Foundation of Law and Finance
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Large companies are increasingly on trial. Over the last decade, many of the world’s biggest firms have been embroiled in legal disputes over corruption charges, financial fraud, environmental damage, taxation issues or sanction violations, ending in convictions or settlements of record-breaking fines, well above the billion-dollar mark. For critics of globalization, this turn towards corporate accountability is a welcome sea-change showing that multinational companies are no longer above the law. For legal experts, the trend is noteworthy because of the extraterritorial dimensions of law enforcement, as companies are increasingly held accountable for activities independent of their nationality or the place of the activities. Indeed, the global trend required understanding the evolution of corporate criminal law enforcement in the United States in particular, where authorities have skillfully expanded its effective jurisdiction beyond its territory. This paper traces the evolution of corporate prosecutions in the United States. Analyzing federal prosecution data, it then shows that foreign firms are more likely to pay a fine, which is on average 6,6 times larger.
Prospective welfare analysis - extending willingness-to-pay assessment to embrace sustainability
(2022)
In this paper we outline how a future change in consumers’ willingness-to-pay can be accounted for in a consumer welfare effects analysis in antitrust. Key to our solution is the prediction of preferences of new consumers and changing preferences of existing consumers in the future. The dimension of time is inextricably linked with that of sustainability. Taking into account the welfare of future cohorts of consumers, concerns for sustainability can therefore be integrated into the consumer welfare paradigm to a greater extent. As we argue in this paper, it is expedient to consider changes in consumers’ willingness-to-pay, in particular if society undergoes profound changes in such preferences, e.g., caused by an increase in generally available information on environmental effects of consumption, and a rising societal awareness about how consumption can have irreversible impacts on the environment. We offer suggestions on how to conceptionalize and operationalize the projection of such consumers’ changing preferences in a “prospective welfare analysis”. This increases the scope of the consumer welfare paradigm and can help to solve conceptual issues regarding the integration of sustainability into antitrust enforcement while keeping consumer surplus as a quantitative gauge.
Using granular supervisory data from Germany, we investigate the impact of unconventional monetary policies via central banks’ purchase of corporate bonds. While this policy results in a loosening of credit market conditions as intended by policy makers, we document two unintended side effects. First, banks that are more exposed to borrowers benefiting from the bond purchases now lend more to high-risk firms with no access to bond markets. Since more loan write-offs arise from these firms and banks are not compensated for this risk by higher interest rates, we document a drop in bank profitability. Second, the policy impacts the allocation of loans among industries. Affected banks reallocate loans from investment grade firms active on bond markets to mainly real estate firms without investment grade rating. Overall, our findings suggest that central banks’ quantitative easing via the corporate bond markets has the potential to contribute to both banking sector instability and real estate bubbles.
Since the 2008 financial crisis, European largest banks’ size and business models have largely remained unchallenged. Is that because of banks’ continued structural power over States? This paper challenges the view that States are sheer hostages of banks’ capacity to provide credit to the real economy – which is the conventional definition of structural power. Instead, it sheds light on the geo-economic dimension of banks’ power: key public officials conceive the position of “their own” market-based banks in global financial markets as a crucial dimension of State power. State priority towards banking thus result from political choices over what structurally matters the most for the State. Based on a discourse analysis of parliamentary debates in France, Germany and Spain between 2010 and 2020 as well as on a comparative analysis of the implementation of a special tax on banks in the early 2010s, this paper shows that State’s Finance ministries tend to prioritize geo-economic considerations over credit to firms. By contrast, Parliaments tend to prioritize investment. Power dynamics within the State thus largely shape political priorities towards banking at the domestic and international levels.
Are we in a new “Polanyian moment”? If we are, it is essential to examine how “spontaneous” and punctual expressions of discontent at the individual level may give rise to collective discourses driving social and political change. It is also important to examine whether and how the framing of these discourses may vary across political economies. This paper contributes to this endeavor with the analysis of anti-finance discourses on Twitter in France, Germany, Italy, Spain and the UK between 2019 and 2020. This paper presents three main findings. First, the analysis shows that, more than ten years after the financial crisis, finance is still a strong catalyzer of political discontent. Second, it shows that there are important variations in the dominant framing of public anti-finance discourses on social media across European political economies. If the antagonistic “us versus them” is prominent in all the cases, the identification of who “us” and “them” are, vary significantly. Third, it shows that the presence of far-right tropes in the critique of finance varies greatly from virtually inexistent to a solid minority of statements.
In times of increased political polarization, the continuing existence of a deliberative arena where people with antagonistic views may engage with each other in non-violent ways is critical for democracy to live on. Social media are usually not conceived as such arenas. On the contrary, there has been widespread worry about their role in increasing polarization and political violence. This paper suggests a more positive impact of social media on democracy. Our analysis focuses on the subreddit “r/WallStreetBets” (r/WSB) - a finance-related forum that came under the spotlight when its users coordinated a financial attack on hedge funds during the Gamestop saga in early 2021. Based on an original method attributing partisanship scores to users, we present a network analysis of interactions between users at the opposite sides of the political spectrum on r/WSB. We then develop a content analysis of politically relevant threads in which polarized users participate. Our analyses show that r/WSB provides a rare space where users with antagonistic political leanings engage with each other, debate, and even cooperate.
