Natural Experiment Setting Research Articles

Executive Compensation Convexity and Firm Crash Risk

This paper demonstrates that executive compensation convexity, measured as the sensitivity of managerial equity compensation portfolios to stock volatility, predicts firm-specific crashes. A bottom-to-top decile change in compensation convexity results in a 21% increase in a firm's crash risk after controlling for managerial price-increasing incentives. In contrast, there is no robust evidence of a symmetric relation between compensation convexity and a firm's idiosyncratic positive jump risk. We exploit an exogenous shock to compensation convexity, arising from a change in the expensing treatment of executive stock options, in further supporting our interpretations within a natural experiment setting. Our results suggest that managerial equity compensation portfolios do not augment a firm's future idiosyncratic crash risk because they link managerial wealth to equity prices, but rather because they tie managerial wealth to the volatility of a firm's equity.

The distributional effects of the multi-track year-round calendar: a quantile regression approach

Year-round school (YRS) calendars that redistribute the 180 school days more evenly across the calendar year are growing in popularity. Learning loss theory predicts student response to year-round calendars could vary substantially across achievement levels. Existing research on the heterogeneous effects of YRS focuses on estimating mean treatment effects by subgroup. We instead use a quantile regression approach with school and grade-by-year fixed effects to estimate the distributional impact of year-round calendars using a natural experiment setting in Wake County, NC. Contrary to the prior literature, we find evidence of a positive impact of year-round calendars for the lowest-performing students. However, even for these students, the estimated academic impact is small.

Market Reactions to the Regulation of Executive Compensation

This paper investigates equity market reactions to the regulation of executive compensation. We exploit a natural experimental setting in Germany, where recent legislation introduces restrictions on the amount and on the components of board executive compensation packages, and invokes liability for the supervisory board in case of inappropriate remuneration arrangements. We use this exogenous shock to the contracting environment to infer market perceptions of the usefulness of the regulation. Using event study methodology, we investigate market reactions for the first-time announcement of regulatory intent and for a pooled sample of seven events leading to the adoption of the law act. We find weak evidence of an average negative market reaction to the proposed regulation. Multivariate analyses reveal that firms which were particularly affected by the regulation because board members received high abnormal remuneration experienced larger stock price discounts on average. Consistent with this, we find a positive relation between pay-performance sensitivity and the equity market reaction. Taken together, these findings indicate that the regulation was not considered beneficial from a shareholder perspective. This result is consistent with the market perceiving the regulation of executive compensation to impose potentially inefficient contractual arrangements for some firms.

Debtholders’ Demand for Conservatism: Evidence from Changes in Directors’ Fiduciary Duties

ABSTRACTDebtholders’ demand has been widely discussed as a key determinant of conservatism but clear causal evidence is not yet established. Using a natural experiment setting, wherein a Delaware court ruled that the fiduciary duties of directors in near insolvent Delaware companies extend to creditors, we predict and find that firms subject to the ruling significantly increased their accounting conservatism. In addition, our results suggest that the increase in conservatism is more pronounced in near insolvent Delaware firms with stronger boards, confirming that the court ruling takes effect through the channel of the board of directors. Our results are robust to using alternative measures of conservatism and near insolvency status, and controlling for potential confounding factors and other stakeholders’ demand for conservatism. Overall, our study provides empirical evidence to support the causal relation between debtholders’ demand and accounting conservatism previously suggested in the literature, and offers some insights into the role of the board of directors in financial reporting.

