Essays in Corporate Finance

This dissertation consists of three chapters in corporate finance and private equity. Chapter 1, “Incentives of Private Equity General Partners from Future Fundraising”, co-authored with Ji-Woong Chung, Berk Sensoy and Michael Weisbach, studies the incentives of private equity general partners (GPs). Lifetime incomes of GPs are affected by their current funds’ performance not only directly, through carried interest profit-sharing provisions, but also indirectly by the effect of the current fund’s performance on GP’s abilities to raise capital for future funds. In the context of a rational learning model, which we show better matches the empirical relations between future fundraising and current performance than behavioral alternatives, we estimate that indirect pay for performance from future fundraising is of the same order of magnitude as direct pay for performance from carried interest. Consistent with the learning framework, indirect pay for performance is stronger when managerial abilities are more scalable and weaker when current performance is less informative about ability. Specifically, it is stronger for buyout funds than for venture capital funds, and declines in the sequence of a partnership’s funds. Total pay for performance in private equity is both considerably larger and much more heterogeneous than implied by the carried interest alone. Our framework can be adapted to estimate indirect pay for performance in other asset management settings. Uncertainty is ubiquitous in financial markets, and market participants form expectations and learn about parameters, which may be the ability of general partners or the quality of a firm’s governance structure. Assessing the quality of a firm\u27s governance is valuable, which might explain the recent growth of the governance industry. Yet, governance indices have been criticized by researchers and practitioners alike, mainly on the grounds of overlooking firms\u27 heterogeneity and their specific governance needs. Chapter 2, “D&O Insurance and IPO Performance: what can we learn from insurers?”, co-authored with Martin Boyer, provides new insights into the ability of directors’ and officers’ (D&O) insurers to price risk, and in particular risk related to governance characteristics. Therefore, learning by investors about governance quality could be facilitated by providing investors with a market-based assessment of governance as reflected in the D&O insurance premium. We investigate whether a firm’s D&O liability insurance contract at the time of the IPO is related to insured firms’ first year post-IPO performance. We find that insurers charge a higher premium per dollar of coverage to protect the directors and officers of firms that will subsequently have poor first year post-IPO stock performance. A higher price of coverage is also associated with a higher post-IPO volatility and lower Sharpe ratio. Our results are robust to various econometric specifications and suggest that even when the high level of information asymmetry inherent to the IPO context prevails, insurers have information about the firms’ prospects that should be valuable to outside investors. In Chapter 3, “A Learning-Based Approach to Evaluating Boards of Directors”, I develop a general framework based on a theoretical model of learning to assess how investors react to the appointment of new directors. Using predictions from a learning model, this chapter exploits the cross-sectional variation in the learning-induced decline in stock return volatility over director tenure to infer the marginal value of different kinds of directors. This new framework confirms prior empirical findings and documents new results. For example, directors joining better compensated boards have higher marginal value while the marginal value of a director joining an entrenched board is muted. Furthermore, the estimates imply that governance related uncertainty associated with the arrival of a new director accounts for 7% of return volatility, shedding light on the extent to which governance matters

Pay for Performance from Future Fund Flows: The Case of Private Equity

Lifetime incomes of private equity general partners are affected by their current funds’ performance through both carried interest profit sharing provisions, and also by the effect of the current fund’s performance on general partners’ abilities to raise capital for future funds. We present a learning-based framework for estimating the market-based pay for performance arising from future fundraising. For the typical first-time private equity fund, we estimate that implicit pay for performance from expected future fundraising is approximately the same order of magnitude as the explicit pay for performance general partners receive from carried interest in their current fund, implying that the performance-sensitive component of general partner revenue is about twice as large as commonly discussed. Consistent with the learning framework, we find that implicit pay for performance is stronger when managerial abilities are more scalable and weaker when current performance contains less new information about ability. Specifically, implicit pay for performance is stronger for buyout funds compared to venture capital funds, and declines in the sequence of a partnership’s funds. Our framework can be adapted to estimate implicit pay for performance in other asset management settings in which future fund flows and compensation depend on current performance.Private equity; Venture capital; Fundraising; Compensation; Incentives

