Malcolm Wardlaw

Visiting Assistant Professor
University of Michigan
Ross School of Business
701 Tappan Street, R4330
Ann Arbor, MI 48109-1234

W: 734-763-0486

Research Interests

Corporate finance, banking and institutional capital, labor and finance


"Financing Constraints and Workplace Safety" (with Jonathan Cohn)

  • Journal of Finance (2016)
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 another, economically important margin on which firms respond to financing constraints.

Note: If you have questions about the injury data used in this paper, please review the data section of the paper, and read the following statement here before you contact me. 

"The Costs of Closing Failed Banks: A Structural Estimation of Regulatory Incentives" (with Ari Kang and Richard Lowery)

  • Review of Financial Studies (2014)
We estimate a dynamic model of the decision to close a troubled bank. Regulators trade off an aversion to closing banks against the risk that allowing a bank to continue will raise the eventual costs to the deposit insurance fund. Using a conditional choice probability approach, we estimate the costs associated with closing banks, both in direct costs to the insurance fund and in other costs perceived by regulators, either social or personal. We find that delayed closures were driven by a desire to defer costs, an aversion to closing the largest and smallest troubled banks, and political influence.

Current Working Papers

"Private equity buyouts and workplace safety" (with Jonathan Cohn and Nicole Nestoriak)

  • Revise and Resubmit at Review of Financial Studies
This paper studies the impact of leveraged buyouts (LBOs) on workplace injury risk. Injury rates decrease substantially after LBOs of public firms, both in absolute terms and relative to controls. These changes persist for several years post-buyout. Cross-sectional analysis suggests that alleviation of public market pressure to behave myopically contributes to the decrease in injury risk after LBOs of public firms. The reduction in injury risk, for which employees demand a compensating wage differential, may partly explain the recently-documented fall in employee earnings after public firm LBOs. Injury rates increase after LBOs of private firms, though from substantially lower pre-LBO levels.

"Complexity, Standardization, and the Design of Loan Agreements" (with Bernhard Ganglmair)

  • Presented at 2015 SFS Cavalcade, 2015 Econometric Society World Congress, 2015 NFA Meetings, 2016 AFA Meetings
This paper uses a text-based approach to analyze the level of detail and customization found in the defaults and covenants sections of a large sample of private loan contracts. While previous studies have examined a small number of well-defined accounting covenants, we characterize a significant amount of detail not captured by these covenants. We demonstrate that while complexity and detail are an important aspect of complete contracts, tradeoffs exist in which excess detail is incorporated at the expense of less customization. Contracts are more detailed when firms are closer to the default boundary, maturities are longer, loan amounts are larger, lenders are distant from the firm, loans are widely syndicated, and the existing financial structure is more complex. Alternatively, we find that loans are less customized and more "boilerplate" when they are widely syndicated and lenders are more distant. We also find that loans with more detailed clauses are renegotiated more often, while more customized ones are renegotiated less, suggesting that boilerplate language may serve as a reference point for future renegotiation.

Using a novel dataset from the Freedman's Savings and Trust Bank, a large, multi-branch 19th century bank chartered to serve newly freed American slaves in the aftermath of the Civil War, we examine how trust altering events impact depositor behavior. We find that financial panics have a significant impact on new and existing depositors which varies significantly across regions. This impact is unrelated to distance to the source of the panic but does depend on factors related to the fragility of trust within the local community. We also find that non-financial events which impact institutional trust more broadly have a strong impact on impact banking participation. Our results demonstrate how the fragility of bank run equilibria may have feedback effects on savings and wealth creation in disenfranchised populations.

"The Trust Alternative" (with Indraneel Chakraborty and Alessio Saretto)

We propose an alternative market design to the current credit ratings industrial organization. An issuer delegates a pass-through non-monitoring trust to acquire a rating report from credit ratings agencies (CRAs). The trust pays outcome contingent fees, which guarantee truth-telling and therefore eliminate ratings inflation. Moreover, because the trust acts as an intermediary, it also eliminates the ability of issuers to shop different CRAs for better ratings. Voluntary participation to the trust mechanism from both issuers and CRAs is guaranteed by the surplus generated by improved ratings efficiency. Ultimately, the trust can improve social welfare by inducing more effort, especially when CRAs are competing over the accuracy of ratings. Differently from up front fees, in fact, payments contingent upon outcomes can be properly designed to increase the CRA’s effort to produce more precise signals.

