Incheol Kim

Do Unions Affect Innovation

We examine the impact of unionization on the innovation activities of firms by exploiting a novel database of union elections. Firm innovation output, measured by patent counts and citations, declines significantly after firms elect to unionize and increases significantly for firms that vote to deunionize. To establish causality, we use a regression discontinuity design relying on “locally” exogenous variation in unionization generated by union elections that pass or fail by a small margin of votes. The market reaction to firms that elect to unionize is negatively related to firms’ past innovation output. Our evidence suggests unionization stifles innovation.

The Heterogeneous Impact of Corporate Social Responsibility Activities that Target Different Stakeholders

We aggregate different dimensions of corporate social responsibility (CSR) activities following the stakeholder framework proposed in Clarkson (Acad Manag Rev 20(1), 92–117, 1995) and present consistent evidence that CSR strengths targeting different stakeholders have their unique impact on firm risk and financial performance. Institutional CSR activities that target secondary stakeholders are negatively associated with firm risk, measured by total risk and systematic risk. Technical CSR that target primary stakeholders are positively associated with firm financial performance, measured by Tobin’s Q, ROA, and cash flow returns. Our results, based on a sample of S&P 500 component firms over the period of 1995–2009, are consistent with the risk management view of “altruistic” CSR activities and with the stakeholder salience theory. We also show that the impact of CSR activities on risk varies with the ethical climate, as proved in our subsample analyses on pre- and post-Sarbanes–Oxley periods. Our empirical analyses mitigate possible omitted variables and endogeneity concerns that are often overlooked in previous research. Our findings are robust to alternative CSR measures, to alternative risk and performance measures, and to alternative estimation methods.

Drivers Behind the Monitoring Effectiveness of Global Institutional Investors: Evidence from Earnings Management

This paper studies the drivers behind the monitoring effectiveness of institutional investors in curbing earnings management in an international setting. We identify three distinct drivers and propose two competing hypotheses: the hometown advantage hypothesis predicts that because of proximity to monitoring information, domestic institutions have a comparative advantage over foreign institutions in deterring earnings management, whereas the global investor hypothesis predicts that foreign institutions have a comparative advantage because of their proclivity toward activism and ability to deploy superior monitoring technologies. Consistent with the hometown advantage hypothesis, in aggregate, domestic, but not foreign, institutional ownership is associated with less earnings management; the monitoring effectiveness of foreign institutions improves as they gain proximity to monitoring information. Consistent with the global investor hypothesis, the monitoring effectiveness of foreign institutions improves in environments of greater agency conflicts or weaker governance controls or when the gap in monitoring technology between foreign and domestic institutions widens.We study the comparative advantages of domestic and foreign institutional investors in monitoring opportunistic financial reporting using a broad sample of non-U.S. firms. We find that in aggregate, domestic institutions are more effective than foreign institutions at deterring earnings management. This monitoring advantage of domestic institutions is driven by their proximity to monitoring information. In an international setting, proximity to monitoring information takes many forms, including geographic proximity and proximity measured in terms of institutions’ familiarity with the host country’s accounting standards, business laws, cultural norms and so on. We find that as they gain proximity to monitoring information, foreign institutions play a more effective monitoring role. For example, familiarity with the host country’s culture and accounting standards significantly improves the monitoring effectiveness of foreign institutions. In addition, we find that superior monitoring technology and proclivity toward governance activism drive the comparative monitoring advantages of foreign institutions. We find that the comparative advantage in monitoring technology possessed by foreign institutions matters more when foreign institutions monitor firms domiciled in countries in which monitoring technology is weaker. Specifically, foreign institutions are more effective than domestic institutions at deterring earnings management in emerging countries. Further, foreign institutions are more effective at curbing earnings management in civil-law countries than in common-law countries.

