This paper studies how firms deal with business-unfriendly regulations that limit their operations. I first exploit a natural experiment to show that the ownership structure of a firm affects its degree of compliance with regulations, with publicly listed firms complying more than privately held ones. Then I show that this differential compliance imposes a burden on listed firms that helps explain the patterns of M&A activity in emerging markets. When the level of market regulations increases, private firms acquire listed ones and when market regulations decrease the results are reversed. I find that this effect is stronger for listed firms that are subject to stricter auditing and enforcement standards, suggesting that scrutiny plays an important role. Taken together, these results uncover an additional cost faced by listed companies, identify a new driver of M&A transactions in emerging markets, and show evidence that high levels of regulation lead to opaque corporate structures.
“Organized Crime and Firms: Evidence from Italy”, joint with Stefan Zeume
We exploit staggered municipality-level anti-mafia enforcement actions over the 1995-2015 period to study the effect of organized crime on firms. We find that as organized crime weakens, firm turnover increases through entry of new and exit of existing firms. Firms that do not exit shrink in size and experience reduced operational efficiency. These results are more pronounced among manufacturing firms and firms founded during the heydays of the mafia. Furthermore, the weakening of organized crime leads to increased innovative activity and competition for procurement contracts. Our results suggest that organized crime facilitates collusion among existing firms, which benefits inefficient incumbents but hinders entry of new innovative firms.
“Drug money and firms: The unintended consequences of anti-money laundering policies”, joint with Mauricio Villamizar-Villegas and Tomas Williams
We study the unintended consequences of anti-money laundering policies. We exploit the passage of a regulation in Colombia whose objective was to limit the introduction of resources coming from illegal activities, such as drug trafficking, into the financial system. We find that deposits into banks’ branches located in municipalities with high cocaine activity decline after the regulation, evidence of its effectiveness. We show that this funding shock has consequences for credit in municipalities with no drug trafficking activities. Banks that source their deposits from areas with high cocaine activity cut lending relative to banks that source their deposits from other areas. This shock has also consequences for the real economy. We use a confidential database on bank-firm credit relationships and find that, after the regulation, small firms that rely on credit from affected banks experience a negative shock to investment, sales, size, and profitability. In addition, the regulation reduced employment growth in small firms. Our results shed light on a novel negative side effect of the fight against money laundering on the real economy.
“Paying Attention to Banks: Evidence from Offshore Deposits”, joint with Matthieu Chavaz
Retail depositors are often assumed to lack incentives to pay attention to bank risk. We use weekly Google search volumes and novel confidential data of deposit rates and inflows for UK banks
to test this notion. To control for deposit insurance, we compare the same deposit offered at the same time by a same group of banks in mainland UK vs. in the British Crown Dependencies, where
insurance is weaker. We find that riskier banks lose retail deposits when they receive heightened attention. These banks respond by increasing deposit rates. This effect is larger where deposit
insurance is weaker. Our findings suggest that attention to bank risk matters over and above risk itself.