Law and Finance
This research group studies the role of corporate governance for firm value and policies, with a focus on firm-creditor relationships and legal institutions. We plan to investigate these issues along three lines of research. First, we look at how financial and legal innovations impact firm-creditor relationships. In a project, we examine how the possibility to hedge against credit risk on a firm’s debt through credit default swaps (CDS) may alter such relationships by reducing creditors’ incentives to monitor the firm. The second line of research explores theoretically and empirically how the dynamics of debtor-creditor conflicts shape managerial incentives, and how these in turn influence the firm's cost of debt. The third line of research relates to the role of the court system for firms. The outcome of a legal dispute has two main sources: The applicable laws and the courts that enforce them. We shed light on the role of courts in determining the impact of legal conflicts on firm value.
Research ClusterInstitutions and Social Norms
Equity Crowdfunding: High-quality or Low-quality Entrepreneurs?
in: Entrepreneurship Theory and Practice, forthcoming
Equity crowdfunding (ECF) has potential benefits that might be attractive to high-quality entrepreneurs, including fast access to a large pool of investors and obtaining feedback from the market. However, there are potential costs associated with ECF due to early public disclosure of entrepreneurial activities, communication costs with large pools of investors, and equity dilution that could discourage future equity investors; these costs suggest that ECF attracts low-quality entrepreneurs. In this paper, we hypothesize that entrepreneurs tied to more risky banks are more likely to be low-quality entrepreneurs and thus are more likely to use ECF. A large sample of ECF campaigns in Germany shows strong evidence that connections to distressed banks push entrepreneurs to use ECF. We find some evidence, albeit less robust, that entrepreneurs who can access other forms of equity are less likely to use ECF. Finally, the data indicate that entrepreneurs who access ECF are more likely to fail.
Entrenchment through Corporate Social Responsibility: Evidence from CEO Network Centrality
in: International Review of Financial Analysis, forthcoming
This paper investigates whether CEOs with high network centrality entrench themselves when taking CSR decisions and how that affects firm value. Evidence portrays that CSR in firms with more central CEOs is negatively associated with firm-value, and this association is mitigated by better corporate governance mechanisms and by geographic areas of higher social capital. This negative association is lower during disasters which reflect periods of positive exogenous shocks to the societal demand for CSR. Furthermore, CSR by more central CEOs is positively associated with future increases in CEO compensation and future improvement in a CEO's network position. The findings reveal that, in general, central CEOs use CSR to entrench themselves and gain private benefits rather than increase shareholder value.
Investor Relations and IPO Performance
in: Review of Accounting Studies, forthcomingread publication
Executive Compensation and Labor Expenses
in: B.E. Journal of Economic Analysis & Policy, forthcomingread publication
On the Effect of Business and Economic University Education on Political Ideology: An Empirical Note
in: Journal of Business Ethics, forthcoming
We empirically test the hypothesis that a major in economics, management, business administration or accounting (for simplicity referred to as Business/Economics) leads to more-conservative (right-wing) political views. We use a panel dataset of individuals (repeated observations for the same individuals over time) living in the Netherlands, drawing data from the Longitudinal Internet Studies for the Social Sciences from 2008 through 2013. Our results show that when using a simple fixed effects model, which fully controls for individuals’ time-invariant traits, any statistically and quantitatively significant effect of a major in Business/Economics on the Political Ideology of these individuals disappears. We posit that, at least in our sample, there is no evidence for a causal effect of a major in Business/Economics on individuals’ Political Ideology.
Executive Compensation, Macroeconomic Conditions, and Cash Flow Cyclicality
in: IWH Discussion Papers, No. 6, 2016
I model the joint effects of debt, macroeconomic conditions, and cash flow cyclicality on risk-shifting behavior and managerial pay-for-performance sensitivity. I show that risk-shifting incentives rise during recessions and that the shareholders can eliminate such adverse incentives by reducing the equity-based compensation in managerial contracts. I also show that this reduction should be larger in highly procyclical firms. Using a sample of U.S. public firms, I provide evidence supportive of the model’s predictions. First, I find that equity-based incentives are reduced during recessions. Second, I show that the magnitude of this effect is increasing in a firm’s cash flow cyclicality.
Do Courts Matter for Firm Value? Evidence from the U.S. Court System
in: IWH Discussion Papers, No. 1, 2016
We estimate the link between the court system and firm value by exploiting a U.S. Supreme Court ruling which changed firms‘ exposure to different courts. We find that exposure to courts which are highly ranked by the U.S. Chamber of Commerce increases firm value. The effect is driven by courts‘ attitude towards businesses more than by their efficiency and is more pronounced for firms in industries with high litigation risk. We also test whether firms benefit from the ability to steer lawsuits into friendly courts, so-called forum shopping. We provide evidence that a reduction in firms‘ ability to forum shop decreases firm value, whereas a reduction in plaintiffs‘ ability to forum shop increases firm value.