Atanas Mihov

Cost Inflexibility and Capital Structure: Evidence from SOX Section 404

This paper provides causal evidence that a firms operating cost structure is an important determinant of its leverage. We design a quasi-natural experiment exploiting the implementation of Sarbanes-Oxley Act Section 404 to provide us with exogenous variation in the proportion of a companys fixed to variable costs. The results from our 2SLS estimations indicate a strong negative relation between cost inflexibility and firm debt levels: our main specification implies that a one percentage point increase in the ratio of fixed to total operating costs reduces a firms leverage ratio by approximately 0.66 percentage points.

Operational Risk and Risk Management Quality: Evidence from U.S. Bank Holding Companies

This study documents the association between the quality of risk management practices and operational losses at large U.S. financial institutions. Using detailed supervisory data, we find that companies with weak risk management practices experience higher and more volatile operational losses. We also present evidence that the strength of risk management practices prior to the 2008–2009 Financial Crisis has explanatory power over losses during the crisis period. Our analysis provides new evidence of the importance of risk management practices for curtailing risk at financial institutions.