On October 1st, the Rotterdam School of Management hosted the 18th edition of the Corporate Finance Day. I greatly enjoyed organizing this conference with my colleagues, Daniel Metzger and Peter Roosenboom, and even more so listening to the presentations of the many excellent papers on the program (available here). There were 26 paper presentations and two keynote lectures on various issues in corporate finance, including gender, governance, M&A, entrepreneurship, financial technologies, and product market. As I won’t be able to do justice to all of them, a quick overview of a few of them.
A partial list of papers presented
In “The Effect of Female Leadership on Contracting from Capitol Hill to Main Street,” Nataliya Gerasimova (NHH) and co-authors explore whether women-owned firms are discriminated in the allocation of government procurement contracts when they are exposed to female politicians. Exploiting shocks stemming from close US congressional elections, they find that elected female politicians increase significantly more the proportion of procurement contracts to women-owned firms in their own district. Interestingly, they argue that female politicians mitigate the consequences of statistical discrimination with inaccurate beliefs in the government procurement sector.
In “Stock Market Response to Firms’ Unethical Conduct,” Elisa Navarra (ULB) studies companies allegedly involved in industrial disasters and the effect on their market valuation. With a death toll of 1,134 people the Rana Plaza collapse is one of the many tragic examples of industrial disasters she examines. She shows that price returns drop in the day after the disaster and remain negative over the three weeks following the disasters, without ever recovering. Elisa also presents evidence that negative stock market reactions are driven by reputation losses.
Francois Koulischer (University of Luxembourg) presented a paper, entitled “The Visible Hand when Revenues Stop: Evidence from Loan and Stock Markets during Covid19,” showing empirical evidence that public interventions (loan guarantees) in the corporate sector in Europe during the pandemic help firms access bank credit, cushion liquidity shortfall and improve market valuations. They also develop a moral-hazard model of firm investment and financing suggesting that public interventions are good for the real economy in the long run. Banks internalize part of the benefits of interventions as loan guarantees compensate them to provide liquidity to firms with severe debt overhang problems.
In “Post-merger Restructuring of the Labor Force,” Christoph Schneider (University of Münster) and co-authors study workforce restructuring after M&As. This paper is obviously not the first to examine restructuring activities in the M&A context. However, the data exploited in this study clearly increases the standard in this literature. They make use of a dataset of more than a thousand of M&As in Germany from the late 1990s onwards linked with an employer-employee dataset with over 500,000 employees. They find that workforce restructuring is large: net employment of target firms declines by more than half in the two years following M&As. Moreover, employee turnover also increases, especially if the acquirer and target have similar workforce. As compared to targets, acquirers have a better-educated, better-paid, and more qualified workforce. Newly-hired workers are younger and cheaper. Interestingly, firms become more hierarchical if they grow and if they become more diversified. Finally, they also show that M&As create internal labor markets, which are more active if firms have more managerial capacities. However, they also report that most hiring is external, especially for managers.
Another study that uses unique and really interesting data is “CEO Pet Projects.” In this paper, Denis Sosyura and Paul Decaire (both at Arizona State University) provide compelling evidence that CEOs prioritize corporate investment projects that increase the value of their personal assets at the expense of shareholder value. Examining 229,000 investment projects overseen by 412 CEOs in the oil and gas industry, they find that CEOs select lower NPV projects for the firm and erode firm investment efficiency. Their findings suggest that private benefits introduce frictions in capital budgeting decisions, lining up closely with the predictions of the classical agency theories on CEO pet projects.
Two fantastic keynotes
One of the highlights of the conference was the keynote speech of Daniel Ferreira from LSE. In an exciting talk, he presented his view on the governance of blockchains. To him, the main challenge of blockchains is not speed or scaling, but their governance. Blockchains have rules that govern their operations and as such they need a governance system to decide on how to change them. The governance of blockchains relies on a combination of voice (that is, voting) and exit (that is, stop using the blockchain), similarly than in political and corporate governance. I don’t have the space here to summarize all insights from his talk, but what I can tell is that Daniel inspired (and encouraged) all of us to pursue research in this area, whether theoretical or empirical.
Another highlight of the conference was certainly the keynote speech of Christophe Perignon (HEC Paris) who presented his study on research reproducibility in economics. Needless to say how important this topic is, also in corporate finance research. His talk also coincided with the launch of the October DataFest, an event at our university intended to bring awareness on open data and promote the use of the Erasmus Data Repository (EDR). Reproducibility means that one can check whether “same code + same data = same results.” Reproducibility is different from replication, which is about duplicating results by using the same methodology but in another context or time period or a different methodology to same data.
Christophe’s paper examines why research reproducibility is low in economics and argues that competition between journals to attract authors leads to such a low level a reproducibility. Christophe and his co-authors estimate the cost associated with the verification of the reproducibility of empirical research in economics around USD 350 per paper on average. He then explained what can be done to move out of this suboptimally low level of reproducibility. Critical is that journals conduct a systematic verification of the results prior to publication; this verified reproducibility stage could be conducted either internally by journals or outsourced to a trusted third party. Journals with sufficient market power should take the lead in this respect. AEA journals, for instance, are at the forefront of this evolution and follow this strategy. Moreover, trusted third parties, conducting the verification of reproducibility of empirical research, exist. Christophe founded one: cascad, the first certification agency for scientific code and data. Having recently experienced it, I highly recommend researchers to verify the reproducibility of their research by relying on cascad (or any other similar agency, if any).
Next year in Amsterdam…
The Corporate Finance Day is a successful annual conference series gathering a diverse group of researchers active in corporate finance. Despite that this 18th edition took place in a hybrid format (accommodating onsite and online participation), I think this edition has successfully met its goal of connecting corporate finance researchers based in the Benelux and elsewhere. And, I’d like to thank the 130+ participants for having contributed to its success. I’m also happy that the newly created Benelux Corporate Finance Network now ensures the organization of the future editions. I look forward to the next one at VU Amsterdam on September 16, 2022. See you there!