Corporate Investment and Stock Market Listing: A Puzzle?

Asker, John; Farre-Mensa, Joan; Ljungqvist, Alexander

doi:10.1093/rfs/hhu077

Cited by 657 publications

(432 citation statements)

References 71 publications

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“…The empirical literature has shown evidence consistent with managerial short-termism in publicly traded firms. For example, Asker, Farre-Mensa, and Ljungqvist (2015) find that compared to unlisted firms, listed firms tend to invest less and their investment levels are less sensitive to changes in investment opportunities. Bushee (1998) shows that firms are more prone to cut R&D in response to a decline in earnings when a very large proportion of institutional owners are investors that often trade in and out of individual stocks.…”

Section: Related Literaturementioning

confidence: 99%

The bright side of financial derivatives: Options trading and firm innovation

Blanco

Wehrheim

2017

Journal of Financial Economics

116

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Do financial derivatives enhance or impede innovation? We aim to answer this question by examining the relationship between equity options markets and standard measures of firm innovation. Our baseline results show that firms with more options trading activity generate more patents and patent citations per dollar of R&D invested. We then investigate how more active options markets affect firms' innovation strategy. Our results suggest that firms with greater trading activity pursue a more creative, diverse and risky innovation strategy. We discuss potential underlying mechanisms and show that options appear to mitigate managerial career concerns that would induce managers to take actions that boost short-term performance measures. Finally, using several econometric specifications that try to account for the potential endogeneity of options trading, we argue that the positive effect of options trading on firm innovation is causal.

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Section: Related Literaturementioning

confidence: 99%

The bright side of financial derivatives: Options trading and firm innovation

Blanco

Wehrheim

2017

Journal of Financial Economics

116

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“…Following a long list of prior studies (Whited, 2006;Bloom et al, 2007;Badertscher et al, 2013;Shroff et al, 2014;Asker et al, 2015), we proxy for investment opportunities using …”

Section: Capital Investment Consequences Of Tax Rate Choicesmentioning

confidence: 99%

“…We focus on capital structure and investment outcomes to limit the scope of the paper and because these are important decisions with empirical proxies in prior research. We use proxies from Graham (2000) and van Binsbergen, Graham, and Yang (2010) to evaluate firms' capital structure decisions; we use the sensitivity of investment to investment opportunities following Bloom, Bond, and Van Reenen (2007) and Asker, Farre-Mensa, and Ljungqvist (2015) among others as well as the difference between firms' actual and optimal investment (predicted by our model) to evaluate firms' capital investment decisions.…”

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confidence: 99%

Tax Rates and Corporate Decision Making

et al. 2015

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Abstract:We survey companies and find that many use incorrect tax rate inputs into important corporate decisions. Specifically, many companies use an average tax rate (the GAAP effective tax rate, ETR) to evaluate incremental decisions, rather than using the theoretically correct marginal tax rate. We find evidence consistent with behavioral biases (heuristics, salience) and managers' educational backgrounds affecting these choices. We estimate the economic consequences of using the theoretically incorrect tax rate and find that using the ETR for capital structure decisions leads to suboptimal leverage choices and using the ETR in investment decisions makes firms less responsive to investment opportunities. This paper is the winner of the American Accounting Association 2015 FARS Midyear Meeting Best Paper Award. We thank John Barrios for sharing data on the LinkedIn profiles of our survey respondents. We appreciate helpful comments from Robin Greenwood (the editor), two anonymous referees, Mary Barth, James Chyz, Bryan Cloyd, Russ Lundholm, Lil Mills (discussant), Richard Sansing, Joel Slemrod (discussant), seminar participants at the Baruch College, Columbia Law School, INSEAD conference, International Institute for Public Finance (IIPF) Annual Congress (Dublin), MaTax Conference in Germany, Stanford Summer Camp, University of California, Davis, University of Tennessee, and Virginia Tech University. Thanks to the following people for helpful comments on the development of survey questions: Jennifer Blouin, Merle Erickson, Ken Klassen, Ed Maydew, Peter Merrill, Lil Mills, Sonja Rego, Richard Sansing, Stephanie Sikes, Joel Slemrod, and Ryan Wilson. We also appreciate the support of PricewaterhouseCoopers (especially Peter Merrill) and the Tax Executives Institute (especially Tim McCormally) in asking firms to participate and in reviewing the survey document. We are grateful for the discussions with several tax executives about their role in their company. Finally, each author is grateful for the financial support of the Fuqua School of Business, Paton Accounting Fund at the University of Michigan, MIT Junior Faculty Research Assistance Program, and the Paul Merage School of Business at the University of California-Irvine. All errors are our own. 1Taxes represent a significant cost for most profitable corporations and, thus, are an important input into many corporate decisions (see Shackelford and Shevlin (2001), Graham (2003), and Hanlon and Heitzman (2010) for reviews). According to theory, the marginal tax rate (MTR), defined as the present value of additional taxes paid on an additional dollar of income earned today (Scholes et al., 2014), is the appropriate rate to use to evaluate incremental corporate decisions (MacKie-Mason, 1990; Graham, 1996a, b;Brealey, Myers, and Allen, 2014;and Scholes et al., 2014). Consistent with this theory, prior research finds that the MTR is correlated with firms' capital structure decisions (e.g., Graham, 1996a;Heider and Ljungqvist, 2015). However, prior research also finds...