Internal Control and Maturity of Debt

The managerial agency issue between manager and investors can be controlled by debtholders via short term debt as it provides an external control on managers via frequent renegotiation of the debt contract. Alternatively, increased board independence can mitigate the managerial agency problem by establishing a stronger and effective internal monitoring mechanism of managers. So, strong corporate governance can substitute the maturity structure of debt, or vice versa, in terms of managerial control. In this paper, we investigate the effect of internal board monitoring on firms’ debt maturity structure. We exogenously identify internal monitoring via board independence and estimate its real impact on maturity using Sarbanes – Oxley Act of 2002 and the Securities and Exchange Commission regulations as exogenous shocks to board structure in a natural experiment setting. Supporting the managerial agency theory, our findings indicate that firms have debt with longer maturity as board independence increases and internal monitoring becomes stronger. Our original results stay unchanged after implementing placebo tests and controlling for the CEO ownership, bond ratings and CEO duality. We also provide more insight into this relation by considering different aspects of debt issuance, organizational structure and as well as the times with financial crises. Our findings stay robust focusing only on the new debt issuance while the results are even stronger for conglomerate firms. We find the relation between internal monitoring and debt maturity becomes less clear during times of financial instability.

Mandatory IFRS Adoption and Information Contents of Earnings Announcements: The Canadian Case

We investigate the impact of mandatory adoption of International Financial Reporting Standards (IFRS) in Canada on the information content of earnings announcements of Canadian companies. The motivation stems from the possibility of filling the gap in the extant literature in a natural experiment setting in Canada, which is arguably a unique case with possible policy implications for the U.S. Moreover, there exists a paucity of research on impact of IFRS in the Canadian context. Using a comprehensive database of Canadian companies, we find that the mandatory adoption of IFRS enhances the information content of earnings announcement in terms of abnormal return volatility, but not in terms of abnormal trading volume. We provide an explanation for this departure from prior studies. Our results are robust to a broad array of sensitivity tests.

Do tax incentives affect households׳ adoption of ‘green’ cars? A panel study of the Stockholm congestion tax

Policymakers have made several attempts to introduce local and national policies to reduce CO2 emissions and stimulate the consumer adoption of alternative fuel vehicles (ethanol/E85 cars). The purpose of this paper is to analyze how a local policy measure impacts the composition of the car fleet over time. More specifically, we take advantage of the natural experiment setting caused by the introduction of the Stockholm congestion tax (2006) to analyze how the tax affected purchases of ethanol cars that were exempted from the tax. To estimate effects, we employ a Difference-in-differences methodology. By using a comprehensive database of the car fleet and car owners, sociodemographic and geographic factors are analyzed, which is unique in the existing literature. Our results suggest that the congestion tax had a significant impact on ethanol car purchases although the effect fades away over time. Furthermore, there is a positive relationship between the level of education and ethanol car purchases. Previous adoption of an ethanol car is found to be the strongest predictor of ethanol car purchases. Finally, data indicate that Stockholmers substantially increased purchases of ethanol cars half a year before the introduction of the congestion tax, which we refer to as an anticipation effect.

THE EFFECT OF CHANGES IN STATE AND FEDERAL POLICY FOR NONPRESCRIPTION ACCESS TO EMERGENCY CONTRACEPTION ON YOUTH CONTRACEPTIVE USE: A DIFFERENCE‐IN‐DIFFERENCE ANALYSIS ACROSS NEW ENGLAND STATES

One of the more contentious policy changes in the past decade in the United States involves the decisions by several state legislatures and the Food and Drug Administration (FDA) to permit sales of emergency contraception on a nonprescription basis. We took advantage of a set of natural experiments to estimate the impact of changes in state and federal level nonprescription emergency contraception access on the probability of high‐school students' sexual and contraceptive behaviors. We extracted data from the Youth Risk Behavioral Survey for New England states that had data about contraceptive use (Maine, New Hampshire, Rhode Island, and Vermont) from 2003 to 2009. We combined this student‐level data with information on when states and the FDA began allowing nonprescription sales of emergency contraceptives. We estimated a series of difference‐in‐difference models on the impact of these policies on the probability that students were sexually active and on the probability of condom or hormonal birth control use conditional on sexual activity. We found that switching emergency contraception to a nonprescription status had no systematic effect on the probability of sexual activity or the conditional probability of hormonal birth control use, but that it significantly reduced the probability that public school students used condoms by between 5.2% and 7.2%. (JEL I18, I12, I29)

