Matthew Gustafson

The Effects of Removing Barriers to Equity Issuance

We study the consequences of an exogenous deregulation allowing small firms to accelerate public equity issuance. Post-deregulation, treated firms double their reliance on public equity (both overall and compared to a control group), transition away from private investments in public equity, and increase their total annual equity issuance by 40%. This is accompanied by a 5.6 percentage point reduction in equity issuance costs, a 19% increase in investment, and a 12% decline in financial leverage. Our findings provide evidence that reducing issuance frictions benefits issuers even in highly developed markets.We study the consequences of a U.S. deregulation allowing small firms to accelerate their public equity issuance. Post-deregulation, affected firms double their reliance on public equity and transition away from private investments in public equity compared to similar untreated firms. The net effect is a 5.7 percentage point or 49% increase in the annual probability of raising equity. This is accompanied by a reduction in equity issuance costs, an increase in investment, and a decrease in leverage. Our findings provide evidence that reducing equity issuance barriers benefits issuers even in highly developed markets.

Disaster on the Horizon: The Price Effect of Sea Level Rise

Abstract Homes exposed to sea level rise (SLR) sell for approximately 7% less than observably equivalent unexposed properties equidistant from the beach. This discount has grown over time and is driven by sophisticated buyers and communities worried about global warming. Consistent with causal identification of long-horizon SLR costs, we find no relation between SLR exposure and rental rates and a 4% discount among properties not projected to be flooded for almost a century. Our findings contribute to the literature on the pricing of long-run risky cash flows and provide insights for optimal climate change policy.

When Bankers Go to Hail

We introduce taxi ridership between the Federal Reserve Bank of New York and large financial institutions with major presences in New York City as a proxy for Fed activity. A market-timing strategy that buys the market portfolio (risk-free asset) when lagged Fed-bank ridership is low (high) earns a 50% larger Sharpe ratio than the market portfolio. The strategy’s superior performance is concentrated around FOMC meetings and Fed-primary dealer interactions. Collectively, our findings are consistent with a monetary policy channel whereby Fed-bank interactions increase when one of the parties possesses monetary policy-related information that will ultimately adversely affect stock prices.

Minimum Wage and Corporate Policy

Using cross-state and intertemporal variation in whether a state’s minimum wage is bound by the federal minimum wage, we provide evidence that minimum wage increases lead firms in minimum wage sensitive industries (i.e., retail, restaurant, and entertainment) to scale down relative to a control group of non-labor-intensive firms. This scaling down effect manifests via less total investment, less capital and mergers and acquisitions expenditures, and more negative total asset and establishment growth. We find no evidence that minimum wage changes affect research and development and little evidence of any significant effects outside of the most minimum wage sensitive industries.

Index Membership and Small Firm Financing

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Tax-Advantaged Pre-IPO Trusts and Private Information

We examine the prevalence and determinants of CEOs’ use of tax-advantaged trusts prior to their firm’s IPO. Twenty-three percent of CEOs use tax-advantaged pre-IPO trusts, and share transfers into tax-advantaged trusts are positively associated with CEO equity wealth, estate taxes, and dynastic preferences. We project that pre-IPO trust use increases CEOs’ dynastic wealth by approximately

Weathering Cash Flow Shocks

830,000 on average. We next examine a simple model’s prediction that trust use will be positively related to IPO-period stock price appreciation. We find that trust use is associated with twelve percent higher one-year post-IPO returns, but is not significantly related to the IPO’s valuation, filing price revision, or underpricing. This evidence is consistent with CEOs’ personal finance decisions prior to the IPO containing value relevant information that is not immediately incorporated into market prices.

IPOs and the Local Economy

Unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank-borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower-friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the non-fundamental component of cash flow volatility, especially for solvent small bank borrowers.

Post-IPO Market Returns and the Benefits to Going Public

After accounting for endogeneity in the IPO decision, areas hosting large companies that go public experience muted growth in employment, establishments, and population, relative to areas where firms remain private. These effects are most pronounced in low income areas. Establishment-level analyses and tests of IPO-filer acquisition activity reveal that transitioning to public ownership causes firms to geographically diversify their establishments and employee base. These findings are consistent with public ownership reducing a firm’s reliance on local agglomeration economies, to the detriment of the local community.

The Market Sensitivity of Retirement and Defined Contribution Pensions: Evidence from the Public Sector

Abstract We examine the effect of IPO proceeds on post-IPO liquidity and market monitoring. To do so we exploit variation in the amount of proceeds raised that is unrelated to firm size and manager decisions using an instrumental variable approach. We find that marginal increases in IPO proceeds lead to large increases in liquidity, analyst coverage, and institutional ownership in the first two years a firm is public. Increases in IPO proceeds also lead to more frequent follow-on offerings and longer survival as a public firm. We find evidence that immediate shocks to ownership dispersion represent one plausible channel through which changes in IPO proceeds affect long-run liquidity and market monitoring. Overall, our findings support the theoretical liquidity and market quality benefits associated with reductions in ownership concentration.