Research Summary
Research Summary
Overview
Description
My focus is empirical financial accounting research, with particular interests in governance, valuation, M&A, and short-sellers. All three of my papers to date fall under the broad heading of “alternative governance mechanisms”—studies of how accounting information is used by parties to influence and control the firm, outside of the most canonical settings.
My dissertation and job market paer, "Truth and Bias in M&A Target Fairness Valuations: Appraising the Appraisals,” focuses on an understudied mechanism in M&A governance: third-party appraisal of the target. Accepting a takeover offer is an important decision, and one where sound governance mechanisms are vital. Most prior research on M&A governance has focused on formal incentives, process, and structure. But U.S. M&A law and practice include a surprisingly strong role for third-party appraisal. U.S. targets are effectively required to obtain, consider, and disclose a “fairness opinion,” with supporting valuations, before accepting a takeover offer. Critics note that the opinion providers often have conflicts of interest and biased incentives, and argue that even unbiased valuations cannot provide useful information to public targets, which can use their pre-deal stock price as an appraisal of their value. I use a novel, hand-collected dataset and implement the most comprehensive empirical analysis of the valuations supporting target fairness opinions to date. My paper is the first to show that the valuations impound useful information that is incremental to the target’s standalone stock price—specifically, they can detect fundamental mispricing and forecast deal-level synergies—which could render them useful in resolving agency conflicts in M&A. It is also the first to document the systematic bias in these valuations, as well as some constraints (including recent judicial scrutiny) on that bias. These findings suggest avenues for reform of the fairness opinon procss. They are also relevant to the live debate over Delaware appraisal rights, which centers on the fundamental question of whether and when an abstract valuation can serve as a superior measure of value to the negotiated transaction price.
“Governance Through Shame and Aspiration: Index Creation and Corporate Behavior in Japan,” co-authored with Charles C.Y. Wang and Akash Chattopadhyay, studies the novel and growing role of index providers as instruments of corporate governance (see, e.g., the S&P and FTSE Russell index-inclusion decisions in the summer of 2017). After decades of stagnation, and concerns about low corporate profitability and capital efficiency, Japan launched a novel stock index, the JPX 400, inclusion in which was predominantly based on accounting profitability and efficiency measures. We develop a novel research design to study how competition to attain membership in the index affected corporate performance, and find that it had a surprisingly powerful impact, in an environment where decades of formal governance reforms had proved ineffective. Intriguingly, however, wining inclusion in the index did not appear to generate measurable financial benefits, and our cross-sectional tests suggest that firms were largely motivated by the prestige of membership. The implications are novel: Stock indices can, in some circumstances, powerfully shape corporate behavior simply by serving as a prestigious “club.”
Finally, my work-in-progress, Short Selling Constraints, Activism, and Public “Bounties”: The Failure of Inter Partes Review Activism,” also studies an unusual twist on the classic governance setting. In 2011, partially motivated by social concerns about the rising costs of pharmaceuticals and the perception that the U.S. patent office was overburdened and too generous in granting patent protection to trivial innovations, Congress passed a law that made it easier for a large number of entities—including hedge funds—to challenge and possibly invalidate patents. Soon after, several hedge funds identified and began exploiting an opportunity: going short on a pharmaceutical stock before filing a challenge to the company's key patents. Thus, these hedge funds were taking negative ownership positions, and, in a sense, taking on the regulatory role of monitoring patent quality, motivated by the “bounties” from successfully identifying and litigating invalid patents. I find that an institutional feature of the financial markets—the very high costs of maintaining a short position, relative to a long position—contributed to the failure of this hedge fund strategy and its ultimate demise. These findings shed light on an unusual and innovative governance mechanism, and the effects and possible social costs of short-selling constraints.