Corporate Forms

Kevin Lewis

December 07, 2022

Is There a Trade-off Between Protecting Investors and Promoting Entrepreneurial Activity? Evidence from Angel Financing
Jiajie Xu
Journal of Financial and Quantitative Analysis, forthcoming


This paper studies how changes in investor protection regulations affect local entrepreneurial activity, relying on the heterogeneous impact of a 2011 SEC regulation change on the definition of accredited investors across U.S. cities. Using a difference-in-differences approach, I show that cities more affected by the regulation change experienced a significantly larger decrease in local angel financing, entrepreneurial activity, innovation output, employment, and sales. I find that small business loans and second-lien mortgages became entrepreneurs' partial substitutes for angel investment. My cost-benefit analysis suggests that the costs of protecting angel investors through the 2011 regulation change outweigh its benefits.

How Important Is Corporate Governance? Evidence from Machine Learning 
Ian Gow, David Larcker & Anastasia Zakolyukina
University of Chicago Working Paper, September 2022


We use machine learning to assess the predictive ability of over a hundred corporate governance features for firm outcomes. We consider financial-statement restatements, class-action lawsuits, business failures, operating performance, firm value, stock returns, and credit ratings. We discover that adding corporate governance features does not improve the models' predictive accuracy beyond the predictive accuracy captured by firm characteristics. Our results raise doubts about the existence of strong causal effects of corporate governance on a range of firm outcomes studied in prior research.

Common Ownership, Competition, and Top Management Incentives
Miguel Anton et al.
Journal of Political Economy, forthcoming


We present a mechanism based on managerial incentives through which common ownership affects product market outcomes. Firm-level variation in common ownership causes variation in managerial incentives and productivity across firms, which leads to intra-industry and intra-firm cross-market variation in prices, output, markups, and market shares that is consistent with empirical evidence. The organizational structure of multiproduct firms and the passivity of common owners determine whether higher prices under common ownership result from higher costs or from higher markups. Using panel regressions and a difference-in-differences design we document that managerial incentives are less performance-sensitive in firms with more common ownership.

Who Uses Corporate Sustainability Reports?
Suzanne Burzillo, Matthew Shaffer & Richard Sloan
University of Southern California Working Paper, August 2022


Recent years have witnessed significant growth in corporate sustainability reporting. Yet existing research provides mixed evidence on the information content of these reports for investors. We examine the stock market reaction to the announcement of corporate sustainability reports incorporating SASB metrics that are intended to provide financially material and decision useful information to investors. Using standard measures, we are unable to find compelling evidence that these reports provide a significant amount of decision-useful information to investors. Further analysis of a subset of common metrics indicates that they are either financially immaterial or preempted by traditional financial disclosures. Finally, we show that firms target sustainability reports at a broad set of stakeholders concerned with environmental and social impacts and conclude that a narrow focus on financial materiality to investors is unnecessarily restrictive.

Why Do Unsuccessful Companies Survive? U.S. Airlines, Aircraft Leasing, and GE, 2000-2008
Gishan Dissanaike, Ranadeva Jayasekera & Geoff Meeks
Business History Review, Autumn 2022, Pages 615-642


Warren Buffett famously commented that the U.S. airline industry had made zero profit in its first nine decades. Subsequently, between the millennium and the Great Financial Crisis the airlines in total lost almost $60 billion. Yet no major airline was liquidated or taken over in those nine years. Financial support was repeatedly provided by GE, the conglomerate supplier of leasing finance, engines, and servicing. The article offers a historical perspective on the factors behind this relationship between GE and airlines. It outlines the benefits or costs to GE, airline shareholders, and passengers; the relevance of the model for other industries; and implications for different notions of efficiency.

Scope, Scale and Concentration: The 21st Century Firm
Gerard Hoberg & Gordon Phillips
NBER Working Paper, November 2022 


We provide evidence that over the past 30 years, U.S. firms have expanded their scope of operations. Increases in scope and scale were achieved largely without increasing traditional operating segments. Scope expansion significantly increases valuation and is primarily realized through acquisitions and investment in R&D, but not through capital expenditures. We show that traditional concentration ratios do not capture this expansion of scope. Our findings point to a new type of firm that increases scope through related expansion, which is highly valued by the market.

Shining a Light in a Dark Corner: Does EDGAR Search Activity Reveal the Strategically Leaked Plans of Activist Investors?
Ryan Flugum, Choonsik Lee & Matthew Souther
Journal of Financial and Quantitative Analysis, forthcoming 


We provide evidence of a network of information flow between activists and other investors prior to 13D filings. We match EDGAR search activity to investor IP addresses, identifying specific investors who persistently download information on an individual activist's campaign targets prior to that activist's 13D disclosures. This outside investor's knowledge of pending activist campaign plans seems to benefit both parties: the informed investor, unnamed in the 13D, increases its holdings in the targeted stock prior to the price surge upon 13D disclosure, while the activist earns voting support that increases their likelihood of pursuing and winning a proxy fight.

