Corporate Finance I
Session Chair: Ekaterina Volkova, The University of Melbourne
Laura Starks, The University of Texas at Austin
Mitch Towner, The University of Arizona
The Determinants of ESG Ratings: Rater Ownership Matters
Dragon Yongjun Tang, The University of Hong Kong
Jiali Yan, University of Liverpool
Chelsea Yaqiong Yao, Lancaster University
Environmental, social, and governance (ESG) ratings become increasingly common in financial markets and for policy making. We show that firms held by the same investors who own the rater (“sister firms”) receive higher ESG ratings. Exogenously created sister firms through acquisitions provide causal inference for the ownership effect. Sister firms receive higher ratings when the common owners have larger stakes in the ESG rater. Notwithstanding their initial higher ratings, sister firms have poorer future ESG outcomes. These findings suggest that the quality of ESG ratings can be undermined by conflicts of interest and have important implications for practitioners and regulators.
Bargaining with Private Equity: Implications for Hospital Prices and Patient Welfare
Tong Liu, University of Pennsylvania
I use proprietary insurance claims data covering over 60% of individuals with private health insurance in the United States to study the impact of private equity (PE) hospital buyouts on hospital price negotiations, health spending, and patient welfare. I structurally estimate a model featuring PE buyouts, hospital–insurer bargaining, and patient choices. I find that PE buyouts lead to an 11% increase in total spending of the privately insured, mostly driven by an increase in bargained prices at PE-backed hospitals and price spillovers to local rivals. Specifically, PE investors’ superior bargaining skills account for 43% of the price and spending increases, while financial engineering and bankruptcy threats contribute 40%, changes in patient demand contribute 10%, and decreases in social responsibility contribute 8%. Operational efficiency gains reduce spending, but only by 1%. A counterfactual ban on PE hospital buyouts would increase patient surplus by an equivalent of 10.7% of health expenses in affected regions. If regulators who conduct merger review ignore PE-backed acquirers’ unique features, they risk greatly underestimating the impact of hospital M&As.