Research
Working Papers
▪ Presentations: FMA Meeting 2023 (scheduled), AFA Meeting 2024 (scheduled), University of Iowa
▪ FMA Meeting 2023 Semi-Finalist for Best Corporate Finance Paper Award
▪ Best Paper Award, Department of Finance, Tippie College of Business, University of Iowa
Abstract: Government influence on private industry is thought to be substantial. However, the channels of that influence and even the consistency of an effect, are unclear. Prior studies primarily approach the question of this influence based on legislation or political parties, and this has led to decidedly mixed results. We approach the problem differently. We recognize that until very recently, the literature largely ignored the reality that much political work is done by executive agencies. Moreover, the recent literature that does examine regulatory agencies focuses exclusively on firm responses. In contrast, we build a broad measure of policy enforcement from the regulatory agency perspective. That is, we construct six agency-perspective variables, including actions, budget variables, and regulation-verbiage (from the Code of Federal Regulations). We combine the six measures in exploratory factor analysis to obtain a latent Enforcement Index variable. Applying this measure to firms exposed to four major agencies (EPA, FDA, OSHA and SEC), we find stronger regulatory enforcement is associated with lower firm operating performance. We also (logically) find that greater firm exposure to the agency strengthens the relationship. There is significant cross-agency heterogeneity in enforcement’s influence. We document that the channel most likely driving the relationship is a cost channel, as opposed to an asset-(in)efficiency channel. We also highlight the importance of studying six agency variables, by showing heterogeneity across them in the influence on firm performance. Our results are largely orthogonal to recent findings that focus strictly on CFR-related firm-expressed-concerns. At a more granular enforcement level, we also find that firm-specific violations imposed (from Violation Tracker) are associated with weaker firm performance. We conclude that executive-branch enforcement is an important contributor to the cost of regulation, regardless of firm attention to it as expressed through their own disclosures.
"Political Partisanship, Analyst Career, and Financial Transparency: Evidence from Political Misalignment Between Analysts and the Firms They Follow" with Noor Hashim (available upon request)
Abstract: The US has witnessed increased partisan conflict in the past few decades. Recent research shows that people systematically view others more (less) favorably when they have the same (different) political ideology (Pew Research 2016). Analysts’ career depends on their performance in the market and how they are perceived by management and investors. This study explores whether this perception can be affected by political misalignment between analysts and management. Specifically, the paper examines whether partisan misalignment between the equity analysts and the executives of the followed firms affects: a) analysts’ job separations (i.e. whether they move up or down the brokerage house hierarchy), b) analysts’ stock coverage (i.e. whether they cover large and important stocks within their industry), c) analysts’ rewards and promotions, and d) the quality of the company’s information. We use data on equity analysts covering US firms between 2002 and 2020 to measure analyst career progression. We also use contributions of analysts and company management to political campaigns from the Federal Election Commission (FEC) to measure political affiliations. The findings of the study highlight an obstacle to analysts’ career advancement. We also show that the misaligned analysts are more likely to lose coverage of large and important stocks in their portfolio. Importantly, this effect is not attributed to analyst underperformance but is likely rooted in how their political misalignment and behavior are perceived by management.
"Unlocking the Revolving Door: How FDA-Firm Relationships Affect Drug Approval Rates and Innovation in the Pharmaceutical Industry" Sole-authored (available upon request)
Abstract: FDA reviewers and directors are often hired by the firms they enforce. In this study, I investigate how this revolving door phenomenon benefits the hiring firm. I find that when pharmaceutical companies hire former FDA employees, the rate of drug approvals increases which in turn raises the firm value. Also, I find that when the former revolving door employee held higher-ranked executive positions, the effect is more pronounced. Robustness tests within a subset of larger firms and controlling for variables that could drive the firm drug approval rate like firm R&D, expenditure, and performance would not change my results. These robustness tests indicate a likely causal relationship. Additionally, I find no evidence that the drug quality of these revolving firms is affected, as evidenced by FDA recall enforcement data. This suggests that the revolving door effect operates through the channels of knowledge and efficiency, rather than relying on personal favors or compromising drug safety. Consistent with this hypothesis, I find evidence of an uptick in innovation output for firms employing former FDA personnel.
Works In Progress
"Patent Challenges and Financial Performance: Evidence from PTAB" with Mosab Hammoudeh (Draft preparation)
▪ Presentations: University of Iowa 2023
Abstract: In this study, we document the effect of patent litigation on the firm’s competitor’s financial performance. We use patent litigation cases under America Invents Act (AIA) from the Patent Trial and Appeal Board (PTAB) data to investigate how firms react when their peer’s patent is challenged. We show that the patent litigation effect is well recognized by their peers as their stock abnormal returns experience significant changes around the date of litigation announcement. Specifically, we identify two different channels for this effect. The first is the competitive effect, wherein peer firms whose technologies are less intertwined with the contested patent but who vie for market share exhibit positive stock reactions to the litigation news. These rivals’ stocks react favorably to the litigation news as their competitor firm is challenged providing potentially more opportunities for their market share. The second channel of effect is called the learning effect where the peers rely on technology (patent space) similar to the challenged firm. The abnormal returns around the litigation announcement date for these firms are significantly negative as the litigation also indicates a potential challenge for their own patents. Once we identified these two channels, we investigate how each of them affects the rival firms’ innovation/patenting activities. Our analysis indicates that technology peers tend to shift their innovation focus away from the contested patent domain, a strategic response aimed at sidestepping potential challenges and fostering novel avenues for technological advancement.
"Regulatory Capture in Action: Assessing Political Affiliation's Impact on Auto Insurance Rate Approval Processes" with Siegfried Anyomi (Data preparation)
"Human Capital and Firm Performance" with Jon Garfinkel (Preliminary results)