Corporate Finance

How Political Connections Can Hurt, Rather Then Help, Firm Value

We often think of political connections as clearly favoring a company. Perhaps the most extreme example is Donald Trump owning around 500 businesses (collectively known as the Trump Organization), which may affect the decisions that he takes as President. But political connections can extend far beyond a politician owning a business himself. A politician, or …

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What Drives the Cost of Default Insurance?

One of the many negative consequences of the COVID-19 pandemic is that companies may default. Companies going bankrupt are indeed less important than deaths, but they still have human consequences. Employees lose jobs, suppliers lose customers (and then may themselves default), and investors lose money. We often downplay the third effect for two reasons. One …

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Corporate Finance in China

China will soon become the largest economy in the world, but many Westerners (myself included) know very little about it. I’ve thus tried to educate myself about the Chinese economy, and earlier posted introductions to corporate governance in China and capital markets in China. This post is an introduction to corporate finance in China – capital structure, corporate investment, …

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A Layman’s Guide to Separating Causation from Correlation … and Noticing When Claims of Causality are Invalid

Imagine you’re the Minister for Education, deciding how large to make a school district. Smaller school districts offer parents more school choice. For example, in Boston, there are 70 school districts within a 30-minute commute of the downtown area, so parents with a job in downton Boston have 70 districts they can live in and …

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CEOs Cut Investment To Sell Their Own Shares At High Prices

One of the most fundamental concerns with corporations is that they focus on short-term profit rather than investing for the long-term. This is a particular concern in the 21st century, where innovation is particularly critical for competitive success. Moreover, allegations of short-termism have serious social repercussions. Long-term investments, such as reducing carbon emissions, developing blockbuster drugs, or …

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Is Short Termism Really A Problem?

“Myopia [short-termism] is a first-order problem faced by the modern firm. In the last century, firms were predominantly capital-intensive, but nowadays competitive success increasingly depends on intangible assets such as human capital and R&D capabilities (Zingales (2000)). Building such competencies requires significant and sustained investment. Indeed, Thurow (1993) argues that investment is an issue of …

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