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  5. Regulation, Litigation and Politics
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Regulation, Litigation and Politics

Paper Session

Friday, Jan. 6, 2023 10:15 AM - 12:15 PM (CST)

Sheraton New Orleans, Grand Couteau
Hosted By: Association of Financial Economists & American Finance Association
  • Chair: Kose John, New York University

How Does Removing the Tax Benefits of Debt Affect Firms? Evidence from the 2017 US Tax Reform

Ali Sanati
,
American University

Abstract

Despite extensive efforts, the impact of the tax benefits of debt on firm decisions is an open question. The 2017 US tax reform creates an opportunity to directly estimate the effects. The reform limits the tax advantage of debt for all firms except for small businesses with average sales below $25 million. I use the exception threshold in a regression discontinuity design and show that corporate debt declines nearly dollar for dollar as the present value of the tax benefits of debt shrinks, but equity financing is not affected. Treated firms decrease their investments and hiring, consistent with the rise in the cost of external financing. The effects are similar in public and private companies. Although the new law disproportionately reduces the tax benefits of debt in small firms, the evidence suggest that the estimates likely provide a lower bound for the effects in large companies. Overall, I document a first-order role for tax incentives that affect the cost of capital in shaping corporate financial and real policies.

The Impact of Money in Politics on Labor and Capital: Evidence from Citizens United v. FEC

Pat Akey
,
University of Toronto
Tania Babina
,
Columbia University
Greg Buchak
,
Stanford University
Ana-Maria Tenekedjieva
,
Federal Reserve Board

Abstract

We examine whether corporate money in politics benefits capital and hurts labor using the 2010 Supreme Court ruling Citizens United, which rendered bans on political election spending unconstitutional. In difference-in-difference analyses, states with newly overturned bans experience increases in both capital and labor income relative to states without bans. We find evidence consistent with increased political spending spurring political competition. This leads to policies that benefit a broader set of constituents compared to alternate forms of political influence like lobbying. Affected states see increased political turnover and reduced regulatory burdens. The economic effects are stronger among ex-ante politically inactive firm

Does Litigation Risk Deter Insider Trading? Evidence from Universal Demand Laws

Binay K. Adhikari
,
University of Texas-San Antonio
Anup Agrawal
,
University of Alabama
Bina Sharma
,
Southern Utah University

Abstract

We exploit US states’ staggered adoption of Universal Demand laws to study how the risk of shareholder lawsuits affects opportunistic insider trading. UD laws, which make it harder for shareholders to bring derivative lawsuits against directors and officers (see, e.g., Houston, Lin and Xie 2018; and Appel 2019), lead to significantly more profitable insider trades, especially sales. This effect is greater in firms with higher information asymmetry or lower institutional monitoring, and comes from more opportunistic and riskier timing of trades. Our findings suggest that a decrease in litigation threat emboldens insiders to increase risk-taking and trade more profitably.

Regulation and Politics of Share Repurchases: Theory and Evidence

Subramanian Rama Iyer
,
University of New Mexico
Ramesh P. Rao
,
Oklahoma State University
Emma Xu
,
University of New Mexico

Abstract

Share repurchases have come under intense scrutiny and criticism from politicians, regulators, media, and academics. First, we examine whether such criticism is justified from the perspective of private optimality of corporate objectives or that of social optimality. We also test empirically whether the predictions that follow from the critical view of repurchases are supported by evidence. Our results indicate that stock repurchases do not cause firms to become less resilient. We find quite the opposite, i.e., repurchasing firms have adequate cash resources to meet their needs for investments, even more so compared to non-repurchasing firms. This holds even after the firms have experienced negative financial shocks. We document that repurchasing firms do not reduce hiring rate, employee compensation, employee satisfaction or environmental commitment. We do not find that repurchases lead to an increase in underfunded pension liabilities. Finally, we do not find that repurchases accompany higher CEO compensation.

Discussant(s)
John Graham
,
Duke University
Vincent Pons
,
Harvard University
Jon Karpoff
,
University of Washington
S. Abraham Ravid
,
Yeshiva University
JEL Classifications
  • K2 - Regulation and Business Law
  • G3 - Corporate Finance and Governance