Jonathan B. Cohn
Associate Professor of Finance
McCombs School of Business
The University of Texas at Austin
McCombs School of Business
The University of Texas at Austin
2110 Speedway Stop - B6600
Austin, TX 78712
|Accepted and Published Papers|
Equity Buyouts and Workplace Safety || with Nicole Nestoriak
and Malcolm Wardlaw || Review of Financial Studies,
This paper presents evidence of a large, persistent decline in establishment-level workplace injury rates after private equity (PE) buyouts of publicly-traded U.S. firms. We also find that firms experience fewer OSHA safety violations after buyouts and that a larger decline in injury rates is associated with an increased probability of exit via IPO. Employment reductions after buyouts are concentrated at relatively low-injury risk establishments. Overall, our results suggest that buyouts improve workplace safety and that PE acquirers benefit from this improvement. We explore possible causes of these changes through interviews with executives of companies acquired in buyouts and cross-sectional analysis.
|A Project-Level Analysis of
Value Creation in Firms || with Umit Gurun and Rabih
Moussawi || Financial Management, 2020,
This paper analyzes value-creation in firms at the project level. We present evidence that managers facing short-termist incentives set a lower threshold for accepting projects. Using novel data on new client and product announcements in both the U.S. and international markets, we find that the market responds less positively to a new project announcement when the firm's managers have incentives to focus on short-term stock price performance. Furthermore, textual analysis of project announcements show that firms with short-termist CEOs use more vague and generically positive language when introducing new projects to the marketplace.
Constraints and Workplace Safety || with Malcolm Wardlaw
|| Journal of
We present evidence that financing frictions adversely impact investment in workplace safety, with implications for worker welfare and firm value. Using several identification strategies, we find that injury rates increase with leverage and negative cash flow shocks, and decrease with positive cash flow shocks. We show that firm value decreases substantially with injury rates. Our findings suggest that investment in worker safety is an economically important margin on which firms respond to financing constraints.
Enhancing Shareholder Control: A (Dodd-) Frank Assessment of
Proxy Access || with Stu Gillan and Jay Hartzell || Journal of Finance, 2016, 71(4):1623-1668
We use events related to a proxy access rule passed by the SEC in 2010 as natural experiments to study the valuation effects of changes in shareholder control. We find that valuations increase (decrease) following increases (decreases) in perceived control, especially for firms that are poorly performing, have shareholders likely to exercise control, and where acquiring a stake is relatively inexpensive. These results suggest that an increase in shareholder control from its current level would generally benefit shareholders. However, we find that the benefits of increased control are muted for firms with shareholders whose interests may deviate from value maximization.
Stock Analysts Influence Merger Completion? An Examination
of Post-Merger Announcement Recommendations || with
David Becher and Jennifer Juergens || Management
Science, 2015, 61(10): 2430-2448
This paper investigates the effects of analyst recommendations issued after a merger announcement on deal completion. We find the probability of completion increases (decreases) with the favorability of acquirer (target) recommendations. Results from instrumental variables tests support causality running from recommendations to merger outcomes. Additional tests suggest that these relations are driven by target shareholders reassessing the merger offer in response to movements in acquirer and target valuations. We also find that favorably-recommended firms in a proposed merger underperform following deal resolution, suggesting that investors overreact to post-merger announcement recommendations.
Much Do Analysts Influence Each Other's Forecasts? ||
with Jennifer Juergens || Quarterly Journal of
Finance, 2014, 4(3): 1-35
This paper develops and applies a new approach to disentangling the influence of analysts on each other’s earnings forecasts from the effects of correlated information shocks. We estimate that, on average, each cent a new forecast by an analyst is above (below) another analyst’s most recent forecast causes the other analyst to revise her forecast upwards (downwards) by between 0.21 and 0.36 cents. More reputable analysts are more influential, while those that tend to be optimistic are less influential and are influenced more by the forecasts of other analysts. We do not find support for career concerns-driven herding or anti-herding. Finally, we find that more influential analysts are more likely to subsequently be ranked as All-Stars and to move from a less to more prestigious brokerage house, and less likely to leave the analyst profession, suggesting that influence is a desirable characteristic.
