Law and Economics
March 4, 2016
Christine Jolls of Yale Law School, Organizer
Alex Edmans, London Business School; Luis Goncalves-Pinto, National University of Singapore; Yanbo Wang, INSEAD; and Moqi Xu, London School of Economics
Strategic News Releases in Equity Vesting Months
Edmans, Goncalves-Pinto, Wang, and Xu show that CEOs reallocate news releases into months in which their equity vests, and away from prior and subsequent months. CEOs release 7% more discretionary news in vesting months than in prior months, but there is no difference for non-discretionary news. These vesting months are determined by equity grants made several years prior, and thus unlikely driven by the current information environment. Discretionary news releases in vesting months lead to favorable media coverage, suggesting they are positive in tone. They also generate a temporary run-up in stock prices and market liquidity, which the CEO exploits by cashing out shortly afterwards.
Ye Cai, Santa Clara University; Jin Xu, Virginia Tech; and Jun Yang, Indiana University
Affiliated Corporate Donations and Director Independence
This paper examines how corporate charitable contributions to independent directors-affiliated charities (affiliated donations) affect board monitoring effectiveness. Cai, Xu, and Yang find that firms with weaker corporate governance tend to make affiliated donations. Moreover, CEO compensation is greater, while CEO pay-for-performance sensitivity (PPS), CEO turnover to performance sensitivity, and reporting quality of the firm are lower at firms that make affiliated donations. The researchers further link monitoring ineffectiveness to committee assignments. Specifically, they find poor compensation practices (reporting quality) only at firms that make charitable contributions to charities affiliated with compensation (audit) committee members. Their results are stronger when corporate governance is weaker, and when corporate donations are made to charities affiliated with committee chairs or multiple committee members. Interestingly, corporate donations to charities affiliated with any independent directors affect the CEO turnover decisions because the entire board is engaged in such decisions. This paper contributes to the corporate governance literature by uncovering a new determinant of director independence, incremental to those identified based on business transactions, social connections, and director appointment decisions.
A. Mitchell Polinsky, Stanford University and NBER
Prison Work Programs in a Model of Deterrence
In this article, Polinsky considers the social desirability of prison work programs in a model in which the function of imprisonment is to deter crime. Two types of prison work programs are studied voluntary ones and mandatory ones. A voluntary work program is socially beneficial: if prisoners are paid a wage that just compensates them for their disutility from work, the deterrent effect of the prison sentence is unaffected, but society obtains the product of the work program. But in the basic model considered, a mandatory work program is superior to a voluntary work program: if prisoners are forced to work without compensation, the deterrent effect of the prison sentence rises, allowing society to restore deterrence and save resources by reducing the probability of detection or the sentence length, and also to obtain greater output than under the optimal voluntary work program. In an extension of the basic model, however, in which prisoners vary in their disutility from work, a voluntary work program may be superior to a mandatory work program because prisoners with relatively high disutility from work can elect not to work.
Alberto Galasso, University of Toronto and NBER, and Mark Schankerman, London School of Economics
Patent Rights and Innovation by Small and Large Firms (NBER Working Paper No. 21769)
In this paper, Galasso and Schankerman study the causal impact of patents on subsequent innovation by the patent holder. The analysis is based on court invalidation of patents by the U.S. Court of Appeals for the Federal Circuit, and exploits the random allocation of judges to control for the endogeneity of the judicial decision. Patent invalidation leads to a 50 percent decrease in patenting by the patent holder, on average, but the impact depends critically on characteristics of the patentee and the competitive environment. The effect is entirely driven by small innovative firms in technology fields where they face many large incumbents. Invalidation of patents held by large firms does not change the intensity of their innovation but shifts the technological direction of their subsequent patenting.
