Common Errors: How to (and Not to) Control for Unobserved Heterogeneity

Controlling for unobserved heterogeneity (or “common errors”), such as industry-specific shocks, is a fundamental challenge in empirical research.This paper discusses the limitations of two approaches widely used in corporate finance and asset pricing research: demeaning the dependent variable with respect to the group (e.g., “industry-adjusting”) and adding the mean of the group\u27s dependent variable as a control. We show that these methods produce inconsistent estimates and can distort inference. In contrast, the fixed effects estimator is consistent and should be used instead. We also explain how to estimate the fixed effects model when traditional methods are computationally infeasible

Growing Out of Trouble? Corporate Responses to Liability Risk

This article analyzes corporate responses to the liability risk arising from workers\u27 exposure to newly identified carcinogens. We find that firms, especially those with weak balance sheets, tend to respond to such risks by acquiring large, unrelated businesses with relatively high operating cash flows. The diversifying growth appears to be primarily motivated by managers\u27 personal exposure to their firms\u27 risk in that the growth has negative announcement returns and is related to firms\u27 external governance, managerial stockholdings, and institutional ownership. The results suggest that corporate governance is particularly important when firms are exposed to the risk of large, adverse shocks

Labor Unemployment Risk and Corporate Financing Decisions

This paper examines the impact of labor unemployment risk on corporate financing decisions. Theory suggests that firms choose conservative financial policies partly as a means of mitigating worker exposure to unemployment risk. Using changes in state unemployment insurance benefit laws as a source of variation in the costs borne by workers during layoff spells, we explore the connection between unemployment risk and the corporate financing decisions of public firms in the United States. We find that increases in legally mandated unemployment benefits lead to increases in corporate leverage. The impact of reduced unemployment risk on financial policy is especially strong for firms that have greater layoff separation rates, labor intensity, and financing constraints. The estimated premium required to compensate workers for unemployment risk due to financial distress is about 57 basis points of firm value for a BBB-rated firm. These findings suggest that labor market frictions have a significant impact on corporate financing decisions

Labor unemployment risk and corporate financing decisions

This paper presents evidence that firms choose conservative financial policies partly to mitigate workers' exposure to unemployment risk. We exploit changes in state unemployment insurance laws as a source of variation in the costs borne by workers during layoff spells. We find that higher unemployment benefits lead to increased corporate leverage, particularly for labor-intensive and financially constrained firms. We estimate the ex ante, indirect costs of financial distress due to unemployment risk to be about 60 basis points of firm value for a typical BBB-rated firm. The findings suggest that labor market frictions have a significant impact on corporate financing decisions

CEO Compensation and Corporate Risk: Evidence From a Natural Experiment

This paper examines the two-way relationship between managerial compensation and corporate risk by exploiting an unanticipated change in firms\u27 business risks. The natural experiment provides an opportunity to examine two classic questions related to incentives and risk—how boards adjust incentives in response to firms\u27 risk and how these incentives affect managers\u27 risk-taking. We find that, after left-tail risk increases, boards reduce managers\u27 exposure to stock price movements and that less convexity from options-based pay leads to greater risk-reducing activities. Specifically, managers with less convex payoffs tend to cut leverage and R&D, stockpile cash, and engage in more diversifying acquisitions

5-hydroxymethyl-cytosine enrichment of non-committed cells is not a universal feature of vertebrate development

5-hydroxymethyl-cytosine (5-hmC) is a cytosine modification that is relatively abundant in mammalian pre-implantation embryos and embryonic stem cells (ESC) derived from mammalian blastocysts. Recent observations imply that both 5-hmC and Tet1/2/3 proteins, catalyzing the conversion of 5-methyl-cytosine to 5-hmC, may play an important role in self renewal and differentiation of ESCs. Here we assessed the distribution of 5-hmC in zebrafish and chick embryos and found that, unlike in mammals, 5-hmC is immunochemically undetectable in these systems before the onset of organogenesis. In addition, Tet1/2/3 transcripts are either low or undetectable at corresponding stages of zebrafish development. However, 5-hmC is enriched in later zebrafish and chick embryos and exhibits tissue-specific distribution in adult zebrafish. Our findings show that 5-hmC enrichment of non-committed cells is not a universal feature of vertebrate development and give insights both into evolution of embryonic pluripotency and the potential role of 5-hmC in its regulation. © 2012 Landes Bioscience

The contribution of financial entities to the sustainable development through the reporting of corporate social responsibility information

This paper aims at examining the relationship between board composition and corporate social responsibility (CSR) of a sample of listed financial entities, discussing the driving reasons of these entities to disclose CSR information. We hypothesize that there is a positive association between outside (institutional and independent directors) and female directors and CSR disclosure and a negative relationship between inside directors and CSR reporting. Our findings provide evidence that the proportions of independent directors and female directors on boards encourage CSR disclosure. Moreover, the results also show that the proportions of inside directors and institutional directors on boards do not have influence on CSR reporting. Thus, our evidence suggests that board attributes such as independent and female directors encourage financial entities to report CSR matters, showing the effectiveness of these two corporate governance mechanisms. The paper shed light on the influence of board structure of financial entities on CSR disclosure. Therefore, this study contributes to past research by providing an index to measure CSR disclosure of financial entities and the importance of the distinction between outside and inside directors

Oxidation of Cellular Amino Acid Pools Leads to Cytotoxic Mistranslation of the Genetic Code

Aminoacyl-tRNA synthetases use a variety of mechanisms to ensure fidelity of the genetic code and ultimately select the correct amino acids to be used in protein synthesis. The physiological necessity of these quality control mechanisms in different environments remains unclear, as the cost vs benefit of accurate protein synthesis is difficult to predict. We show that in Escherichia coli, a non-coded amino acid produced through oxidative damage is a significant threat to the accuracy of protein synthesis and must be cleared by phenylalanine-tRNA synthetase in order to prevent cellular toxicity caused by mis-synthesized proteins. These findings demonstrate how stress can lead to the accumulation of non-canonical amino acids that must be excluded from the proteome in order to maintain cellular viability