Peter MacKay

Investment and Competition

This paper examines how industry structure affects corporate investment patterns. Real options theory shows that deferring irreversible investment in the face of uncertainty is valuable. Theory also shows that the value of waiting to invest falls if investment opportunities are contestable. Consistent with these theories, we find that firms in monopolistic industries exhibit lower investment-q; sensitivity and are slower to invest than firms in competitive industries. However, we find that investment-q; sensitivity and investment speed are highest in oligopolistic industries, suggesting that the value of investing strategically can outweigh the value of waiting. Indeed, oligopolistic industries experience less entry and more exit than other industries.

Is There an Optimal Industry Financial Structure

We examine how intra-industry variation in financial structure relates to industry factors and whether real and financial decisions are jointly determined within competitive industries. We find that industry and group factors beyond standard industry fixed effects are also important to firm financial structure. Firm financial leverage, capital intensity, and cash-flow risk are interdependent decisions that depend on the firms proximity to the median industry capital-labor ratio, the actions of firms within its industry quintile, and its status as entrant, incumbent, or exiting firm. Our results support competitive industry equilibrium models of financial structure in which debt, technology, and risk are simultaneous decisions.

Redeemability as Governance: A Study of Closed-end and Open-end Funds under Common Management

The option shareholders have to liquidate their firm’s assets as an ultimate recourse is a powerful corporate governance mechanism. We test this hypothesis using a natural experiment in Chinese securities regulation and detailed data on investment-fund holdings and trades. Specifically, we investigate whether redeemable and non-redeemable (open-end and closed-end) investment funds managed by the same fund family are run differently. We find that fund families favor the performance of their open-end funds over their closed-end funds by channeling superior trades and resources toward open-end funds. This evidence confirms that shareholders’ ability to remove assets from managerial control is a key dimension of corporate governance. 1 This paper was previously circulated under the title: “Closed-end and Open-end: Share Redeemability and Cross-fund Subsidization.” We thank Sugato Bhattacharya, Kalok Chan, Sudipto Dasgupta, Jie Gan, Cen Ling, Laurence Swinkels, Mungo Wilson, Youchang Wu, and Lu Zheng for helpful discussions and participants at HKUST’s Ph.D. workshop, the 2007 Conference on Professional Asset Management (Rotterdam), Singapore Management University, National University of Singapore, Tsinghua University (Beijing), the International Conference on Economics, Finance, and Accounting (Taipei), the China International Conference in Finance (Chengdu), the 2nd Asia-Pacific Corporate Governance Conference (Hong Kong). The usual caveats apply.