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“…First, there is substantial empirical work to suggest that the extent to which agents' behavior is characterized by an undervaluation of long-term consequences (shorttermism) depends on the nature and intensity of team owner oversight (Asker et al 2014;Bernstein 2012;Gonzalez and André 2012). Our dataset enables us to examine the effects of a possible change in team owner oversight or even intervention on the use of rookies.…”

Section: Introductionmentioning

confidence: 99%

“…Much of the empirical literature on short-termism has focused on the investment decisions of CEOs of public companies and on how their decisions compare with those of CEOs of private companies (see, e.g., Dechow and Sloan 1991;Xu 2012;Aghion et al 2010;Edmans et al 2013;Ladika and Sautner 2013;and Asker et al 2014). However, with the important exception of Azoulay, Manso and Zivin (2011), who focus on investments by medical researchers in longterm risky projects, there is little work on short-termism in other contexts, and our paper highlights the potential value of studying such contexts.…”

Section: Introductionmentioning

confidence: 99%

Termination Risk and Agency Problems: Evidence from the NBA

2015

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When agents face a risk of termination by the principal in the short term, they may underinvest in projects whose results would be realized only in the long term. We use data on decisions made by NBA coaches to study how risk of termination by the principal affects the behavior of agents. Because letting a rookie play produces long-term benefits on which coaches with a shorter investment horizon might place lower weight, we hypothesize that higher termination risk might lead to lower rookie participation. Consistent with this hypothesis, we find that, during the period of the NBA's 1999 collective bargaining agreement (CBA) and controlling for the characteristics of rookies and their teams, higher termination risk was associated with lower rookie participation and that this association was driven by important games. We also find that the association does not exist for second-year players and that the identified association disappeared when the 2005 CBA gave team owners stronger incentives to monitor the performance of rookies and preclude their underuse. JEL Classification: D20, J44, K00, L83 * We would like to thank Lucian Bebchuk, Liran Einav, Yaniv Grinstein, Saul Lach, Yona Rubinstein, Analia Schlosser, Charles Wang and workshop participants at Harvard, Hebrew University, Tel Aviv University, and IDC for helpful comments and conversations, and Zvika Messing for valuable research assistance. ᵼ Harvard Law School, Tel-Aviv University, and NBER ᵵ Interdisciplinary Center (IDC) ᵴ Tel-Aviv University 1

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Corporate Investment and Stock Market Listing: A Puzzle?

Cited by 657 publications

References 71 publications

The bright side of financial derivatives: Options trading and firm innovation

The bright side of financial derivatives: Options trading and firm innovation

Tax Rates and Corporate Decision Making

Termination Risk and Agency Problems: Evidence from the NBA

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