Malcolm Wardlaw

Research Interests

Corporate finance, banking and institutional capital, labor and finance

Publications

"Count (and Count-Like) Data in Finance"* (with Jonathan Cohn and Zack Liu)

• Journal of Financial Economics (Forthcoming)

This paper assesses different econometric approaches to working with count-based outcome variables and other outcomes with similar distributions, which are increasingly common in corporate finance applications. We demonstrate that the common practice of estimating linear regressions of the log of 1 plus the outcome produces estimates with no natural interpretation that can have the wrong sign in expectation. In contrast, a simple fixed-effects Poisson model produces consistent and reasonably efficient estimates under more general conditions than commonly assumed. We also show through replication of existing papers that economic conclusions can be highly sensitive to the regression model employed.

* A version of this paper previously circulated as "Count Data in Finance"

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

• Review of Financial Studies (2021)

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 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 in 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 through cross-sectional analysis..

"Measuring Mutual Fund Flow Pressure as Shock to Stock Returns"

• Journal of Finance (2020)

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 function of a stock's actual realized return during the outflow quarter, raising doubts about its orthogonality to fundamentals. After removing these direct measurements of return, 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.

"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.

Short Publications

"Freedman’s Savings and Trust Bank Passbook and Dividend Repayment Records" (with Virginia Traweek)

• Journal of Slavery and Data Preservation (2022)

Documentation and details on the collection and recording of passbook records and dividend repayment records for the Freedman's Savings and Trust. Records are part of the data gathering effort associated with the separate associated working paper Societal Trust and Financial Market Participation: Evidence from the Freedman's Savings Bank.

Current Working Papers

"Societal Trust and Financial Market Participation: Evidence from the Freedman's Savings Bank" (with Virginia Traweek)

• Presented at MFA (2019), FIRS (2019), SFS Cavalcade (2021), AFA (2022)

Using a novel dataset from the Freedman's Savings Bank, we examine how societal trust impacts policy makers' goals of increased financial participation and economic integration. We find that events that impact trust in political representation and public safety also impact financial participation. The same factors that make communities resilient to racial violence also influence the reactions to financial panics, which increases the likelihood of having wealth destroyed in a collapse, particularly as compared to white depositors. Our results demonstrate how the inherent fragility of financial institutions can cause disproportionate damage to the stability of disenfranchised communities.

Companion website: Freedman's Bank Research

"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.

"Can a Platform-Pays Mechanism reduce Credit Ratings Bias?" (with Indraneel Chakraborty and Alessio Saretto)

We show that a platform-pays mechanism can address ratings inflation and ratings shopping with minimum regulatory oversight. The mechanism has two necessary and sufficient features to address ratings inflation and ratings shopping: strategic delegation and outcome-contingent contracts. First, an issuer strategically delegates the task to acquire ratings, from credit ratings agencies (CRAs) to a pass-through non-monitoring platform (the ``trust''). The trust operates as a commitment mechanism for the issuer, signaling to investors that there is no ratings shopping. Second, the ex-ante determined publicly available fees schedule is partially outcome-contingent, allowing most of the fees to be paid upfront. We provide the contractual space of the fees that satisfies the participation constraints of the CRAs and issuers, and satisfies truth-telling conditions, i.e. ensures no ratings inflation by CRAs. Unbiased ratings increase investors' participation in the market, creating the surplus necessary for voluntary participation of CRAs and issuers. Overall, the platform-pays mechanism creates a Pareto-improving equilibrium compared to the present economy. A contract calibrated to data shows that the cost of implementation of a platform-pays mechanism is small. Our results should encourage policymakers to guide the reform of the credit ratings industry to address ratings inflation and ratings shopping.

"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.

"Information, Competition, and Investment Sensitivity to Peer Stock Prices" (with Arzu Ozoguz and Michael J. Rebello)

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.

"Agency Costs, Information, and the Structure of Corporate Debt Covenants" (with Richard Lowery)

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.

Teaching Experience

• • Managerial Finance (MBA Course) - Spring 2020

• Financial Management (Undergraduate Course) - Fall 2018 / 2019

  • Financial Management (MBA Course) - Spring 2012 / 2013 / 2014 / 2015 / 2016 / 2017

  • 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