Variation in risk seeking behaviour following large losses: A natural experiment

This study explores people׳s risk taking behaviour after having suffered large real-world losses following a natural disaster. Using the margins of the 2011 Australian floods (Brisbane) as a natural experimental setting, we find that homeowners who were victims of the floods and face large losses in property values are 50% more likely to opt for a risky gamble – a scratch card giving a small chance of a large gain ($500,000) – than for a sure amount of comparable value ($10). This finding is consistent with prospect theory predictions regarding the adoption of a risk-seeking attitude after a loss.

Market Reactions to the Regulation of Executive Compensation

This paper investigates equity market reactions to the regulation of executive compensation. We exploit a natural experimental setting in Germany, where recent legislation introduces restrictions on the relative amount and on the components of board executive compensation packages, and invokes liability for the supervisory board in case of inappropriate remuneration arrangements. We use this exogenous shock to the contracting environment to infer market perceptions of the usefulness of the regulation. Using event study methodology, we investigate market reactions for the first-time announcement of regulatory intent and for a pooled sample of seven events leading to the adoption of the law act. We find weak evidence of an average negative market reaction to the proposed regulation. Multivariate analyses reveal that firms which were particularly affected by the regulation because board members received high abnormal remuneration on average experienced larger stock price discounts. Consistent with this, we find a positive relation between pay-performance sensitivity and the equity market reaction. Taken together, these findings indicate that the regulation was not considered beneficial from a shareholder perspective. This result is consistent with the market perceiving the regulation of executive compensation to impose potentially inefficient contractual arrangements for some firms.

Restricting access to a suicide hotspot does not shift the problem to another location. An experiment of two river bridges in Brisbane, Australia

Restricting access to lethal means is a well-established strategy for suicide prevention. However, the hypothesis of subsequent method substitution remains difficult to verify. In the case of jumping from high places ('hotspots'), most studies have been unable to control for a potential shift in suicide locations. This investigation aims to evaluate the short- and long-term effect of safety barriers on Brisbane's Gateway Bridge and to examine whether there was substitution of suicide location. Data on suicide by jumping - between 1990 and 2012, in Brisbane, Australia - were obtained from the Queensland Suicide Register. The effects of barrier installation at the Gateway Bridge were assessed through a natural experiment setting. Descriptive and Poisson regression analyses were used. Of the 277 suicides by jumping in Brisbane that were identified, almost half (n=126) occurred from the Gateway or Story Bridges. After the installation of barriers on the Gateway Bridge, in 1993, the number of suicides from this site dropped 53.0% in the period 1994-1997 (p=0.041) and a further reduction was found in subsequent years. Analyses confirmed that there was no evidence of displacement to a neighbouring suicide hotspot (Story Bridge) or other locations. The safety barriers were effective in preventing suicide from the Gateway Bridge, and no evidence of substitution of location was found.

National-level differences in the adoption of environmental health technologies: a cross-border comparison from Benin and Togo

Environmental health problems such as malaria, respiratory infections, diarrhoea and malnutrition pose very high burdens on the poor rural people in much of the tropics. Recent research on key interventions-the adoption and use of relatively cheap and effective environmental health technologies-has focused primarily on the influence of demand-side household-level drivers. Relatively few studies of the promotion and use of these technologies have considered the role of contextual factors such as governance, the enabling environment and national policies because of the challenges of cross-country comparisons. We exploit a natural experimental setting by comparing household adoption across the Benin-Togo national border that splits the Tamberma Valley in West Africa. Households across the border share the same culture, ethnicity, weather, physiographic features, livelihoods and infrastructure; however, they are located in countries at virtually opposite ends of the institutional spectrum of democratic elections, voice and accountability, effective governance and corruption. Binary choice models and rigorous non-parametric matching estimators confirm that households in Benin are more likely than households in Togo to plant soybeans, build improved cookstoves and purchase mosquito nets, ceteris paribus. Although we cannot identify the exact mechanism for the large and significant national-level differences in technology adoption, our findings suggest that contextual institutional factors can be more important than household characteristics for technology adoption.