Using loan-level data from Germany, we investigate how the introduction of model-based capital regulation affected banks’ ability to absorb shocks. The objective of this regulation was to enhance financial stability by making capital requirements responsive to asset risk. Our evidence suggests that banks ‘optimized’ model-based regulation to lower their capital requirements. Banks systematically underreported risk, with under reporting being more pronounced for banks with higher gains from it. Moreover, large banks benefitted from the regulation at the expense of smaller banks. Overall, our results suggest that sophisticated rules may have undesired effects if strategic misbehavior is difficult to detect.
In this study, we analyze the trading behavior of banks with lending relationships. We combine detailed German data on banks’ proprietary trading and market making with lending information from the credit register and then examine how banks trade stocks of their borrowers around important corporate events. We find that banks trade more frequently and also profitably ahead of events when they are the main lender (or relationship bank) for the borrower. Specifically, we show that relationship banks are more likely to build up positive (negative) trading positions in the two weeks before positive (negative) news events, and also that they unwind these positions shortly after the event. This trading pattern is more pronounced for unscheduled earnings events, M&A transactions, and after borrower obtain new bank loans. Our results suggest that lending relationships endow banks with important information, highlighting the potential for conflicts of interest in banking, which has been a prominent concern in the regulatory debate.
Increasing the diversity of policy committees has taken center stage worldwide, but whether and why diverse committees are more effective is still unclear. In a randomized control trial that varies the salience of female and minority representation on the Federal Reserve’s monetary policy committee, the FOMC, we test whether diversity affects how Fed information influences consumers’ subjective beliefs. Women and Black respondents form unemployment expectations more in line with FOMC forecasts and trust the Fed more after this intervention. Women are also more likely to acquire Fed-related information when associated with a female official. White men, who are overrepresented on the FOMC, do not react negatively. Heterogeneous taste for diversity can explain these patterns better than homophily. Our results suggest more diverse policy committees are better able to reach underrepresented groups without inducing negative reactions by others, thereby enhancing the effectiveness of policy communication and public trust in the institution.
We identify strong cross-border institutions as a driver for the globalization of in-novation. Using 67 million patents from over 100 patent offices, we introduce novel measures of innovation diffusion and collaboration. Exploiting staggered bilateral in-vestment treaties as shocks to cross-border property rights and contract enforcement, we show that signatory countries increase technology adoption and sourcing from each other. They also increase R&D collaborations. These interactions result in techno-logical convergence. The effects are particularly strong for process innovation, and for countries that are technological laggards or have weak domestic institutions. Increased inter-firm rather than intra-firm foreign investment is the key channel.
Using hand-collected data on CEO appointments during shareholder activism campaigns, this study examines whether shareholder involvement in CEO recruiting affects frictions in CEO hiring decisions. The results indicate that appointments of CEOs who are recruited with shareholder activist influence are followed by more favorable stock market reactions and stronger profitability improvements than CEO appointments that also occur during activism campaigns but without the influence of activists. I find little evidence that shareholder activists increase hiring frictions by facilitating the recruiting of CEOs who will implement myopic corporate policies. Analyses of recruiting process characteristics reveal that activist influence is associated with more resources being dedicated to the CEO search process and with a higher propensity to recruit CEOs from outside the firm. These findings contribute to the CEO labor market literature, which tends to focus on the decision to remove incumbent CEOs but provides limited insights into CEO recruiting.
This paper argues that the key mechanisms protecting retail investors’ financial stake in their portfolio investments are indirect. They do not rely on actions by the investors or by any private actor directly charged with looking after investors’ interests. Rather, they are provided by the ecosystem that investors (are legally forced to) inhabit, as a byproduct of the mostly self-interested, mutually and legally constrained behavior of third parties without a mandate to help the investors (e.g., speculators, activists). This elucidates key rules, resolves the mandatory vs. enabling tension in corporate/securities law, and exposes passive investing’s fragile reliance on others’ trading.
Do required minimum distribution 401(k) rules matter, and for whom? Insights from a lifecylce model
(2021)
Tax-qualified vehicles helped U.S. private-sector workers accumulate $25Tr in retirement assets. An often-overlooked important institutional feature shaping decumulations from these retirement plans is the “Required Minimum Distribution” (RMD) regulation, requiring retirees to withdraw a minimum fraction from their retirement accounts or pay excise taxes on withdrawal shortfalls. Our calibrated lifecycle model measures the impact of RMD rules on financial behavior of heterogeneous households during their worklives and retirement. We show that proposed reforms to delay or eliminate the RMD rules should have little effects on consumption profiles but more impact on withdrawals and tax payments for households with bequest motives.
