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 employ staggered municipality-level anti-mafia enforcement actions over the 1995-2015 period in Italy to study the effect of organized crime on firms. At the municipality level, we find that as the influence of organized crime weakens, competition among firms, innovation activity, and competition for public procurement contracts increase. At the firm level, firms that do not exit in response to anti-mafia enforcement actions shrink in size and experience a decline in employee productivity, as well as a slight reduction in profitability. These results are more pronounced for firms that are treated by multiple anti-mafia enforcement actions, firms founded during the height of mafia activity, and firms that operate in the non-tradable sector. Our findings are consistent with accounts of organized crime members acting as cartel enforcers and using legitimate firms to launder money.
“Drug money and firms: The unintended consequences of anti-money laundering policies”, joint with Mauricio Villamizar-Villegas and Tomas Williams
We explore the unintended consequences of Anti-Money Laundering (AML) policies by exploiting the implementation of a program aimed at controlling the flow of money from illegal activities, such as drug trafficking, into the Colombian financial system. We find that deposits located in municipalities with high cocaine activity decline after the implementation of the new program. More importantly, 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. We show that this credit shortfall has important negative effects in the real economy. We use a confidential database on bank-firm credit relationships to show that small firms that rely on credit from affected banks experience a negative shock to investment, sales, size, and profitability. Additionally, we observe a reduction of employment growth in small firms. Our results shed light on a novel negative side effect of the implementation of AML policies 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.