Kinesthetic and vestibular information modulate alpha activity during spatial navigation: a mobile EEG study

In everyday life, spatial navigation involving locomotion provides congruent visual, vestibular, and kinesthetic information that need to be integrated. Yet, previous studies on human brain activity during navigation focus on stationary setups, neglecting vestibular and kinesthetic feedback. The aim of our work is to uncover the influence of those sensory modalities on cortical processing. We developed a fully immersive virtual reality setup combined with high-density mobile electroencephalography (EEG). Participants traversed one leg of a triangle, turned on the spot, continued along the second leg, and finally indicated the location of their starting position. Vestibular and kinesthetic information was provided either in combination, as isolated sources of information, or not at all within a 2 × 2 full factorial intra-subjects design. EEG data were processed by clustering independent components, and time-frequency spectrograms were calculated. In parietal, occipital, and temporal clusters, we detected alpha suppression during the turning movement, which is associated with a heightened demand of visuo-attentional processing and closely resembles results reported in previous stationary studies. This decrease is present in all conditions and therefore seems to generalize to more natural settings. Yet, in incongruent conditions, when different sensory modalities did not match, the decrease is significantly stronger. Additionally, in more anterior areas we found that providing only vestibular but no kinesthetic information results in alpha increase. These observations demonstrate that stationary experiments omit important aspects of sensory feedback. Therefore, it is important to develop more natural experimental settings in order to capture a more complete picture of neural correlates of spatial navigation.

Prevalence and Moderators of the Candidate Name-Order Effect

Although some past studies suggest that candidates may receive more votes when their names are listed first among their competitors than when they are listed later, two recent studies challenged this conclusion with regard to major-party candidates running in statewide races and raised questions about the impact of analytic methods on the conclusions of name-order research. Using the largest data set to date�a set of quasi-randomized natural experiments involving 402 candidates running in 76 statewide California elections�this study tests a series of hypotheses about the conditions under which name-order effects are most likely. Regardless of the analytic method used, a small primacy effect appeared consistently that could have a substantive impact on some contests. This effect was larger in races for lower-visibility offices, in years with higher turnout, and in races that were not close. All of this is consistent with the claim that name-order effects occur among voters who have little or no information about the candidates or among voters who feel ambivalence about the candidates.

How Access to Irrigation Influences Poverty and Livelihoods: A Case Study from Sri Lanka

This study combines a livelihoods approach with a regression approach to quantify the effectiveness of irrigation infrastructure investment on improving people’s livelihood strategies. Using a unique dataset based on households in southern Sri Lanka, and a natural experimental setting, we estimate from a two-stage income regression model to show that irrigation access has a positive effect on income through livelihood choices. We also show through qualitative approaches that factors not linked to irrigation infrastructure may contribute to changes in livelihood portfolios. In addition, we highlight factors that result in certain households being unable to move out of poverty despite access to the improved irrigation infrastructure.

Genetic differentiation and habitat connectivity across towhee hybrid zones in Mexico

