Publications

Network Effects in Corporate Financial Policies, Journal of Financial Economics (2022), with Charles Hadlock, James LeSage, and Morad Zekhnini

We study the role of peer effects in capital structure decisions by exploiting the heterogeneous and intransitive nature of product market networks combined with spatial econometric techniques that account for these features. In contrast to prior work, this approach allows us to provide economically meaningful estimates of the magnitude of the causal role of peer effects in capital structure decisions. Our estimates indicate an initial sensitivity of a firm’s leverage choice to peer average leverage on the order of .20, indicating a substantive but moderate level of strategic complementarity in capital structure decisions. Our modeling allows peer effects to vary by a firm’s location in the product market network, with more central firms having relatively larger aggregate effects on their set of network peers. Our evidence appears most likely to reflect strategic behavior. Extensions of our modeling framework to related finance questions are also briefly considered.

♦Presented at the 2019 Finance Organizations and Markets Conference, Texas A\&M University, and Tulane University

Industry Networks and the Geography of Firm Behavior, Management Science (2022), with James LeSage, and Morad Zekhnini

We consider the role of local geographical peers in the determination of firm behavior. We exploit intransitivity in local peer-firm networks and spatial econometric techniques to circumvent well-known challenges in estimating and interpreting empirical models of peer effects. We find that geography network effects play a highly significant causal role in explaining corporate investment decisions, and a much more modest role in explaining financial policy and firm performance. We then implement a novel structured network regression to separately identify geography, product market, and supply-chain network effects. We find that local externalities in firm behavior operate almost exclusively within industry boundaries, and that geography effects outside of industry are only present (yet moderately so) for corporate investment decisions.

♦ Presented at the 2019 Lone Star Finance Conference, Universidad de los Andes Corporate Finance Conference, Heriot-Watt University, Louisiana State University, Michigan State University, Texas Christian University, Texas State University, Tulane University, University of Alabama, University of Cambridge, University of Colorado at Boulder, University of Edinburgh, University of Notre Dame, and University of Oxford.

Agglomeration, Coordination, and Corporate Investment, Journal of Corporate Finance (2022), with Gonzalo Maturana, Ioannis Spyridopoulos, and Santiago Truffa

Agglomeration is positively correlated with productivity and exhibits substantial heterogeneity across industries. Yet, the connection between agglomeration and corporate investment, an important driver of production, remains relatively underexplored. We study this relation using counterfactuals that account for the empirical distribution of industry size and firm locations, and by employing network methods that exploit firm geographic location and patent citation connections. We find a strong positive relation between industry peers’ proximity, investment externalities, uncertainty, and knowledge capital. Collectively, our evidence supports the notion that knowledge spillovers generate positive investment externalities that drive firm location decisions and explain industry-level agglomeration patterns.

♦Presented at the 2019 Urban Economics Association Conference in Philadelphia, the 2016 Regional Science Association International Conference, Michigan State University, and Tulane University

Doing Good When Doing Well: Evidence on Real Earnings Management, Review of Accounting Studies (forthcoming), with Charles Hadlock and Josh Pierce

We provide evidence on earnings management by exploiting temporary exogenous shocks to utility firms’ sales in the form of annual weather variation.  We find that sample firms’ sales are highly sensitive to annual changes in average temperatures in the region where the firm operates, but this sensitivity disappears quickly moving down the income statement.  We interpret this as indirect evidence of earnings management.  In search of direct evidence, we study charitable giving decisions by sample firms and uncover a significant positive sensitivity of charitable spending to weather-driven demand shocks.  Given the magnitude of this detected relation and the economic returns from charitable giving, this behavior appears to be driven by a desire to smooth earnings.

Panel Data Estimation in Finance: Testable Assumptions and Parameter (In)Consistency, JFQA (2019), with Charles Hadlock.

We investigate the strict exogeneity assumption, a necessary condition for estimator consistency in many finance panel settings. We outline tests for strict exogeneity in both traditional (non-IV) and IV settings. When we apply these tests in common traditional finance panel regressions, we find that the strict exogeneity assumption is often rejected, suggesting large inference errors. We test for strict exogeneity in specific finance IV panel settings and illustrate the potential for these tests to help confirm, or rule out, the validity of common panel IV estimators. We offer a set of recommendations to address the strict exogeneity issue in finance research.

♦ Lead Article in JFQA

♦ Click here to see Charlie’s interview about the paper

♦Presented at the 2015 London Business School Symposium on Causal Inference, the 2016 Financial Research Association conference in Las Vegas, Iowa University, and the University of Nebraska

Corporate Investment and Innovation in the Presence of Competitor Constraints, Review of Financial Studies (2019), with Zack Liu

We study the relation between investment behavior and competitor financial constraints. Using inter-firm patent citations and text-based product market similarities to identify intransitive competitor networks, we find that firms increase investment spending, patenting activity, and employee poaching when competitor constraints become more binding. In addition, firms shift their investment composition (product market and patent portfolios) towards competitors who experience a relative tightening in constraints. These effects are robust to controlling for selection and correlated effects across competitors. To mitigate endogeneity concerns, we exploit the 2004 AJCA tax holiday and the 1989 junk bond crisis as exogenous shocks to competitor constraints and find similar effects.

♦ Presented at the 2017 American Finance Association meetings in Chicago, Texas Christian University, the University of Texas at Austin, Michigan State University, and the 2015 Midwest Finance Association