 "Investment, Cash Flow, and the Structure of Corporate Debt Covenants" (with Richard Lowery)

  • Presented at 2013 AFA Meetings
We analyze the determinants of covenant structure in private debt contracts. While previous studies have demonstrated a relationship between firm characteristics and the overall strictness of loan contracts, few studies have examined why covenants are written on a range of accounting variables and what determines their selective use. Using a simple model of firm investment where firms face uncertain cash flows and investment opportunities, we characterize the conditions under which it is optimal for a debt contract to specify a restriction on investment or to specify a minimum cash flow realization. Consistent with this model, we find that the application of covenants based on these variables is not necessarily monotonic in firm risk. While the financially riskiest firms tend to employ capital expenditure covenants, cash flow and net worth covenants are most common among moderately risky firms with greater profitability and firms with stronger banking relationships. The results also highlight the importance of debt covenants in both mitigating agency frictions and maximizing the value of future private information.

"The Impact of Bank Health on the Investment of Its Corporate Borrowers"

  • Presented at 2011 WFA Meetings
This paper investigates how changes in a bank’s health impact real investment of its existing borrowers. Using a sample of U.S. firm bank relationships, I find that firms reduce investment by around 10% in response to a one standard deviation increase in the loan nonperformance of their primary bank. This effect is only present during active borrowing relationships, and is not driven by reverse causality or changes in region or industry specific investment opportunities. The effect weakens in the decade following the mid-90s but returns post 2006, suggesting that U.S. have not become less bank dependent

  • Presented at 2017 EFA Meetings
We examine the response of investment to peers' stock prices. While the response to average peer-Q is typically positive, the response to prices of peer firms that are more threatening and those of industry leaders is reliably negative. The responses are more strongly negative when the prices contain more firm-specific information. We also show that different measures of peer price informativeness can capture either positive or negative investment signals. Thus, the response to peer prices varies with industry competition and whether the prices reflect firm-specific or industry information, clouding the traditional interpretation of variation in the responses to peers prices.

"Complementarities in the Design of Corporate Bonds" (with Robert Kieschnick)

This study examines the choices that corporations make over different contractual features that define their bonds. Using data on new U.S. corporate bond issues from 1990 through 2012, we find that corporate bonds are packages of different provisions and restrictions that reflect complementarities between bond features that change with issuer characteristics. Certain collections of features represent strong complements while others act as broad substitutes for each other. As a result, we observe a surprisingly narrow set of packages of bond features. Since these features strongly interact with each other in the observed choices of firm, the determinants of individual covenants and bond provisions are highly conditional on choices over the entire package.

A large and rapidly growing literature examines the impact of misvaluation on firm policies by using mutual fund outflow-induced price pressure to isolate non-fundamental price variation. I demonstrate that the standard approach to computing outflow-induced price pressure produces a measure that is inadvertently a direct mechanical function of a stock’s actual realized return during the outflow quarter, raising doubts about its orthogonality to fundamentals. After removing this direct return component, outflows generate a fairly negligible quarterly decline in returns, with no subsequent reversal, and many established results in this literature no longer hold. I provide suggestions for future analysis.

Teaching Experience

  • Financial Management (MBA Course) - Spring 2012 / 2013 / 2014 / 2015 / 2016
  • Topics in Empirical Corporate Finance (PhD Course) - Spring 2014/ Spring 2015
  • Topics in Theoretical Corporate Finance (PhD Course) - Spring 2013
  • Energy Risk Management (Undergraduate Course) - Fall 2010
  • Financial Modeling in Excel (Undergraduate Course) - Fall 2008 / Spring 2009
  • Business Finance (Undergraduate Course) - Summer 2007

Erdös Number

5 (M. Wardlaw → R. Lowery → J. Ledyard → R.McKelvey → C. Tovey → P. Erdős)

Additional Information

Dual Citizen, U.S. and United Kingdom

Subpages (1): Note on BLS data