Working Papers and Publications

It Pays to Set the Menu: Mutual Fund Investment Options in 401(K) Plans (with Veronika Pool and Clemens Sialm), December 2012. [link]

ABSTRACT: This paper documents that mutual fund families acting as trustees of 401(k) plans display favoritism toward their own funds. Using a hand-collected dataset on retirement investment options, we show that poorly-performing funds are less likely to be removed from and more likely to be added to a 401(k) menu if they are affiliated with the plan trustee. The subsequent performance of poorly-performing aliated funds indicates that these trustee decisions are not information driven and are costly to retirement savers. While plan participants could undo the affiliated bias by avoiding underperforming trustee funds, we find no evidence that they do.

Cost savings and the freezing of corporate pension plans (with Joshua Rauh and Steve Zeldes), October 2012. [link]

ABSTRACT: A growing number of U.S. corporations have chosen to freeze defined benefit (DB) pension plans, replacing new DB promises with contributions to defined contribution (DC) plans. We estimate expected DB accruals over various horizons from the age-service and salary distributions of a large sample of U.S. corporate pension plans with more than 1,000 employees. Comparing the counterfactual DB accruals to the actual increase in 401(k) and other DC contributions for firms that freeze, we find that there is only partial compensation to employees for the lost DB accruals. Net of the increase in total DC contributions, firms save 2.0-2.5% of payroll per year, and over a 10-year horizon they save 3.7% of total firm assets. Workers would have to value the structure, choice, flexibility, or portability of DC plans by at least this much more to experience welfare gains from freezes. The forgone accruals and net cost effects are generally larger for older employees. Furthermore, the probability that a firm freezes a pension plan is positively related to the value of new accruals as a share of firm assets. Estimates on firms freezing cash balance plans are smaller but qualitatively similar. The results support the hypothesis that pension freezes affect overall compensation and therefore that they change compensation costs relative to a worker’s marginal product.

The "Real" Value of Conflicted Analyst Coverage (with Stacey Jacobsen and Xiaoyun Yu), December 2012. [link]

ABSTRACT: This paper examines whether conflicted analyst research affects the firms under coverage. We develop a novel approach to identify a sample of firms whose coverage is mostly driven by analysts’ private incentives to generate investment banking revenue. We find that conflicted analyst coverage is recognized by investors and its loss has little adverse effect on information efficiency, capital investment, cost of capital, and equity issuance. Our results suggest that firms attain little benefit when offering investment banking business in exchange for analyst coverage.

The impact of fraudulent earnings manipulations on industry rivals (with Eitan Goldman and Urs Peyer), 2012, Financial Management 41(4), 915-945. [link]

ABSTRACT: Firms targeted by Securities and Exchange Commission enforcement actions for fraudulent financial misrepresentation, on average, experience a significant drop in shareholder value. This paper highlights the additional impact of such enforcement actions on the shareholders of rival firms. Consistent with the importance of the industry competition effect we find that rivals in less competitive industries benefit from the event. However, in competitive industries, the information spillover effect dominates the competition effect, resulting in negative returns to rival shareholders following the event. We find that the spillover effect increases in importance with the severity of the accusation of financial misrepresentation. We also find that the
information spillover effect is more important for opaque rivals and for rivals that had positive stock price reactions to past positive earnings surprises of the accused firm. Results from this paper shed light on the differential impact of financial misrepresentation on rival firms.

How do pension plans affect corporate capital structure decisions? (with Anil Shivdasani), 2010, The Review of Financial Studies 23, 1287-1323. [link]

ABSTRACT: This article examines the capital structure implications of defined benefit corporate pension plans. The magnitude of the liabilities arising from these pension plans is substantial. We show that leverage ratios for firms with pension plans are about 35% higher when pension assets and liabilities are incorporated into the capital structure. We estimate that the tax shields from pension contributions are about a third of those from interest payments. Pension contributions have a modest effect in lowering firms’ marginal corporate tax rates. Once pensions are considered, firms are less conservative in their choice of leverage than
has been previously thought.We show that firms incorporate the magnitude of their pension assets and liabilities into their capital structure decisions.

Why are Firms in the United States Abandoning Defined Benefit Pension Plans? (with Joshua Rauh), 2009, Rotman International Journal of Pension Management [link]