12 Financial: Labor Unions/Political Connections/Equity Valuation
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ItemThe Bright Side of Unionization: The Case of Stock Price Crash Risk( 2019-08-29)This study examines whether and how labor unionization influences stock price crash risk. Using a regression discontinuity design that employs union elections as an exogenous shock yielding local variation in unionization, we find that unionization leads to a significant decline in stock price crash risk. We further explore the underlying mechanisms through which unionization affects crash risk and find that labor unions constrain managerial resource diversion and overinvestment, demand less risk-taking, and facilitate transparent information flow, which in turn reduces crash risk. Overall, our results suggest that unions play an important governance role. Our study sheds new light on a formerly under-researched beneficial impact of unionization and the role that organized labor plays in influencing extreme downside risk in the equity market.
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ItemLabor Union and Linguistic Attributes in Firm Disclosure( 2019-08-29)Little research examines managers’ language itself in the presence of labor unions, especially using a rich communication channel such as earnings conference calls. By disentangling the two latent components of linguistic complexity (i.e. information and obfuscation) using conference call transcripts, I find that firms with stronger labor unions tend to disclose less information and, surprisingly, employ less obfuscation. However, the negative relation between obfuscation and union strength is driven by the loss firms subsample, indicating that the strategic obfuscation of negative news is less likely for firms with a powerful labor union in order to be forthcoming about negative information to gain bargaining power. Furthermore, I document that unionized firms tend to disclose less forward-looking information, and use more negative words in their narratives. This study provides a comprehensive view on the nuanced linguistic styles and contents via which firms react to labor unions.
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ItemDoes It Pay to be Socially Connected with Wall Street? Evidence from Cost of Equity( 2019-08-29)We investigate whether social connections of a firm’s executives and directors with brokerage houses that follow the firm will affect the firm’s cost of equity. We find that a firm’s cost of equity significantly decreases with its social connectedness with brokerages, and that the effect is more pronounced for firms with more soft information, opaque information environment, tight financial constraints, or weak corporate governance. We use two types of quasi-natural experiments to address endogeneity concerns: 1) exogenous brokerage exit and 2) CEO turnover with internal CEO replacement. We find that an exogenous reduction in firm-brokerage social connections leads to an economically large increase in the firm’s cost of equity, indicating that the effect of social connections in reducing cost of equity is likely causal. Our results are robust to using alternative measures of cost of equity. Further, consistent with the evidence on cost of equity, we find that firm-brokerage social connections improve the firm’s equity valuation.
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ItemWhy do Companies meet with the SEC Chair?( 2019-08-29)We examine whether meetings between the SEC Chair and public companies facilitate regulatory capture. Our analyses indicate that firms seek out meetings with the SEC Chair, as meetings are more likely to occur for politically active rather than industry leading firms, and meetings are more likely to occur during periods when the firm is under nonpublic investigation. In addition, we find that firms with meetings benefit from reduced monetary penalties, and that these reduced penalties are attributable, in part, to the favorable selection of the adjudication forum. These findings extend our understanding of how regulatory capture occurs at the SEC, and suggest that closed-door meetings between the SEC Chair and public companies may facilitate regulatory capture by providing a forum that helps firms negotiate for and obtain favorable regulatory outcomes.
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ItemPolitical Information Flow and Management Guidance( 2019-08-28)We examine whether politically active firms play a role in disseminating political information via their management guidance. Using campaign financing activity or the presence of a government affairs office to proxy for firms’ access to political information, we find that politically active firms are more likely to issue management guidance overall, and especially when the government is a customer of the firm. Further, relative to politically inactive firms, the guidance released by politically active firms is more likely to discuss government policies. In addition to using numerous econometric techniques to address self-selection, we examine the timing of when guidance is issued. We find that politically active firms are more likely to issue guidance and change their government policy-related disclosures prior to the public revelation of government policy decisions. Collectively, these findings suggest that the privileged information firms obtain through their political activities is shared with investors through voluntary disclosures.
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ItemCommon ownership, price informativeness, and corporate investment( 2019-08-26)Using financial institution mergers as exogenous shocks to common ownership, we find that stock prices of commonly held firms incorporate future earnings news more efficiently and are less sensitive to noise traders. We identify two potential mechanisms: (1) information diffusion between connected firms, and (2) active trading by common owners. We find that the investment sensitivity to Tobin’s Q for commonly held firms is higher, indicating that managers of such firms rely more on market prices for information. Our findings suggest that common ownership has a positive effect on information production and influences real corporate decision by improving price informativeness.
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ItemThe Role of Life Cycle-Wide Earnings in Forecasting and Valuation( 2019-08-22)In this study, we investigate the existence and informational value of life cycle-wide and firm-specific earnings, and examine the extent to which these components are reflected in stock prices. We find that life cycle-wide earnings are significantly more persistent than firm-specific earnings. Investors misprice these earnings by underreacting to the common component and overreacting to the firm-specific component. Consistent with our results reflecting mispricing, we find a predictable drift in future abnormal stock returns in the direction of life cycle earnings. We additionally find that our results are not affected by industry dynamics, which further illustrates the added value of life cycle as a fundamental driver of firm profitability. Finally, we find that analysts do recognize the importance of life cycle information, and, at least partly, incorporate such information in their earnings forecasts. Our study adds to the understanding of a firm’s earnings generating process and provides additional evidence on the relevance of life cycle information in forecasting and valuation.