Note: All articles are the sole copyright of the respective publishers.  Materials are provided for educational use only.

Media versus Special Interests
with A. Dyck and D. Moss, September 2008.

We argue that profit-maximizing media help overcome the problem of “rational ignorance” highlighted by Downs (1957) and in so doing make elected representatives more sensitive to the interests of general voters. By collecting news and combining it with entertainment, media are able to inform passive voters on politically relevant issues. To show the impact this information has on legislative outcomes, we document the effect ”muckraking” magazines had on the voting patterns of U.S. representatives and senators in the early part of the 20th century. We also show under what conditions profit-maximizing media will cater to general (less affluent) voters in their coverage, providing a counterbalance to special interests.

Long Term Persistence
with L. Guiso and P. Sapienza, August 2008.

Is social capital long lasting? Does it affect long term economic performance? To answer these questions we test Putnam’s conjecture that today marked differences in social capital between the North and South of Italy were due to the culture of independence fostered by the free city-states experience in the North of Italy at the turn of the first millennium. We show that the medieval experience of independence has an impact on social capital within the North, even when we instrument for the probability of becoming a city-state with historical factors (such as the Etruscan origin of the city and the presence of a bishop in year 1,000). More importantly, we show that the difference in social capital among towns that in the Middle Ages had the characteristics to become independent and towns that did not exists only in the North (where most of these towns became independent) and not in the South (where the power of the Norman kingdom prevented them from doing so). Our difference in difference estimates suggest that at least 50% of the North-South gap in social capital is due to the lack of a free city-state experience in the South.

Understanding Trust
with P. Sapienza and A. Toldra, August 2007.

Several papers study the effect of trust by using the answer to the World Values Survey (WVS) question “Generally speaking, would you say that most people can be trusted or that you can’t be too careful in dealing with people?” to measure the level of trust. Glaeser et al. (2000) question the validity of this measure by showing that it is not correlated with senders’ behavior in the standard trust game, but only with his trustworthiness. By using a large sample of German households, Fehr et al. (2003) find the opposite result: WVS-like measures of trust are correlated with the sender’s behavior, but not with its trustworthiness.  In this paper we resolve this puzzle by recognizing that trust has two components: a belief-based one and a preference based one. While the sender behavior’s reflects both, we show that WVS-like measures capture mostly the belief-based component, while questions on past trusting behavior are better at capturing the preference component of trust.

The Corporate Governance Role of the Media: Evidence from Russia
with A. Dyck and N. Volchkova, February 2007.

We study the effect of media coverage on corporate governance by focusing on Russia in the period 1999-2002. This setting offers us three ideal conditions for such a study: plenty of corporate governance violations, no alternative mechanisms to address them, and the presence of an investment fund (the Hermitage) that actively lobbies the international press to shame companies perpetrating those violations. We find that Hermitage 's lobbying is effective in increasing the coverage of corporate governance violations in the Anglo-American press. We also find that coverage in the Anglo-American press increases the probability that a corporate governance violation is reversed: one more article increases the probability of reversal by 5 percentage points. This effect is present even when we instrument coverage with an exogenous determinant, i.e. the Hermitage's portfolio composition at the beginning of the period. The Hermitage's strategy seems to work in part by impacting Russian companies' reputation abroad and in part by forcing regulators into action.

Theft and Taxes
with M. A. Desai and A. Dyck, forthcoming Journal of Financial Economics.

This paper analyzes the interaction between corporate taxes and corporate governance. We show that the characteristics of a taxation system affect the extraction of private benefits by company insiders. A higher tax rate increases the amount of income insiders divert and thus worsens governance outcomes. In contrast, stronger tax enforcement reduces diversion and, in so doing, can raise the stock market value of a company in spite of the increase in the tax burden. We also show that the corporate governance system affects the level of tax revenues and the sensitivity of tax revenues to tax changes. When the corporate governance system is ineffective (i.e., when it is easy to divert income), an increase in the tax rate can reduce tax revenues. We test this prediction in a panel of countries. Consistent with the model, we find that corporate tax rate increases have smaller (in fact, negative) effects on revenues when corporate governance is weaker. Finally, this approach provides a novel justification for the existence of a separate corporate tax based on profits.

Who Blows the Whistle on Corporate Fraud
with A. Dyck and A. Morse, January 2007.

What external control mechanisms are most effective in preventing corporate fraud?  To address this question we study in depth all reported cases of corporate fraud in companies with more than 750 million dollars in assets between 1996 and 2004.  We find that no specific actor dominates the scene: fraud is detected by a web of, sometimes unlikely, monitors.  Auditors play only a limited role in detecting it (14%), albeit their weight has increased after SOX.  Analysts fare relative well (15%), as do industry regulators other than the SEC (15%).  The most surprising monitors are the employees (19%) and the media (15%).  Overall only 36% of fraud detection comes from institutions designed for that purpose, while the remaining 64% comes from institutions motivated by market-based incentives.  Our analysis suggests simple and cheap ways to improve the detection system.

Trust and the Stock Market
with L. Guiso and P. Sapienza, January 2007.

We provide a new explanation to the limited stock market participation puzzle. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stock, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross country data.

Is the U.S. Capital Market Losing Its Competitive Edge?

In this paper I analyze the competitiveness of the U.S. equity markets by studying the recent trend in the share of global IPOs they are able to attract. I find that the U.S. equity market share has dropped dramatically from 2000 to 2005. This drop cannot be explained by changes in the geographical or the sectoral composition of IPOs. The most likely cause is a combination of an improvement in the competitors (mostly European equity markets) and an increase in the compliance costs for publicly traded companies.