logit models and their multivariate, Tobit models, models for count data, censored and missing data schemes, causal (or treatment) effects, and duration analysis. Econometric Analysis of Cross Section and Panel Data was the first graduate econometrics text to focus on microeconomic data structures, allowing assumptions to be separated into population and sampling assumptions. This second edition has been substantially updated and revised. Improvements include a broader class of models for missing data problems; more detailed treatment of cluster problems, an important topic for empirical researchers; expanded discussion of "generalized instrumental variables" (GIV) estimation; new coverage (based on the author's own recent research) of inverse probability weighting; a more complete framework for estimating treatment effects with panel data, and a firmly established link between econometric approaches to nonlinear panel data and the "generalized estimating equation" literature popular in statistics and other fields. New attention is given to explaining when particular econometric methods can be applied; the goal is not only to tell readers what does work, but why certain "obvious" procedures do not. The numerous included exercises, both theoretical and computer-based, allow the reader to extend methods covered in the text and discover new insights.
28,298 citations
TL;DR: In this article, the generalized method of moments (GMM) estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables.
Abstract: This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.
26,580 citations
TL;DR: In this paper, two alternative linear estimators that are designed to improve the properties of the standard first-differenced GMM estimator are presented. But both estimators require restrictions on the initial conditions process.
19,132 citations
Posted Content•
TL;DR: The authors surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world, and presents a survey of the literature.
Abstract: This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.
13,489 citations