Currying Favor with Top Venture Capital Firms: The Role of IPO Underpricing and All-Star Coverage

We explore the central role that top venture capitalists play in the IPO underwriting market. We argue that underwriters curry favor with Top VCs, not necessarily issuing firms, because Top VCs have the ability to direct the most business in a repeated game sense to banks that treat them well. The relationship between VC firms and investment banks extends through time and therefore incentives extend beyond the current IPO. Consistent with this view, we find that Top VC-backed IPOs are more likely to get all-star coverage regardless of analyst bank affiliation. In turn, banks providing all-star coverage are more likely to be chosen to lead the next VC-backed deal. We find a positive relationship between underpricing and all-star coverage for Top VCs, but not non-Top VCs. Top VCs tolerate higher levels of underpricing because the information momentum generated by underpricing allows them to cash out at higher prices when the lockup expires.

Policy Uncertainty and the Dual Role of Corporate Political Strategies

Firms use active political strategies not only to mitigate uncertainty emanating from legislative activity, but also to enhance their growth opportunities. We find that the impact of such policy uncertainty on systematic risk (beta) can be hedged away by employing various political strategies involving the presence of former politicians on corporate boards of directors, contributions to political campaigns, and corporate lobbying activities. In addition, we show that active political strategies can boost firms’ growth opportunities; they are associated with greater firm heterogeneity and make real options more value-relevant as potential drivers of competitive advantages in uncertain environments.

Shareholder Litigation and Corporate Acquisitions

We examine the effect of shareholder litigation rights on managers’ acquisition decisions. Our experimental design exploits a U.S. Ninth Circuit Court of Appeals ruling on July 2, 1999 that resulted in a reduction in shareholder class actions. We find that, since the ruling, firms in Ninth Circuit states acquire larger targets. Furthermore, acquirers’ returns are lower in these states, especially for those with weaker corporate governance. Further analysis shows that value destruction is the result of managers’ freedom to conduct empire-building acquisitions using overvalued equity. Overall, our findings indicate the importance of shareholder litigation as an external governance mechanism.

Shareholder Litigation Rights and Corporate Acquisitions

We examine the effect of shareholder litigation rights on managers’ acquisition decisions. Our experimental design exploits a U.S. Ninth Circuit Court of Appeals ruling on July 2, 1999 that resulted in a reduction in shareholder class actions. We find that, since the ruling, firms in Ninth Circuit states acquire larger targets. Furthermore, acquirers’ returns are lower in these states, especially for those with weaker corporate governance. Further analysis shows that value destruction is the result of managers’ freedom to conduct empire-building acquisitions using overvalued equity. Overall, our findings indicate the importance of shareholder litigation as an external governance mechanism.

Is Shareholder Litigation an Effective External Monitoring Device? Evidence from M&As

We examine the effect of shareholder litigation rights on managers’ acquisition decisions. Our experimental design exploits a U.S. Ninth Circuit Court of Appeals ruling on July 2, 1999 that resulted in a reduction in shareholder class actions. We find that, since the ruling, firms in Ninth Circuit states acquire larger targets. Furthermore, acquirers’ returns are lower in these states, especially for those with weaker corporate governance. Further analysis shows that value destruction is the result of managers’ freedom to conduct empire-building acquisitions using overvalued equity. Overall, our findings indicate the importance of shareholder litigation as an external governance mechanism.

Institutional Investors and Corporate Environmental, Social, and Governance Policies: Evidence from Toxic Release Data

This paper studies whether institutional investors influence corporate environmental, social, and governance (ESG) policies and the impact of such influence on firm performance. We use facility-level toxic release data to proxy for a firm’s ESG policies. We use geographic distance and the size of equity ownership to proxy for institutions’ interests and preferences. We find robust evidence that local institutional ownership reduces the amount of toxic chemicals released by a nearby facility into the environment. Pollution abatement policies implemented in the presence of high levels of local institutional ownership enhance firm performance. The overall evidence suggests that ESG appeals to a diverse set of institutional investors. There is no evidence that pollution abatement policies are detrimental to firm value. Our results support Jensen (2001)’s theory of enlightened value maximization that firm value is maximized in the long run when the interests of shareholders and other stakeholders are aligned.