Jason M. Smith

Power in Politically Charged Networks

We offer a theory and measure for determining powerful nodal positions based on potential inter-actor control in “politically charged” networks, which contain both allies and adversaries. Power is derived from actors that are dependent on the focal actor and sociometrically weak, either due to a lack of alternative allies or from being threatened by others. We create a new Political Independence Index (PII), compare it to other established measures, and illustrate its use in the setting of an international network of alliances and military conflicts from 1946-2000. Results show that politically independent nations as measured by PII have smaller increases in military personnel than others over time.

Taxes and Leverage at Multinational Corporations

Empirical research has struggled to document the variation in recent corporate capital structures as arising from variation in estimated corporate income tax rates. We argue that in previous studies, both the tax rates applied to multinational corporations and the taxable income earned has been mismeasured, a result of firms operating in many foreign countries. Using a sample of multinational firms collected in the Bureau of Economic Analysis’ annual survey combined with each firm’s respective income and country specific tax rate, we revisit this tax-leverage puzzle. Empirically we find that firms do have higher leverage ratios and lower interest coverage ratios when they operate in countries with higher tax rates, as theory would suggest. Our results demonstrate that the primary benefit of leverage under the trade-off theory of capital structure continues to have empirical support. Note: The statistical analysis of firm-level data on U.S. multinational companies was conducted at the Bureau of Economic Analysis, U.S. Department of Commerce, under arrangements that maintain legal confidentiality requirements. The views expressed in the paper are those of the authors and do not reflect official positions of the U.S. Department of Commerce. The authors would like to thank Craig Doidge, Fritz Foley, Vojislav Maksimovic, Mitchell Petersen, and William Zeile for helpful comments as well as conference participants at the Western Finance Association Annual Conference and the NBER Corporate Finance Summer Institute and seminar participants at New University of Lisbon, the University of Bristol, the University of Michigan, University of Montana, University of Porto, Utah State University, and Warwick University. All errors are our own. Robert H. Smith School of Business, University of Maryland, College Park, MD 20742. Email: mfaulken@rhsmith.umd.edu. Phone: 301-405-1064 Huntsman School of Business, Utah State University, Logan, UT 84322. Email: jason.smith@usu.edu. Phone: 435-797-2363

Policy Uncertainty and Bank Bailouts

We model the effect of government bailouts on portfolio choices and welfare. Banks sell bonds to leverage investment in risky projects and households buy bonds under rational expectations about default risk. Bailouts induce greater leverage but reduce equilibrium interest rates. The interest rate effect dominates the leverage e¤ect and bailouts lead to fewer bank failures. Bailouts are efficient but not Pareto optimal: bailouts increase social welfare by mitigating uninsurable risk, which helps banks but hurts households since the insurance gains are not worth the price households must pay to finance the bailout.

Informed Trading Strategies with Borrowing Costs

Informed investors have been shown to strategically break up their larger trades into smaller trades in order to disguise their information (Kyle, 1985, Barclay and Warner, 1993, and Alexander and Peterson, 2007). In this paper, we consider informed trading strategies when investors face borrowing costs. Borrowing costs may induce more intense trading and increase the use of unusually large trade sizes. Using data which consists of a subset of trades that are both informed and face borrowing costs, we test this assertion empirically. Following prior work that documents that short sales contain information about future stock prices, we show that the most informed short sales are driven primarily by large, unrounded short sales in stocks that are most likely to face higher equity borrowing costs.