Jan Bena

This dissertation is a collection of three essays that explore topics in empirical corporate finance. The first essay studies the quality of proxy advisors' recommendations. Using a comprehensive sample of say-on-pay recommendations from the two largest proxy advisors over the period 2012 – 2019, I document that proxy advisors fail to filter out industry-level returns that are presumably beyond the control of management in evaluating a CEO’s pay package. This finding contradicts the predictions of standard agency theory that CEOs should be evaluated on their relative performance in the presence of common shocks. I use adjustment for industry performance as the quality measure of recommendations. I find a decrease in quality (1) when proxy advisors are busy, and (2) when proxy statements and pay contracts are complex. My analysis suggests that proxy advisors’ capacity constraints are likely explanations for the limited applications of relative performance evaluations in their recommendations. The second essay, coauthored with Jan Bena, develops a novel measure of disagreement in voice between active and passive mutual funds using their proxy votes that captures shareholder conflicts in public firms. We show that the disagreement in voice between passive and active funds is associated with a decrease in firm value and suggest that the firm value loss is due to conflicting incentives between the two groups. The third essay, coauthored with Jan Bena and Guangli Lu, studies the impact of national culture on within-firm pay inequality using a unique administrative dataset covering closely-held immigrant-owned firms in Canada from 2001-2017. We find that within-firm pay inequality varies significantly with a firm owner’s country of origin. Firms owned by immigrants from more individualistic countries have higher pay inequality. Using a difference-in-differences analysis, we find a significant increase in within-firm pay inequality after the firm is taken over by immigrant owners from countries with higher within-firm-pay-inequality or more individualistic cultures.

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A secular trend in the modern economy is a shift towards intangible capital. Investments in data, knowledge, brand, and employees are central to the creation of intangible assets. How do intangibles help overcome the economic frictions underlying firm and individual decision making, information production, productivity, and market competency? My thesis examines the value of intangible assets in three distinct forms: artificial intelligence (AI), intellectual property, and corporate culture.The first essay examines how AI data processing affects intermediary agents’ decision making and information production when selling insurance contracts. I analyze a large-scale randomized experiment conducted by a top insurance agency in China. I show that AI-generated demand information can augment sales productivity of insurance agents, but might also crowd out human-collected information on consumer risk and exacerbate agency conflicts in a multitasking environment. The second essay examines why mergers and acquisitions (M&As) take place and how M&As shape the product space of the combined firm to achieve synergies. Leveraging the USPTO trademark data to capture the creation and elimination of individual product lines, we show that companies facing greater product market competition are more likely to be acquirers, and M&As create product market synergies as combined companies cut overlapping product offerings, leading to cost efficiency. The third essay examines how firms with a strong corporate culture fare amid the COVID-19 outbreak and identify the underlying mechanisms. We use topic analysis of earnings calls to construct firm-level measures of exposure and responses to COVID-19 following the onset of the crisis. We show that despite the damage COVID-19 inflicts on their operations, firms with a strong corporate culture outperform their peers without it. These firms are more likely to support their community, embrace digital transformation, and develop new products than those peers. We provide support for the hypothesis that corporate culture is an intangible asset designed to meet unforeseen contingencies.

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This thesis consists of three essays studying the impacts of economic uncertainty on the financial markets. The first essay examines the impact of economic uncertainty on firms’ decisions to go private. Using an instrumental variable approach, I show that firms are more likely to go private following economic uncertainty shocks. The effect is stronger for firms prone to severe agency conflicts. After going private, the cost of debt decreases. These results are consistent with uncertainty exacerbating agency frictions faced by public companies. Firms go private to alter their capital structures to be less prone to agency frictions: ones with a small number of dominant stakeholders with aligned interests. The agency frictions are mitigated through going private, resulting in a decrease in the cost of debt. The second essay examines how the money creation function of banks affects the relative cost of firm financing in the bank loan vs. bond market – the loan-bond spread. Using a sample of loans and bonds issued by the same firm, the essay finds a lower loan-bond spread for firms impacted by positive information cost shocks. We call this decline in the relative cost of bank credit induced by firm information cost shock the opacity discount and show that it is consistent with the “money creation” hypothesis in the financial intermediation theory, which suggests that banks need to keep information about their assets secret to produce private money. The third essay studies how firms use earnout, a contingent payment contract in M&A, to manage valuation risks under uncertainty. I find that the usage of earnouts positively correlates with target uncertainty. The likelihood of deal completion increases significantly with earnouts. Despite the benefits of bridging the valuation gap, an earnout can introduce incentive misalignment problems in the post-transaction period. After the transaction, the acquirer’s objective is to maximize firm value, while the target’s objective is to maximize earnout payments. Such incentive misalignments can destroy firm value. The essay documents a negative impact on acquirer wealth gains when earnouts are not used to manage valuation risks.

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