Pay for Performance from Future Fund Flows: The Case of Private Equity

Lifetime incomes of private equity general partners are affected by their current funds’ performance through both carried interest profit sharing provisions, and also by the effect of the current fund’s performance on general partners’ abilities to raise capital for future funds. We present a learning-based framework for estimating the market-based pay for performance arising from future fundraising. For the typical first-time private equity fund, we estimate that implicit pay for performance from expected future fundraising is approximately the same order of magnitude as the explicit pay for performance general partners receive from carried interest in their current fund, implying that the performance-sensitive component of general partner revenue is about twice as large as commonly discussed. Consistent with the learning framework, we find that implicit pay for performance is stronger when managerial abilities are more scalable and weaker when current performance contains less new information about ability. Specifically, implicit pay for performance is stronger for buyout funds compared to venture capital funds, and declines in the sequence of a partnership’s funds. Our framework can be adapted to estimate implicit pay for performance in other asset management settings in which future fund flows and compensation depend on current performance.

A novel formulation of inhaled sodium cromoglicate (PA101) in idiopathic pulmonary fibrosis and chronic cough: a randomised, double-blind, proof-of-concept, phase 2 trial

Background Cough can be a debilitating symptom of idiopathic pulmonary fibrosis (IPF) and is difficult to treat. PA101 is a novel formulation of sodium cromoglicate delivered via a high-efficiency eFlow nebuliser that achieves significantly higher drug deposition in the lung compared with the existing formulations. We aimed to test the efficacy and safety of inhaled PA101 in patients with IPF and chronic cough and, to explore the antitussive mechanism of PA101, patients with chronic idiopathic cough (CIC) were also studied. Methods This pilot, proof-of-concept study consisted of a randomised, double-blind, placebo-controlled trial in patients with IPF and chronic cough and a parallel study of similar design in patients with CIC. Participants with IPF and chronic cough recruited from seven centres in the UK and the Netherlands were randomly assigned (1:1, using a computer-generated randomisation schedule) by site staff to receive PA101 (40 mg) or matching placebo three times a day via oral inhalation for 2 weeks, followed by a 2 week washout, and then crossed over to the other arm. Study participants, investigators, study staff, and the sponsor were masked to group assignment until all participants had completed the study. The primary efficacy endpoint was change from baseline in objective daytime cough frequency (from 24 h acoustic recording, Leicester Cough Monitor). The primary efficacy analysis included all participants who received at least one dose of study drug and had at least one post-baseline efficacy measurement. Safety analysis included all those who took at least one dose of study drug. In the second cohort, participants with CIC were randomly assigned in a study across four centres with similar design and endpoints. The study was registered with ClinicalTrials.gov (NCT02412020) and the EU Clinical Trials Register (EudraCT Number 2014-004025-40) and both cohorts are closed to new participants. Findings Between Feb 13, 2015, and Feb 2, 2016, 24 participants with IPF were randomly assigned to treatment groups. 28 participants with CIC were enrolled during the same period and 27 received study treatment. In patients with IPF, PA101 reduced daytime cough frequency by 31·1% at day 14 compared with placebo; daytime cough frequency decreased from a mean 55 (SD 55) coughs per h at baseline to 39 (29) coughs per h at day 14 following treatment with PA101, versus 51 (37) coughs per h at baseline to 52 (40) cough per h following placebo treatment (ratio of least-squares [LS] means 0·67, 95% CI 0·48–0·94, p=0·0241). By contrast, no treatment benefit for PA101 was observed in the CIC cohort; mean reduction of daytime cough frequency at day 14 for PA101 adjusted for placebo was 6·2% (ratio of LS means 1·27, 0·78–2·06, p=0·31). PA101 was well tolerated in both cohorts. The incidence of adverse events was similar between PA101 and placebo treatments, most adverse events were mild in severity, and no severe adverse events or serious adverse events were reported. Interpretation This study suggests that the mechanism of cough in IPF might be disease specific. Inhaled PA101 could be a treatment option for chronic cough in patients with IPF and warrants further investigation