The Unicorn Puzzle
Daria Davydova et al.
NBER Working Paper, October 2022 


From 2010 to 2021, 639 US VC-funded firms achieved unicorn status. We investigate why there are so many unicorns and why controlling shareholders give investors privileges to obtain unicorn status. We show that unicorns rely more than other VC-funded firms on organizational capital as well as network effects and the internet. Unicorn status enables startups to access new sources of capital. With this capital, they can invest more in organizational intangible assets with less expropriation risk than if they were public. As a result, they are more likely to capture the economies of scale that make their business model valuable.

Hiring Lucky CEOs
Mario Daniele Amore & Sebastian Schwenen
Journal of Law, Economics, and Organization, forthcoming


Existing research shows that luck increases CEOs' pay at their current firm. In this work, we explore how luck affects: (1) CEOs' employment opportunities and (2) the performance of firms that hire lucky CEOs. Our results indicate that luck increases the likelihood to get a CEO job at new companies. Conditional on moving, lucky CEOs obtain a higher pay (both in absolute terms and relative to new industry peers) mostly due to higher incentive pay. Moreover, lucky CEOs tend to be hired by firms operating in less competitive industries. Despite the higher compensation they receive, the appointment of lucky CEOs is associated with a substantial decline in firm performance.

A Rising Tide Lifts All Boats: The Effects of Common Ownership on Corporate Social Responsibility
Mark DesJardine, Jody Grewal & Kala Viswanathan
Organization Science, forthcoming


Common owners face an incredible investment challenge: managing systematic risk. Because common owners hold shares in multiple firms across an industry, an action (or inaction) by one firm that affects industry peers is felt more severely by common owners than by non-common owners. Research has largely focused on common owners' role in orchestrating competitive dynamics among their portfolio firms, with almost no empirical investigation of how common owners manage systematic risk. Drawing on research showing that one firm's corporate social responsibility (CSR) can produce positive spillovers for peer firms and that its irresponsibility can harm its peers, we argue that common owners increase firms' CSR to produce spillovers that reduce systematic risk and multiply their investment returns. Consistent with our theory, we find that common ownership is positively associated with firm CSR. Unpacking that relationship, we find that increases in CSR are driven by common owners with long-term orientations and are concentrated in stakeholder sensitive industries, in which CSR spillovers are most economically impactful. We also find that common owners focus their efforts on financially material CSR over financially immaterial CSR. We use a natural experiment with a quasi-exogenous shock to rule out alternative explanations. Our study contributes to literatures on the antecedents of CSR and outcomes of common ownership, providing a new perspective on how common owners shape corporate strategic behavior.

Avoiding the Appearance of Virtue: Reactivity to Corporate Social Responsibility Ratings in an Era of Shareholder Primacy
Ben Lewis & Chad Carlos
Administrative Science Quarterly, December 2022, Pages 1093-1135


We examine why organizations may at times decrease their performance after receiving a positive rating. We argue that in contrast to the prevailing assumption that organizations will strive for favorable ratings to achieve reputational benefits, incompatibility between a positive rating and a dominant institutional logic may cause recognized firms to question the perceived value of maintaining superior performance, thus leading them to strategically reduce their efforts on the rated dimension. Using a difference-in-differences design, we examine how companies responded to being rated as charitable organizations, an evaluation that we argue was generally perceived as incompatible with the dominant logic of shareholder maximization during the early 1990s. Our results suggest that firms that were rated as generous were more likely to decrease philanthropic contributions relative to firms that were not rated as generous. We also found this reaction to be amplified or attenuated by organizational and institutional factors that increased or decreased the saliency of the perceived incompatibility between the philanthropy rating and the dominant shareholder logic. These findings provide insights for scholarship on organizational reactivity and impression management and raise important questions for scholars and practitioners interested in improving the effectiveness of evaluation metrics as drivers of organizational performance.

The Downside of Displaying Agentic Values: Evidence from Shareholder Activism
Mark DesJardine & Wei Shi
Organization Science, forthcoming 


Activist shareholders face a challenging task in preemptively identifying executives who they perceive might destroy shareholder value-before harm is done. We develop a framework where activist shareholders resolve this problem by forming attributions about executives' intentions based on their displays of agentic values, which reflect independence and control. For activist shareholders, a strong display of independence can evoke concerns that an executive will act without the regulation of shareholder input, and a strong display of control can create concerns an executive will engineer governance provisions to their own benefit. As such, we hypothesize that above-average agentic value displays by CEOs increase the likelihood firms are targeted by shareholder activists. Extending our theory, we argue the positive effect that agentic value displays have on attracting shareholder activism is stronger when CEOs permit higher spending on corporate and stakeholder investment, both of which can exacerbate shareholder harm when executed poorly. We also posit that activism campaigns driven by CEOs' agentic value displays will largely come from activist shareholders seeking to exert their own control over agentic-speaking CEOs. Using data on shareholder activism campaigns at US-based companies from 2003-2018, we find support for our hypotheses. We discuss multiple theoretical implications for research on corporate governance, stakeholder management, and investor relations.


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