Jason Sturgess

Finance and Eciency: Do Bank Branching Regulations Matter?*

We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value added output, we calculate for each state the efficient frontier for investments in the real economy, the efficient Sharpe ratio, and the corresponding weights on investments in different industries. We study how rapidly different states converge to an efficient allocation, depending on access to finance. We find that convergence is faster - in terms of distance to the efficient frontier and improving Sharpe ratios - following intra- and (particularly) interstate liberalization of bank branching restrictions. This effect arises primarily from convergence in the volatility of state output growth, rather than in its average. The realized industry shares of output also converge faster to their efficient counterparts following liberalization, particularly for industries that are characterized by young, small and external finance dependent firms. Convergence is also faster for states that have a larger share of constrained industries, greater distance from the efficient frontier before liberalization and larger geographical area. These effects are robust to industries integrating across states and the endogeneity of liberalization dates. Overall, our results suggest that financial development has important consequences for the efficiency and specialization (or diversification) of investments, in a manner that depends crucially on the variancecovariance properties of investment returns, rather than on their average only.

The Anatomy of a Credit Supply Shock: Evidence from an Internal Credit Market

We investigate how financial contracting interacts with lending channel effects by tracing the anatomy of a credit supply shock using micro-level data from a multinational bank. Borrowers with stronger lending relationships, higher non-lending revenues, and those that pledge collateral, especially outside assets and real estate, experience less credit rationing. Consistent with a tightening of financing constraints post shock, borrower composition shifts toward larger and less risky firms, and loans exhibit higher collateralization rates. Our analysis highlights the value of relationships and suggests that relationship banking is a channel through which borrowers can mitigate lending channel effects.

Cash Stockpiles and Investment: Do Cash-Rich Firms Use Cash in Acquisitions?

U.S. firms are hoarding a

Why are Cash-Rich Firms More Likely to Pay for Acquisitions with Stock?

2 trillion cash stockpile which many believe will spur acquisition activity. In light of this fact, we examine whether cash-rich firms actually use their cash when making acquisitions. Surprisingly, we show that firms in the top third of cash holdings are 45% more likely to use stock versus cash in acquisitions, vis-a-vis other firms. Additionally, cash-rich firms both make fewer all-cash bids and use a lower proportion of cash in mixed bids. We investigate this phenomenon further and show that cash-rich firms are more likely to use equity as the method of payment when they are overvalued. Moreover, there is no evidence that cash rich firms waste their cash on acquisitions; cash-rich firms that pay with cash actually acquire undervalued firms. Finally, in the post-acquisition period, cash-rich firms that acquire with stock are at least as likely to maintain high levels of excess cash as non-bidder cash-rich firms. Overall, the evidence implies that the link between cash stockpiles and cash acquisitions is not as obvious as commonly believed.

Multinational Firms, International Diversification, Value, and Governance

We examine why cash-rich firms prefer to use stock to make acquisitions. Consistent with prior literature, we find that cash-rich firms are more likely to attempt acquisitions than other firms. However, cash-rich acquirers are more likely to employ stock as the method of payment. We investigate this finding further and show that cash-rich firms use overvalued equity to make acquisitions. Moreover, there is no evidence that firms waste excess cash on acquisitions; cash-rich firms that pay with cash actually acquire undervalued firms. Finally, in the post-acquisition period, cash-rich firms that acquire with stock are at least as likely to maintain high levels of excess cash as non-bidder cash-rich firms.

The Valuation Effects of Multinational Firms

This paper presents evidence that subsidiaries of multinational firms have higher valuations than locally matched firms. Using a unique sample of 251 UK multinational firms and 4,676 subsidiaries, the paper finds that multinational firms achieve, on average, an international diversification premium of 19%. Further, the value premium is increasing in the difference between the parent and host countrys firm-level corporate governance, consistent with the hypothesis that multinational firms are compensated for exporting good governance. The results are robust to alternative governance mechanisms, and continue to obtain in regressions controlling for endogeneity and self-selection.

Economics of Voluntary Information Sharing

Using a unique sample of 212 UK multinational firms and 4,676 subsidiaries, I show that multinational firms attract, on average, a global diversification premium of approximately 16% compared with a country-industry matched portfolio of local non-multinational firms. I also show that the value premium is higher when the difference between UK and host country internal corporate governance is greater - on average better corporate governance practices explain roughly one-third of the value premium. This result suggests that multinational firms are compensated for exporting good corporate governance. Further, I find evidence that advocates multinational firms invest more in countries with weaker governance standards. At the subsidiary level, I find that multinational firms use internal capital markets to channel higher levels of investment into better investment opportunities. Finally, consistent with a value premium, I show that multinational firms channel investment into globally cheap assets.

Multinational Firms, Internal Capital Markets, and the Value of Global Diversification

We show that lenders join a U.S. commercial credit bureau when information asymmetries between incumbents and entrants create an adverse selection problem that hinders market entry. Lenders also delay joining when information asymmetries protect them from competition in existing markets, consistent with lenders trading off new market entry against heightened competition. We exploit shocks to information coverage to show that lenders enter new markets after joining the bureau in a pattern consistent with this trade-off. Our results illuminate why intermediaries voluntarily share information and show how financial technology that mitigates information asymmetries can shape the boundaries of lending.

The Trade-Off Between Ex-Post and Ex-Ante Efficient Capital Allocation in Internal Capital Markets and Organizational Form

Over the past 30 years, multinational firms’ investment grew four times faster than worldwide GDP. Yet the evidence on whether global diversification is valuable is inconclusive. This paper uses detailed foreign direct investment (FDI) data for 251 UK multinational firms and 4,676 subsidiaries for the period 1999–2005 to show that multinational firms exhibit, on average, a global diversification premium. I investigate this result and show that the premium is positively related to “winner-picking” transfers in internal capital markets, and more so for better-governed firms. The findings help explain why multinational firms’ investment and global diversification have significantly increased over the past three decades.

The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market

This paper examines the efficiency of internal capital markets. I develop a model in which headquarters allocates capital ex-post efficiently to the stronger division and find that this can be ex-ante inefficient. Reallocating capital ex-post to the stronger division reduces ex-ante incentives which can only be restored through monetary compensation. This decreases future investment and may result in the internal capital market being sub-optimal compared with two stand-alone divisions. I show how these effects are particularly important for two types of firm. Finally, ex-ante incentives can be restored by an ex-post inefficient social capital allocation rule, which I show to be optimal.