Expectations about economic variables vary systematically across genders. In the domain of inflation, women have persistently higher expectations than men. We argue that traditional gender roles are a significant factor in generating this gender expectations gap as they expose women and men to different economic signals in their daily lives. Using unique data on the participation of men and women in household grocery chores, their resulting exposure to price signals, and their inflation expectations, we document a tight link between the gender expectations gap and the distribution of grocery shopping duties. Because grocery prices are highly volatile, and consumers focus disproportionally on positive price changes, frequent exposure to grocery prices increases perceptions of current inflation and expectations of future inflation. The gender expectations gap is largest in households whose female heads are solely responsible for grocery shopping, whereas no gap arises in households that split grocery chores equally between men and women. Our results indicate that gender differences in inflation expectations arise due to social conditioning rather than through differences in innate abilities, skills, or preferences.
This paper aims at an improved understanding of the relationship between monetary policy and racial inequality. We investigate the distributional effects of monetary policy in a unified framework, linking monetary policy shocks both to earnings and wealth differentials between black and white households. Specifically, we show that, although a more accommodative monetary policy increases employment of black households more than white households, the overall effects are small. At the same time, an accommodative monetary policy shock exacerbates the wealth difference between black and white households, because black households own less financial assets that appreciate in value. Over multi-year time horizons, the employment effects are substantially smaller than the countervailing portfolio effects. We conclude that there is little reason to think that accommodative monetary policy plays a significant role in reducing racial inequities in the way often discussed. On the contrary, it may well accentuate inequalities for extended periods.
Our starting point is the following simple but potentially underappreciated observation: When assessing willingness to pay (WTP) for hedonic features of a product, the results of such measurement are influenced by the context in which the consumer makes her real or hypothetical choice or in which the questions to which she replies are set (such as in a contingent valuation analysis). This observation is of particular relevance when WTP regards sustainability, the “non-use value” of which does not derive from a direct (physical) sensation and where perceived benefits depend heavily on available information and deliberations. The recognition of such context sensitivity paves the way for a broader conception of consumer welfare (CW), and our proposed standard of “reflective WTP” may materially change the scope for private market initiatives with regards to sustainability, while keeping the analytical framework within the realm of the CW paradigm. In terms of practical implications, we argue, for instance, that actual purchasing decisions may prove insufficient to measure consumer appreciation of sustainability, as they may rather echo learnt but unreflected heuristics and may be subject to the specific shopping context, such as heavy price promotions. Also, while it may reflect current social norm, the latter may change considerably over time as more consumers adopt their behavior.
We present evidence on the way personal and institutional factors could together guide public company directors in decision-making concerning shareholders and stakeholders. In a sample comprising more than nine hundred directors originating from over fifty countries and serving in firms from twenty three countries, we confirm that directors around the world hold a principled, quasi-ideological stance towards shareholders and stakeholders, called shareholderism, on which they vary in line with their personal values. We theorize and find that in addition to personal values, directors’ shareholderism level associates with cultural norms that are conducive to entrepreneurship. Among legal factors, only creditor protection exhibits a negative correlation with shareholderism, while general legal origin and proxies for shareholder and employee protection are unrelated to it.
We show strong overall and heterogeneous economic incidence effects, as well as distortionary effects, of only shifting statutory incidence (i.e., the agent on which taxes are levied), without any tax rate change. For identification, we exploit a tax change and administrative data from the credit market: (i) a policy change in 2018 in Spain shifting an existing mortgage tax from being levied on borrowers to being levied on banks; (ii) some areas, for historical reasons, were exempt from paying this tax (or have different tax rates); and (iii) an exhaustive matched credit register. We find the following robust results: First, after the policy change, the average mortgage rate increases consistently with a strong – but not complete – tax pass-through. Second, there is a large heterogeneity in such pass-through: larger for borrowers with lower income, a smaller number of lending relationships, not working for the lender, or facing less banks in their zip-code, thereby suggesting a bargaining power mechanism at work. Third, despite no variation in the tax rate, and consistent with the non-full tax pass-through, the tax shift increases banks’ risk-taking. More affected banks reduce costly mortgage insurance in case of loan default (especially so if banks have weaker ex-ante balance sheets) and expand into non-affected but (much) ex-ante riskier consumer lending, experiencing even higher ex-post defaults within consumer loans.
This paper shows that judicial enforcement has substantial effects on firms’ decisions with regard to their employment policies. To establish causality, I exploit a reorganization of the court districts in Italy involving judicial district mergers as a shock to court productivity. I find that an improvement in enforcement, as measured by a reduction in average trial length, has a large, positive effect on firm employment. These effects are stronger in firms with high leverage, or that belong to industries more dependent on external finance and characterized by higher complementarity between labor and capital, consistent with a financing channel driving the results. Moreover, in presence of stronger enforcement, firms can raise more debt to dampen the impact of negative shocks and, in this way, reduce employment fluctuations.
We present novel evidence on the value of cross-border political access. We analyze data on meetings of US multinational enterprises (MNEs) with European Commission (EC) policymakers. Meetings with Commissioners are associated with positive abnormal equity returns. We study channels of value creation through political access in the areas of regulation and taxation. US enterprises with EC meetings are more likely to receive favorable outcomes in their European merger decisions and have lower effective tax rates on foreign income than their peers without meetings. Our results suggest that access to foreign policymakers is of substantial value for MNEs.