Corporate Finance.

NBER's Program on Corporate Finance met in Chicago on April 25. Atif Mian, NBER and University of Chicago, and Manju Puri, NBER and Duke University, organized this agenda:

Raghuram G. Rajan, University of Chicago and NBER, and Rodney Ramcharan, International Monetary Fund, "Landed Interests and Financial Underdevelopment in the United States"

Discussant: Shawn Cole, Harvard University

Vojislav Maksimovic and N.R. Phabhala, University of Maryland, and Gordon Phillips, University of Maryland and NBER, "Post-Merger, Restructuring and the Boundaries of the Firm"

Discussant: Murillo Campello, University of Illinois 

Lucian A. Bebchuk, Harvard University and NBER; Martijn Cremers, Yale University; and Urs Peyer, INSEAD, "CEO Centrality"

Discussant: Rajesh Aggarwal, University of Minnesota 

Robin Greenwood and Samuel Hanson, Harvard University, and Jeremy C. Stein, Harvard University and NBER, "A Gap-Filling Theory of Corporate Debt Maturity Choice"

Discussant: Adriano Rampini, Duke University

Christopher Mayer, Columbia University and NBER; Tomasz Piskorski, Columbia University; and Alexei Tchistyi, New York University, "The Inefficiency of Refinancing: Why Prepayment Penalties Are Good for Risky Borrowers"

Discussant: Bruce Carlin, UC, Los Angeles

Benjamin Keys, University of Michigan; Tanmoy Mukherjee, Sorin Capital Management; Amit Seru, University of Chicago; and Vikrant Vig, London Business School, "Did Securitization Lead to Lax Screening? Evidence From Subprime Loans"

Discussant: Daniel Bergstresser, Harvard University

Atif Mian, and Amir Sufi, University of Chicago, "The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis" (NBER Working Paper No. 13936--See "Risks of Financial Institutions" earlier in this issue for a description of this paper.)

Discussant: Nicholas Souleles, University of Pennsylvania and NBER

It is usually thought that the wealthy have an ability to limit wider access to economic institutions only in poor, undemocratic countries. Rajan and Ramcharan find that even in the United States in the early decades of the twentieth century, landed interests seem to play a significant role in the spread of financial institutions. Counties with very concentrated land holdings tended to have disproportionately fewer banks per capita and fewer national banks. Moreover, aggregating land distribution up to the state level, states that had higher land concentration passed more restrictive banking legislation. Finally, financial underdevelopment, as determined historically by land concentration, was negatively correlated with subsequent manufacturing growth, right up to the 1970s. Since these effects are observed across counties possessing similar political and legal institutions at the state level, the evidence is suggestive that the origins of underdevelopment lie, in part, in the historical pattern of constituencies or interests.

Mergers and acquisitions are a fast way for a firm to acquire assets. Using plant-level data, Maksimovic and his co-authors examine how firms redraw their boundaries after acquisitions. They find that there is a surprisingly substantial amount of restructuring in a short period after mergers are consummated. Acquirers sell 27 percent and close 19 percent of acquired plants within three years after completing an acquisition. Plants that belong to the target's peripheral divisions, especially in industries in which asset values are increasing and in industries in which the acquirer does not have a comparative advantage, are more likely to be sold by the purchasing firm. Acquirers who exhibit skill in running their peripheral businesses tend to retain acquired plants. Plants retained by acquirers increase in productivity whereas sold plants do not. The extent of post-merger restructuring activities and their cross-sectional variation do not support an empire building explanation for mergers. Acquirers readjust their firm boundaries in ways that are consistent with the exploitation of their comparative advantage across industries.

Bebchuk and his co-authors investigate the relationship between CEO centrality--the relative importance of the CEO within the top executive team in terms of ability, contribution, or power--and the value, performance, and behavior of public firms. Their proxy for CEO centrality is the fraction of the top-five compensation captured by the CEO. They find that CEO centrality is negatively associated with firm value (as measured by industry-adjusted Tobin's Q). This result is robust to controlling for all standard controls in Q regressions as well as additional controls such as: CEO tenure, whether the CEO is a founder or a large owner, and whether the company's top-five aggregate compensation is high or low relative to peer companies, and in stronger companies with high entrenchment levels. CEO centrality also is richly related to firms' behavior and performance. In particular, CEO centrality is correlated with: lower (industry-adjusted) accounting profitability; lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements; higher odds of the CEO's receiving a "lucky" option grant at the lowest price of the month; greater tendency to reward the CEO for luck in the form of positive industry-wide shocks; lower likelihood of CEO turnover controlling for performance; and lower firm-specific variability of stock returns over time.

Greenwood and his co-authors argue that time-series variation in the maturity of aggregate corporate debt issues arises because firms behave as macro liquidity providers, absorbing the large supply shocks associated with changes in the maturity structure of government debt. The researchers document that when the government funds itself with relatively more short-term debt, firms fill the resulting gap by issuing more long-term debt, and vice-versa. This type of liquidity provision is undertaken more aggressively: 1) in periods when the ratio of government debt to total debt is higher; and 2) by firms with stronger balance sheets. Their theory provides a new perspective on the apparent ability of firms to exploit bond-market return predictability with their financing choices.

Mayer and his co-authors explore the practice of mortgage refinancing in a dynamic competitive lending model with risky borrowers and costly default. They show that prepayment penalties are welfare improving, and are more beneficial to borrowers with higher risk of default. Mobility mitigates the benefits of prepayment penalties only for the safest borrowers. Empirical evidence from more than 43,000 securitized fixed rate mortgages (FRMs) supports the predictions of the model. First, borrowers who receive positive credit shocks are much more likely to prepay their mortgage, the riskier they are. Second, less creditworthy borrowers are most likely to have prepayment penalties, but also receive appreciable benefits. Subprime borrowers with FICO scores below 620 obtain rates as much as 0.7 percent lower than similar borrowers with fully prepayable mortgages and default at a lower rate (13 percent default rate) than comparable borrowers with no prepayment penalties (18 percent default rate). These findings suggest that regulations banning refinancing penalties might have the unintended consequence of raising interest rates, increasing mortgage default, and limiting available credit for the riskiest borrowers.

Theories of financial intermediation suggest that securitization, the act of converting illiquid loans into liquid securities, could reduce the incentives of financial intermediaries to screen borrowers. Keys and his co-authors empirically examine this question using a unique dataset on securitized subprime mortgage loan contracts in the United States. They exploit a specific rule of thumb in the lending market to generate an exogenous variation in case of securitization and compare the composition and performance of lenders' portfolios around the ad-hoc threshold. Conditional on being securitized, the portfolio that is more likely to be securitized defaults by around 20 percent more than a similar risk-profile group with a lower probability of securitization. Crucially, these two portfolios have similar observable risk characteristics and loan terms. Since these findings are conditional on securitization, the researchers conduct additional analyses to address selection on the part of borrowers, lenders, or investors as explanations