Evolution of Capital Structure and Operating Performance
After Leveraged Buyouts: Evidence from U.S. Corporate Tax
Returns || with Lillian
Mills and Erin Towery ||
Journal of Financial
Economics, 2014, 111(2): 469-494
This study uses corporate tax return data to examine the evolution of firms' financial structure and performance after leveraged buyouts for a comprehensive sample of 317 LBOs taking place between 1995 and 2007. We find little evidence of operating improvements subsequent to an LBO, although consistent with prior studies, we do observe operating improvements in the set of LBO firms that have public financial statements. We also find that firms do not reduce leverage after LBOs, even if they generate excess cash flow. Our results suggest that effecting a sustained change in capital structure is a conscious objective of the LBO structure.
Governance in the Presence of an Activist Investor
|| with Uday Rajan || Review of Financial
Studies, 2013, 26(4): 985-1020
We provide a model of governance in which a board arbitrates between an activist investor and a manager facing reputational concerns. The optimal level of internal board governance depends on both the severity of the agency conflict and the strength of external governance. Internal governance creates a certification effect, so greater intervention by the board can lead to worse managerial behavior. Internal and external governance are substitutes when external governance is weak (the board commits to an interventionist policy to induce participation from the activist) and complements when external governance is strong (the board relies to a greater extent on the activist's information).
Credit Ratings: Strategic Issuer Disclosure and Optimal Screening || with Uday Rajan and Günter Strobl || July 2018
We study a model in which an issuer can manipulate information obtained by a credit rating agency (CRA). Better CRA screening reduces the likelihood of a high rating, but increases the value of a rated security. We find that improving the prior quality of assets can have no effect on the quality of a high-rated security, as low-type issuers manipulate more often in equilibrium. The issuer's response to anticipated CRA screening can either amplify or attenuate the effects on accuracy of increased penalties for ratings errors. Our model highlights the importance of strategic issuer disclosure in recent ratings failures.
|The motives for private
equity buyouts of private firms: Evidence from U.S. corporate
tax returns || with Edie Hotchkiss and Erin Towery || June
This paper uses corporate tax return data to study private equity (PE) buyouts of private U.S. firms. PE firms disproportionately target two types of private companies – those with poor operating performance and those that have growth potential but are dependent on external financing and already highly levered. In contrast to studies of buyouts of public firms in the same time period, we find significant improvements in operating performance and rapid growth post-buyout. Overall, our evidence suggests two key rationales for PE buyouts of private firms in the U.S. - to engineer operational turnarounds and to alleviate underinvestment.
Shareholder Activism: Corporate Governance at the Periphery of
Control || with Mitch Towner and Aazam Virani || March 2020
|Capital Structure and
Investor-Level Taxes: Evidence from a Natural Experiment in
Europe || with Sheridan Titman and Garry Twite || February
Financial Resources and Environmental Spills || with Tatyana
Deryugina || October 2018
Using novel US environmental spill data, we document a robust negative relationship between the number of spills a firm experiences in a given year and its contemporaneous and lagged (but not future) cash flow. In addition, studying two natural experiments, we find an increase (decrease) in spills following negative (positive) shocks to a firm's financial resources, relative to control firms. Overall, our results suggest that firms' financial resources play an important role in their ability to mitigate environmental risk and that such resources therefore affect communities in which these firms operate.
Taxes and Investment: The Cash Flow Channel || January 2011
Existing literature focuses on how corporate taxation affects firms' investment decisions by altering after-tax returns. This paper instead examines how corporate taxation affects investment by reducing the cash flow a firm has available to invest in the current period. I use a sharp nonlinearity in the mapping from pre-tax profitability to taxes created by the tax loss carryforward feature of the tax code to identify the cash flow effect of taxes. The results indicate that firms reduce investment when they pay more taxes, especially when unfavorable capital market conditions create a greater dependence of investment on internal sources of cash.
The Temporal Structure of Equity
Compensation || with
Sugato Bhattacharyya || June 2009
It is well accepted that aligning managerial incentives with those of stock holders enhances shareholder value. In theory models, such alignment is usually modeled as giving managers a stake in the realized cash flows of the firm's projects. However, such a stake, which entails a manager holding on to her equity position until all cash flow uncertainty is resolved, can lead a risk averse manager to turn down risky positive NPV projects. In this paper, we argue that equity-linked incentives can mitigate the manager's bias against assuming risk, provided the manager is allowed the flexibility of trading out her equity position early. Thus, allowing managers to hedge away partially the risks associated with their firm's stock price may actually be in the shareholders' best interests. However, it can lead to excessive risk-taking when the firm has debt in its capital structure.