Determinants of recovery from post-COVID-19 dyspnoea: analysis of UK prospective cohorts of hospitalised COVID-19 patients and community-based controls

Background The risk factors for recovery from COVID-19 dyspnoea are poorly understood. We investigated determinants of recovery from dyspnoea in adults with COVID-19 and compared these to determinants of recovery from non-COVID-19 dyspnoea. Methods We used data from two prospective cohort studies: PHOSP-COVID (patients hospitalised between March 2020 and April 2021 with COVID-19) and COVIDENCE UK (community cohort studied over the same time period). PHOSP-COVID data were collected during hospitalisation and at 5-month and 1-year follow-up visits. COVIDENCE UK data were obtained through baseline and monthly online questionnaires. Dyspnoea was measured in both cohorts with the Medical Research Council Dyspnoea Scale. We used multivariable logistic regression to identify determinants associated with a reduction in dyspnoea between 5-month and 1-year follow-up. Findings We included 990 PHOSP-COVID and 3309 COVIDENCE UK participants. We observed higher odds of improvement between 5-month and 1-year follow-up among PHOSP-COVID participants who were younger (odds ratio 1.02 per year, 95% CI 1.01–1.03), male (1.54, 1.16–2.04), neither obese nor severely obese (1.82, 1.06–3.13 and 4.19, 2.14–8.19, respectively), had no pre-existing anxiety or depression (1.56, 1.09–2.22) or cardiovascular disease (1.33, 1.00–1.79), and shorter hospital admission (1.01 per day, 1.00–1.02). Similar associations were found in those recovering from non-COVID-19 dyspnoea, excluding age (and length of hospital admission). Interpretation Factors associated with dyspnoea recovery at 1-year post-discharge among patients hospitalised with COVID-19 were similar to those among community controls without COVID-19. Funding PHOSP-COVID is supported by a grant from the MRC-UK Research and Innovation and the Department of Health and Social Care through the National Institute for Health Research (NIHR) rapid response panel to tackle COVID-19. The views expressed in the publication are those of the author(s) and not necessarily those of the National Health Service (NHS), the NIHR or the Department of Health and Social Care. COVIDENCE UK is supported by the UK Research and Innovation, the National Institute for Health Research, and Barts Charity. The views expressed are those of the authors and not necessarily those of the funders

Southward displacement of the North Atlantic Subtropical Gyre circulation system during North Atlantic cold spells

Key Points: - Rapid subsurface oceanographic change in the tropical W Atlantic reflect shifting Subtropical Gyre - Subsurface warming responds to deglacial AMOC perturbations (Heinrich Stadials 2, 1, and the Younger Dryas) - Southward propagation of Salinity Maximum Water during Northern Hemisphere cold spells shift the mixing zone of tropical and subtropical waters During times of deglacial Atlantic Meridional Overturning Circulation (AMOC) perturbations, the tropical Atlantic experienced considerable warming at subsurface levels. Coupled ocean‐atmosphere simulations corroborate the tight teleconnection between the tropical Atlantic and climate change at high northern latitudes, but still underestimate the relevance of the subsurface N Atlantic Subtropical Gyre (STG) for heat and salt storage and its sensitivity to rapid climatic change. We here reconstruct vertical and lateral temperature and salinity gradients in the tropical W Atlantic and the Caribbean over the last 30 kyrs, based on planktic deep and shallow dwelling foraminiferal Mg/Ca and δ18O‐records. The rapid and large amplitude subsurface changes illustrate a dynamic STG associated with abrupt shifts of North Atlantic hydrographic and atmospheric regimes. During full glacial conditions, the STG has been shifted southward while intensified Ekman‐downwelling associated to strengthened trade winds fostered the formation of warm and saline Salinity Maximum Water (SMW). The southward propagation of SMW was facilitated by the glacially eastward deflected North Brazil Current. During periods of significant AMOC perturbations (Heinrich Stadials 1, and the Younger Dryas), extreme subsurface warming by ~6°C led to diminished lateral subsurface temperature gradients. Coevally, a deep thermocline suggests that SMW fully occupied the subsurface tropical W Atlantic and that the STG reached its southernmost position. During the Holocene, modern‐like conditions gradually developed with the northward retreat of SMW and the development of a strong thermocline ridge between the Subtropical Gyre and the tropical W Atlantic

