Session Chair: Federico Nardari, The University of Melbourne
Paul Ehling, BI Norwegian Business School
Jaewon Choi, University of Illinois Urbana-Champaign
Veronika Krepely Pool, Vanderbilt University
Disagreement and Control Rights: Implications for Debt Policy and Aggregate Dynamics
Steven Baker, University of Virginia
Zhaohui Chen, University of Virginia
Timothy Johnson, University of Illinois Urbana-Champaign
We examine firm capital structure when heterogeneous agents optimally hold different claims, and control of the firm may change hands. When agents cannot commit to firm value maximization, controlling agents have the incentive to alter firm policy to maximize their preferred portfolio at the expense of other claim-holders. We consider settings that can include partial control rights to minority share-holders and/or debt-holders. In general equilibrium, the distortions relative to complete contracting are large even with small disagreement. However, it need not be the case that the distortions amplify the business cycle nor that stronger protection of debt holders mitigates the problem.
Nature as a Defense from Disasters: Natural Capital and Municipal Bond Yields
Claudio Rizzi, University of Miami
This paper shows that climate risk mitigation strategies are priced in financial markets. Using extreme weather and natural capital loss shocks, I demonstrate that the municipal bond market starts to price natural capital following an extreme weather event. The yield spread between counties that lose natural capital and those that do not, i.e., the mitigation premium, increases from zero to 17 basis points. This effect is more prominent for revenue bonds, bonds financing infrastructure projects, and bonds issued by counties dependent on farming. Natural capital protection could decrease the county’s cost of debt by $2.1 million over the bonds’ life.
Tax Evasion and Managerial Incentives: Evidence from the FATCA and Offshore Mutual Funds
Si Cheng, The Chinese University of Hong Kong
Massimo Massa, INSEAD
Hong Zhang, Tsinghua University
Using the Foreign Account Tax Compliance Act (FATCA) as an exogenous shock that reduces the tax advantages of offshore funds sold to U.S. investors, we document that affected funds significantly enhance their performance as a response. Enhanced performance comes from more active management and better processing of information and is more substantial for tax-sensitive funds. Our results reveal a novel substitution effect between tax evasion and performance in the offshore market, which has important normative implications, showing that curbing offshore tax evasion can help improve efficiency in the global asset management industry and related markets.