Corporate Litigation, Governance, and the Role of Law Firms with Allen Ferrell, Alberto Manconi, Will Powley, and Luc Renneboog Journal of Accounting Research (link)
We study plaintiff law firms in corporate litigation, focusing on "star" firms that dominate settlement outcomes. Stars are associated with larger settlements; however, much of this effect is predicted by the defendant's litigation insurance coverage, suggesting assortative matching of stars with lawsuits that have ex ante larger expected payoffs. Moreover, stars charge higher fees for a given settlement size. Additional tests suggest that visibility and information asymmetry vis-à-vis less sophisticated plaintiffs help sustain the stars' market share. These findings advance our understanding of corporate litigation and the agency relationship between plaintiff law firms and their clients.
Trade Associations and Shared Industry Governance (NEW!) with Felipe Cabezon and Gerard Hoberg
We propose that trade associations induce member firms to adopt executive compensation schemes that put higher weight on industry performance relative to firm performance. An extension to classical managerial effort theory predicts this outcome. We empirically test theoretical predictions and find strong support along five dimensions: (1) plausibly exogenous shifts in trade association memberships leads to less relative performance evaluation (RPE), (2) TA members avoid other members as RPE benchmarks but prefer them as compensation peers, (3) these results do not obtain for non-TA industry peers, (4) mechanism tests favor implicit implementation of pay contracts over visible contractual provisions, and (5) a quasi-natural experiment illustrates that the resulting incentive plans are highly effective. These results illustrate a new industry dimension of executive pay that incentivizes collaborative value creation. SSRN Link
Do Trade Associations Matter to Corporate Strategies? with Gerard Hoberg
This paper contributes a dynamic look-ahead bias free platform for conducting research on the near universe of roughly 5,000 U.S. industry-focused trade associations (TAs) from 1999 to 2023. The platform includes public firm memberships identified using entity recognition techniques, trade association activities and texts of annual trade association websites. We conduct a first-of-its kind systematic study of how TAs benefit member firms. We examine profitability, investment, efficiency, product pricing, and geographic expansion patterns. We find that associations bring mutually beneficial efficiency and innovation gains to their members along with some externalities in the form of anti-competitive pricing and market-exclusion strategies. SSRN Link
Corporate Lobbying and Returns to Non-Lobbying Industry Competitors
This paper shows that corporate lobbying generates within-industry effects. Firms that do not lobby experience negative stock returns around the passage of new federal bills and resolutions that attract more lobbying from their competitors. To show that the value losses are related to lobbying, I use plausibly exogenous variation in lobbying intensity generated by lawsuits against lobbyists hired to represent the lobbying firms. The aggregate losses per one piece of legislation are up to $4.9B. They are larger in concentrated industries, and with more product differentiation between lobbying and non-lobbying firms. The non-lobbying firms account for over 65% of the number of publicly listed firms, and they are typically smaller and have fewer resources than their lobbying rivals. I show that these differences manifest in two entry barriers to lobbying in form of: (i) economic and voting power of firms in electoral areas of bill sponsors; and (ii) capture of trade associations by members that also lobby individually. SSRN Link
Underwriting Competition and Bargaining Power in the Corporate Bond Market with Alberto Manconi, and Luc Renneboog
We study the impact of underwriter competition on corporate bond contracts. We develop a new measure of underwriter power and a novel empirical approach, based on the underwriter’s comparative ability to place bonds. When an issuer has few "outside options" to take his bond to the market, the underwriter enjoys a stronger bargaining power over the issuer. The key feature of our approach is that underwriter power varies within a given underwriter at a given point in time across different issuers, allowing us to separate the effects of power from those of reputation and certification with a fixed effects strategy. Using our measure, we document that powerful underwriters are able to extract rents at the expense of bond issuers, in the form of higher fees, issuance yield spreads, and underpricing. Issuers facing underwriters with the highest bargaining power have a $1.5 million higher issuance cost, or about 16% relative to the average issue. A number of checks rule out alternative explanations based on certification, loyalty, and omitted issuer and/or issue characteristics. Our findings suggest that lack of underwriter competition results in material costs for corporate bond issuers. SSRN Link