Hybridization can either reinforce or erode species boundaries; therefore, hybrid zones offer a natural experimental setting in which to assess the dynamics of reproductive isolation. Secondary contact zones, in particular, present a partial separation of the original divergence mechanisms and the subsequent genomic architecture of reproductive isolation (or lack thereof). The spatial context of secondary contact and its consequent effect on dispersal play vital roles on the contact’s outcome. In a hybrid complex between two towhee species in Mexico, Pipilo maculatus and Pipilo ocai, two major hybrid gradients provide natural replicates for comparison. However, genetic analyses demonstrate significant divergence between geographically separate parental populations of each species and divergence of populations within each hybrid zone. The two hybrid transects (Teziutlan and Transvolcanic) are distinct and evidence suggests allelic introgression both across the species boundary and between the two transects. Habitat corridors for dispersal represent functional connectivity hotspots where the two transects meet. Both habitat connectivity and genetic differentiation between geographically disparate parental populations appear to influence the dynamics of gene flow across the hybrid gradients. In southern sympatric populations (Mt. Orizaba and Oaxaca) where morphological evidence for hybridization is scarce, opposing species’ alleles appear to traverse through the hybrid zones rather than arising from cryptic local hybridization. These results illustrate the importance of environmentally mediated gene flow in the context of secondary contact as an important force influencing evolutionary trajectory.

The disciplinary effects of non-debt liabilities: Evidence from asbestos litigation

I study firms with past asbestos ties that suffer from significant increases in legal liabilities after a U.S. Supreme Court ruling in 1999. This event provides a natural experiment setting to estimate the indirect effects of financial distress on real activities. While direct litigation and bankruptcy costs are significant, value computations and clinical evidence at the operational level show that defendant firms suffer only minor indirect costs of financial distress. Furthermore, these firms actively restructure and refocus on core operations during distress. Overall, my results provide support for potentially significant disciplinary effects of non-debt liabilities.

Thriving in the Midst of Financial Distress? An Analysis of Firms Exposed to Asbestos Litigation

I study firms with past asbestos ties that suffer from significant increases in legal liabilities after a U.S. Supreme Court ruling in 1999. This event provides a natural experiment setting to estimate the indirect effects of financial distress on real activities. While direct litigation and bankruptcy costs are significant, value computations and clinical evidence at the operational level show that defendant firms suffer only minor indirect costs of financial distress. Furthermore, these firms actively restructure and refocus on core operations during distress. Overall, my results provide support for potentially significant disciplinary effects of non-debt liabilities.

The effects of natural disasters on farm household income and expenditures: A study on rice farmers in Bangladesh

Although millions of households in the world depend on rice cultivation for income and employment, volatility in rice income and negative income shocks caused by crop failure stem from natural disasters, an almost regular phenomenon in rice farming in Asia and Africa. Income volatility may force households in developing countries to lower their expenditures on health and education, as the literature suggests. A drastic reduction in education and health expenditures due to negative income shocks can affect children’s health and education, and hence human capital formation in the long run, in developing countries. Using the Household Income and Expenditure Survey (HIES) data from the government of Bangladesh and applying the “difference-in-difference” estimation method in a natural experimental setting, this article reveals that in the face of a loss in income caused by a tropical cyclone that hit the coastal region in May 2009, cyclone-affected rice farmers spent less on their children’s education. This study suggests active intervention to ensure stable income to make schooling expenditures less elastic with rice income to ensure human capital development in agriculture-dependent countries in the long run.

Strategic Behavior in Online Reputation Systems: Evidence from eBay

This study examines how sellers respond to changes in the design of reputation systems on eBay. Specifically, we focus on one particular strategic behavior on eBay’s reputation system – the sellers’ explicit retaliation and subsequent revoking of negative feedback provided by buyers. We examine how these strategic sellers respond to the removal of their ability to retaliate against buyers and to revoke negative feedback. We utilize the biggest policy change of eBay’s reputation system in its history, which provides a natural experimental setting that allows us to infer the causal impact of the reputation system on seller behavior. Our results show that revoking enables low quality sellers to manipulate their reputations and masquerade as high-quality sellers. We find that these sellers react strongly to eBay’s announcement of a proposed ban on revoking. Interestingly, after the power of these revokers is curtailed, we find evidence that they exert more effort to improve their reputation scores. This study provides valuable insights about the relationship between reputation system and seller behavior, which have important implications for the design of online reputation mechanisms.