Claudia Möllers and Hans-Theo Normann, Duesseldorf Institute for Competition Economics, and Christopher Snyder, Dartmouth College and NBER
Communication in Vertical Markets: Experimental Evidence
When an upstream monopolist supplies several competing downstream firms, it may fail to monopolize the market because it is unable to commit not to behave opportunistically. Möllers, Normann, and Snyder build on previous experimental studies of this well-known commitment problem by introducing communication. Allowing the upstream firm to chat privately with each downstream firm reduces total offered quantity from near the Cournot level (observed in the absence of communication) halfway toward the monopoly level. Allowing all three firms to chat together openly results in complete monopolization. Downstream firms obtain such a bargaining advantage from open communication that all of the gains from monopolizing the market accrue to them. A simple structural model of Nash bargaining fits the pattern of shifting surpluses well. The researchers conclude with a discussion of the antitrust implications of open communication in vertical markets.
Jesse Leary and Jialan Wang, Consumer Financial Protection Bureau
Liquidity Constraints and Budgeting Mistakes: Evidence from Social Security Recipients
In this paper, Leary and Wang use a unique administrative dataset to analyze the impact of income timing on the use of payday loans, a common form of short-term credit. Exploiting quasi-random variation in the disbursement of benefits by the Social Security Administration, they document three patterns that are difficult to explain under the lifecycle/permanent income hypothesis. First, borrowing is procyclical with liquidity over the pay period. Loan volume declines by 47% over the course of a pay period, and increases discontinuously on pay days. Second, borrowing per day is 38% higher during 35-day compared with 28-day pay periods. Third, consumers borrow 3% less if they are assigned to receive income on the fourth Wednesday compared to the second Wednesday of the month, consistent with imperfect planning for recurring expenditure commitments at the beginning of the month. The researchers' results suggest that failures to adjust to predictable variation in income timing account for at least 18% of payday loan volume and lead to $29-41 million in excess costs per year among benefits recipients.
Itai Ater, Tel Aviv University; Yehonatan Givati, Harvard University; and Oren Rigbi, Ben-Gurion University
The Economic of Rights: Does the Right to Counsel Increase Crime?
Ater, Givati, and Rigbi examine the broad consequences of the right to counsel by exploiting a legal reform in Israel that extended the right to publicly provided legal counsel to suspects in arrest proceedings. Using the staggered regional rollout of the reform, the researchers find that the reform reduced arrest duration and the likelihood of arrestees being charged. They also find that the reform reduced the number of arrests made by the police. Lastly, they find that the reform increased crime. These findings indicate that the right to counsel improves suspects' situation, but discourages the police from making arrests, which results in higher crime.
David Musto, University of Pennsylvania, and Jillian A. Popadak, Duke University
Who Benefits from Bond Market Modernization?
Musto and Popadak analyze how modernization shapes U.S. corporate bond market transactions. To identify the effects of technological change, they use eligibility cut-offs that allow "Well-Known Seasoned Issuers" (WKSI) to significantly accelerate issuance speeds and consequently reduce potential investors' review time. The researchers find this innovation initiated widespread adoption of covenants. Together with evidence on covenant pricing and bondholding, this indicates a new rationale for covenant presence as a substitute for investor due diligence. Overall, the researchers find the benefits of bond market modernization accrue to investors and issuers rather than intermediaries and this distribution is facilitated by covenants' role in simplifying valuation.
Will S. Dobbie, Princeton University and NBER, and Jae Song, Social Security Administration
Debt Relief or Debt Restructuring? Evidence from an Experiment with Distressed Credit Card Borrowers
This paper reports results from a randomized field experiment that offered distressed credit card borrowers more than $50 million in debt forgiveness and over 27,500 additional months to repay their debts. The experimental variation effectively randomized interest rates and repayment periods for debts held by 11 large credit card issuers. Merging information from the experiment to administrative tax and bankruptcy records, Dobbie and Song find that lowering a borrower's interest rates increased debt repayment and decreased bankruptcy filing in the five years following the treatment. Lower interest rates also increased the probability of being employed for the most financially distressed borrowers. In contrast, the researchers find little impact of a longer repayment period on debt repayment, bankruptcy, or employment. They show that this null result can be explained by the presence of two offsetting mechanisms: a positive short-run effect of increased borrower liquidity and a negative long-run effect of exposing borrowers to more default risk.