Examining the generalizability of research findings from archival data

This initiative examined systematically the extent to which a large set of archival research findings generalizes across contexts. We repeated the key analyses for 29 original strategic management effects in the same context (direct reproduction) as well as in 52 novel time periods and geographies; 45% of the reproductions returned results matching the original reports together with 55% of tests in different spans of years and 40% of tests in novel geographies. Some original findings were associated with multiple new tests. Reproducibility was the best predictor of generalizability—for the findings that proved directly reproducible, 84% emerged in other available time periods and 57% emerged in other geographies. Overall, only limited empirical evidence emerged for context sensitivity. In a forecasting survey, independent scientists were able to anticipate which effects would find support in tests in new samples

Addressing climate change with behavioral science: a global intervention tournament in 63 countries

Effectively reducing climate change requires marked, global behavior change. However, it is unclear which strategies are most likely to motivate people to change their climate beliefs and behaviors. Here, we tested 11 expert-crowdsourced interventions on four climate mitigation outcomes: beliefs, policy support, information sharing intention, and an effortful tree-planting behavioral task. Across 59,440 participants from 63 countries, the interventions’ effectiveness was small, largely limited to nonclimate skeptics, and differed across outcomes: Beliefs were strengthened mostly by decreasing psychological distance (by 2.3%), policy support by writing a letter to a future-generation member (2.6%), information sharing by negative emotion induction (12.1%), and no intervention increased the more effortful behavior—several interventions even reduced tree planting. Last, the effects of each intervention differed depending on people’s initial climate beliefs. These findings suggest that the impact of behavioral climate interventions varies across audiences and target behaviors

Changes in Cerebral Hemodynamics during Complex Motor Learning by Character Entry into Touch-Screen Terminals

Introduction Studies of cerebral hemodynamics during motor learning have mostly focused on neurorehabilitation interventions and their effectiveness. However, only a few imaging studies of motor learning and the underlying complex cognitive processes have been performed. Methods We measured cerebral hemodynamics using near-infrared spectroscopy (NIRS) in relation to acquisition patterns of motor skills in healthy subjects using character entry into a touchscreen terminal. Twenty healthy, right-handed subjects who had no previous experience with character entry using a touch-screen terminal participated in this study. They were asked to enter the characters of a randomly formed Japanese syllabary into the touchscreen terminal. All subjects performed the task with their right thumb for 15 s alternating with 25 s of rest for 30 repetitions. Performance was calculated by subtracting the number of incorrect answers from the number of correct answers, and gains in motor skills were evaluated according to the changes in performance across cycles. Behavioral and oxygenated hemoglobin concentration changes across task cycles were analyzed using Spearman\u27s rank correlations. Results Performance correlated positively with task cycle, thus confirming motor learning. Hemodynamic activation over the left sensorimotor cortex (SMC) showed a positive correlation with task cycle, whereas activations over the right prefrontal cortex (PFC) and supplementary motor area (SMA) showed negative correlations. Conclusions We suggest that increases in finger momentum with motor learning are reflected in the activity of the left SMC. We further speculate that the right PFC and SMA were activated during the early phases of motor learning, and that this activity was attenuated with learning progress