The Hidden Costs of Being Public: Evidence from Multinational Firms operating in Emerging Markets” (Journal of Financial Economics, 2021)
This paper studies how firms deal with business-unfriendly regulations that limit their operations. I first exploit a natural experiment to show that the ownership structure of a firm affects its degree of compliance with regulations, with publicly listed firms complying more than privately held ones. Then I show that this differential compliance imposes a burden on listed firms that helps explain the patterns of M&A activity in emerging markets. When the level of market regulations increases, private firms acquire listed ones and when market regulations decrease the results are reversed. I find that this effect is stronger for listed firms that are subject to stricter auditing and enforcement standards, suggesting that scrutiny plays an important role. Taken together, these results uncover an additional cost faced by listed companies, identify a new driver of M&A transactions in emerging markets, and show evidence that high levels of regulation lead to opaque corporate structures.
We exploit staggered municipality-level anti-mafia enforcement actions over the period 1995–2015 in Italy to study the effect of organized crime on firms. Following anti-mafia enforcement actions, we find increases in competition among firms, innovation activity, and competition for public procurement contracts. Firms that do not exit after a weakening of organized crime shrink in size and experience a reduction in profitability, particularly subsequent to higher enforcement intensity. These results are more pronounced among firms founded during the heyday of the mafia and operating in the non-tradable sector. Our findings are consistent with accounts of organized crime groups acting as a barrier to entry and affecting economic growth.
Drug money and bank lending: The unintended consequences of anti-money laundering policies, joint with Mauricio Villamizar-Villegas and Tomas Williams
We explore the unintended consequences of anti-money laundering (AML) policies. For identification, we exploit the implementation of a system in Colombia aimed at controlling the flow of money from drug trafficking into the financial system. We find that bank deposits in municipalities with high drug trafficking activity declined after the implementation of the new AML policy. More importantly, this negative liquidity shock had consequences for credit in municipalities with little or no drug trafficking. Banks that sourced their deposits from areas with high drug trafficking activity cut lending relative to banks that sourced their deposits from other areas, negatively impacting employment and number of firms. Additionally, using a proprietary database containing data on bank-firm credit relationships, we show that small firms that relied on credit from affected banks experience a negative shock to sales, investment, and profitability. Last, we use night lights data to show that these results are not due to a reallocation of activity across firms or to a move to the informal economy. Our results shed light on a hidden cost in the fight against money laundering that should be taken into account in the implementation of these policies.
Anti-money laundering enforcement, banks, and the real economy, joint with Şenay Ağca and Stefan Zeume
We exploit a tightening of anti-money laundering (AML) enforcement that imposed disproportionate costs on small banks to examine the effects of a change in bank composition towards larger banks on real economic outcomes. In response to intensified AML enforcement at the end of 2012, counties prone to high levels of criminal activity in the form of money laundering experience a withdrawal of small banks and increased activity by large banks. This change in bank composition results in an increase in the number of small establishments and real estate prices. Wages and employment increase in the non-tradable sector, consistent with a household demand channel. Increased secured lending through mortgages is one potential driver of this result, whereas lending through the Community Reinvestment Act (CRA) and the Small Business Administration (SBA) are not.
We develop a novel approach to study how banks respond to fluctuations in the risk of panic-driven retail deposit withdrawals. To proxy for changes in withdrawal risk, we track online information acquisition about different brands of UK banks. We find that banks facing surges in information acquisition during the global financial crisis increase interest rates on instant-access deposits. Exploiting variation in information acquisition for different brands of the same bank, we show that part of this response cannot be explained by fundamentals. Comparing similar onshore and offshore deposits offered by the same brand, we show that the effect is stronger when the absence of deposit insurance increases the potential for strategic complementarities. Our results point to a previously undocumented source of self-fulfilling bank fragility.
Organized Crime and Corruption in Labor Union Pension Plans, joint with Sheng-Jun Xu
Work in progress.