Measuring Systematic Risk from Managerial Organization Capital with Linda Allen (Baruch College) (Journal of Business Finance and Accounting, 2021)
Organization capital (OC) constitutes a firm’s unique, hard-to-mimic, hard-to-transfer culture, internal knowledge and language, policies and procedures, growth opportunities and information technology, brand name and any other aspects that are not directly related to the production process. In order to disentangle value enhancement from agency costs inherent in the OC, we calibrate systematic risk premiums from the loss of managerial OC rents by decomposing OC into: (1) portable economic rents in the form of disclosed executive compensation and (2) a strategic component comprised of undisclosed, non-portable OC rents mixed with agency costs. Shareholders in firms with high strategic component (not the portable component) earn an annual systematic risk premium of 4.6%. Disclosures revealing the breakdown between OC and agency costs in the strategic component (earnings surprises, managerial obfuscation and stock mispricing) as well as corporate governance eliminate this risk premium by revealing the OC rents in strategic component and increasing OC portability. Link to paper
The Effect of Relationship Banking on Firm Efficiency and Default Risk (Journal of Corporate Finance, 2020)
Does relationship bank oversight reduce firm default risk and improve firm operational efficiency? I find that a new loan from a relationship bank reduces the default probability and increases the efficiency of a borrowing firm, benefiting both banks and borrowers. Moreover, inefficient and less creditworthy firms experience the highest reductions in their default risks and improvements in their efficiencies in the years following new relationship bank loans. Further, these benefits are disrupted when the relationship bank is acquired. Link to paper
What's Your Bank's Fintech Score? Fintech Integration Transforms Banks from Costly Dealers Into Brokers with Linda Allen (Baruch College), Yu Shan (Syracuse University) and Yi Tang (Fordham University)
Fintech firms mobilize information technology to provide intermediation services using a broker methodology, whereas dealer banks intermediate using leveraged balance sheets. The integration of Fintech into banking (either holistically or via mergers) may reduce the unit cost of intermediation by shifting the production function from dealer to broker. A "Fintech score" is derived using nonlinear and machine learning algorithms that show on-balance sheet lending for low Fintech score dealer banks versus securitization, brokered deposits, and non-interest income for high score, broker banks. Using Data Envelopment and Stochastic Cost Frontier Analyses, we find that banks with higher Fintech scores are more operationally efficient.
Natural Disasters and Green Innovation with Omer Unsal (Merrimack College)
Using natural disasters as quasi-natural experiments, we document that firms headquartered in disaster-zones during a natural disaster increase their green innovation performances following the incidents. The positive effect originates from firms that are headquartered in the states with stricter environmental regulations, as well as those that are financially unconstrained, and operate in high-polluting industries. On the other hand, firms whose majority shares are held by institutional investors with short-term horizons decrease their green innovation performance. Firms that are targeted by socially responsible investing (SRI) environment funds do not have better green innovation performance than firms that are not. Finally, firms temporarily reduce their environmental footprint in the aftermath of a disaster.
Back to Taylorism? Job Task Concentration and (In)Significance of Employee Satisfaction with Iftekhar Hasan (Fordham University) and Dogukan Yilmaz (Erasmus University Rotterdam)
In this paper, we document that the stock market’s perception of employee satisfaction varies with the concentration of job tasks in an industry a firm operates. While investing in employee satisfaction is costly for any company, we argue that in industries with low manual job task ratio, where employee productivity is difficult to measure, increases in employee satisfaction is perceived as a sign of the positive economic environment and future performance. On the other hand, in industries with high manual job task ratios, where employee productivity is easier to quantify, employee satisfaction is perceived as excess expenditure by investors because close monitoring of employee productivity is a viable and less costly option for those firms. In line with our expectations, we find evidence that, long-short portfolios sorted on changes in employee satisfaction generate between 0.77%-1.09% monthly abnormal returns only in industries with low ratio of manual job tasks while we do not find statistically significant abnormal stock returns for firms in industries with high ratio of manual job tasks. We argue that this suggests the potential rise of a new form of Taylorism.