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PROFESJON-Forskningskompetanse for utvalgte profesjonsutdanninger

Incentives, access to capital, and innovation

Alternative title: Insentiver, kapitaltilgang og innovasjon

Awarded: NOK 10.0 mill.

Firms rely on external capital to fund innovation and growth. This project improves our understanding of key corporate governance mechanisms, firms’ leverage and securities issuance decisions, and their innovation activities. We first study the effects of shareholder voting and board composition of publicly listed firms and show that: • The Swedish “say-on-pay” reform, where shareholders vote on executive compensation is binding, curbed excessive CEO compensation but had no measurable effects on firm value, profitability, or CEO turnover. • The mandatory ASA board gender quota in Norway did not affect firm valuation, profitability, or potentially value-relevant board characteristics, such as directors’ CEO experience and busyness. The evidence suggests that board gender quotas are a social policy issue unrelated to shareholder wealth. • Actively managed (non-index) funds increase their share ownership and monitoring activities when passive index funds in the same fund family own shares in the firm. The coordination of institutional investors' shareholder votes reduces concerns with “ownerless” capital. We next study how local labor market competition affects firms’ retention policies and innovation activities and document that: • Local labor market agglomeration offering highly skilled employees more outside job opportunities in the locality (LEO) increases firms’ efforts to retain their employees. These efforts include broad option awards, employee-friendly policies, and more conservative financial policies. The effect is particularly pronounced in the high-tech industry and for firms with high R&D spending, where search and training costs are high. • Firms’ innovation activities and the quality and generality of their patents increase with LEO and the diversity of the local labor market. Outside job options encourage highly skilled workers to innovate, and a diverse labor market improves the matching of the firms’ labor force. • Developing a novel text-based measure of product and service innovation in the banking industry, we show that increased competition reduces the banks’ innovation activities. Finally, we examine firms’ leverage and securities issuance decisions and show that: • Firms that issue debt and distribute the proceeds to shareholders display a negative correlation between profitability and leverage, inconsistent with the dynamic tradeoff theory, holding that profitable firms should have relatively high leverage. • High-frequency net-debt issuers (HFIs) do not manage their leverage toward long-run targets. Thus, even in the subset of firms most likely to follow dynamic tradeoff theory, the theory does not appear to hold. • Equity issues prompted by creditors (and not driven by high project valuations) follow a period of increased market valuations. This evidence cannot reject the notion that firms time the market opportunistically when issuing equity. • Requirements to recognize the funding status of pension liabilities in the financial statements influence firms’ financial leverage decisions. This evidence suggests that reporting requirements may have real effects beyond the information content.

The project has improved our understanding of corporate governance, financing, and innovation activities. Hence, it has helped strengthen NHH's research and education in corporate finance, a key strategic priority area, and entrepreneurship. The insights from the project also have important implications for government policies aimed at shareholder voting and board composition and promoting innovation and entrepreneurship.

Firms often rely on external capital to finance their growth. Entrepreneurs must attract financing from risk-willing investors to develop their business ideas. Technology companies need funding to develop major research and development programs. Large firms use mergers and acquisitions to adapt to changes in the competitive landscape. Companies in need of external funding benefit from an institutional framework that minimizes the frictions between firms and investors. This could involve the design of managerial incentive contracts inducing shareholder value maximization to market organization facilitating optimal allocation and reallocation of capital. This research project focuses on the design of compensation contracts and institutions critical to firms' ability to raise funds. The results will have important implications for the corporate finance curriculum at NHH as well as for the design of government policies aimed at promoting entrepreneurship and corporate growth. To span a broad set of issues governing the relationship between firms and their investors, the research project is organized six subprojects. The first two subprojects examine how investors could design contracts incentivizing the CEO and the board of directors to maximize firm value. The third focuses on the supply of entrepreneurs. It is a common assumption that entrepreneurial activity is limited by funding availability. This research will examine the effects of a sudden increase in skilled but unemployed individuals on startups. The last three subprojects deal with firms' access to capital through the public markets. They examine effects of going public on borrowing costs and corporate innovation policies; the decision to grow through acquisitions and the role of investor's short-term focus on earning; and whether managers time the markets by issuing equity opportunistically when it is inexpensive.

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PROFESJON-Forskningskompetanse for utvalgte profesjonsutdanninger

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