AFA PhD Student Poster Session
Poster Session
Friday, Jan. 3, 2025 7:00 AM - 6:00 PM (PST)
Saturday, Jan. 4, 2025 7:00 AM - 6:00 PM (PST)
Sunday, Jan. 5, 2025 7:00 AM - 1:00 PM (PST)
- Chair: Wei Jiang, Emory University
Anomalies and Links to Market: Supranational Evidence Abroad from New Market Efficiency Measures
Abstract
Cross-sectional anomalies and time-series market returns are jointly determined in equilibrium, suggesting a necessity to unify the two central literatures for more general understanding of asset pricing. Examining 44 non-U.S. countries, we find that representative cross-sectional anomalies are mostly insignificant at the country level, but become significant once aggregated to the supranational level. After aggregation, supposedly “market-neutral” long-minus-short anomaly returns predict developed-market returns, while “market-exposed” long-or-short anomaly returns predict emerging-market returns. Furthermore, characteristics – foundational to cross-sectional predictability – become useful in time-series predictability to some extent after supranational aggregation as well. We rationalize international anomaly-market links by decomposing them into novel measures of foundational market efficiency concepts, including inter-temporal, systematic importance of mispricing, relative importance of price randomness, and asymmetric mispricing correction speed. The first and the latter two factors shape the links differently across markets of different maturity. We address data-mining in testing international anomaly-market linkages by assuming anomalies and their market-return predictability are both data-mined domestically.Are Stablecoins the Money Market Mutual Funds of the Future?
Abstract
This paper is the first to provide a comprehensive comparison of two financial instruments: stablecoins and money market mutual funds (MMFs). We observe similar reserve asset backing for fiat reserve backed (FRB) stablecoins and MMFs, similar importance of sponsor support, and the same negative association between macroeconomic indicators and peg deviations. Both instruments serve as short-term facilities for investors to park funds and their primary market microstructure is similar. However, FRB stablecoins exhibit larger dispersions from the dollar peg, significantly higher volatility, and a lack of transparency in their market infrastructure. Larger FRB stablecoins show reduced volatility compared to their smaller counterparts, with peg deviation drivers more closely resembling those of MMFs. We conclude that FRB stablecoins demonstrate remarkable similarities to MMFs and have the potential to become the MMFs of the future.Auditor Screening in the Presence of Social Polarization
Abstract
"Polarization has been intensifying in recent years and manifested in various facets of our daily lives. What was initially a phenomenon on the ideological political spectrum (“ideological polarization”) has since become a strongly emotional one based on one’s social ties (“affective polarization”), influencing individual and group actions largely based on their group identity (“social polarization”). Intuitively, due to its adversarial nature, one would surmise that accounting audits are particularly vulnerable to social polarization, with auditors’ decisions influenced, whether consciously or unconsciously, by their clients’ group identity on thepolarization spectrum. We first investigate population-level network formation mechanisms that closely model the polarization seen empirically, particularly in the United States. In doing so, we pay a particular close attention to how polarization undergoes a phase change from ideological to affective, which has significant implications for adversarial transactions such as audits. We then discuss the problem of auditor screening from the perspective of an impartial audit committee in a dynamic setting, where the pool of auditors is a sample from the population with a given level of polarization. Auditors (“agents”), just like other members
of the society (“individuals”), dynamically form their social networks to minimize cognitive dissonance that arises from the mismatch between actions implied by their own ideologies and circumstances, and those of their friends, family, and other members of their social network. We find that in equilibrium, given that individuals place sufficient weight on the behaviors of their peers when optimizing their actions (the affective polarization parameter), disparate network communities emerge that partition the network and action space. As a result, the group identity, rather than experiences or ideologies, of the auditor determines their action
particularly in situations without clear-cut answers. We then characterize the class of auditor selection mechanisms that are optimal for impartial audit committees. Given the CFO’s position on the polarization spectrum, the optimal auditor is one whose social network is the most homogeneously polarized on the opposite end of the spectrum."
Balance Sheet Constraints of Prime Brokers on Hedge Fund Performance: Evidence from GSIB Surcharge
Abstract
"Hedge funds often use leverage provided by prime brokers to enhance their investment returns. We investigate how prime brokers’ capital constraints impact the performance of connected hedge funds. At the hedge fund level, we construct a measure for prime brokers’ balance sheet constraints using the capital requirements under the Basel III framework. We document that tighter balance sheet constraints of prime brokers lead to lower future return, alpha, volatility, Sharpe ratio, and information ratio of the hedge funds. These findings are consistent with an analytical model in which prime brokers respond to balance sheet constraints by increasing leverage cost or decreasing leverage provision to hedge funds. The effects are generally stronger for smaller hedge funds andduring more capital binding times. Our results reveal the real effects of bank regulation on connected financial institutions via the services of prime brokers."
Bank Funding to Nonbank Financiers: Risk-sharing or Regulatory Arbitrage?
Abstract
This paper documents a paradigm shift in financial intermediation: banks fund nonbank financiers (95% through contingent funding or credit lines) while nonbank financiers hold approx. 84% of corporate term loans. I theorize that such arrangement is efficient because nonbank financiers use credit lines to insure against inventory uncertainty, while banks enjoy liquidity advantage, making them natural providers of such insurance. I theorize that such arrangement is efficient because banks, with demand deposits, prefer short-term assets, while nonbanks align their funding with corporate loan maturity. I develop a quantitative macro-finance model calibrated to 3 decades of U.S. corporate loan data to study the macro impacts of nonbanks: 1) Bank-only economies experience 13% deeper loan contractions during crises compared to those with nonbanks; 2) Stabilizing nonbank sector lead to bigger but more volatile economies; 3) Interconnected financial systems where banks fund nonbanks extend more intermediated credit to firms but are more vulnerable in crises than segmented systems. Using my model as a policy lab, I examine the real impact of differentially regulating bank loans vs. credit lines, and discuss Fed proposals such as the Federal Liquidity Options (FLOs) to insure against nonbank funding risks.Behind Dollar Savings in Mutual Funds: Are Shifting Sands Threatening Financial Stability?
Abstract
"I unveil the predominance of money market-like mutual funds as source ofdollar savings in emerging markets and explore its consequences for financial
stability. Using Peruvian data, I find that households significantly save dollars
in mutual funds specialized in deposit investments, especially in foreign banks.
This choice enables them to earn higher returns compared to saving in domestic
banks. I associate this excess return to the ability of mutual funds to break the traditional market segmentation of dollar deposits. I identify a trade-off regarding
the effects on financial stability. On one side, the financial system is less exposed
to exchange rate risk as a sizable share of dollar savings is invested abroad. On
the other side, mutual funds become significant term-deposit holders in domestic
banks, which makes banks prone to withdrawals. After a meaningful mutual
fund redemption, banks substantially financed by mutual funds increased their
loan rates and sold their dollar securities."
Betting Against Others' Beta
Abstract
This study examines the asset pricing implications of foreign ownership in equity markets, focusing on the diversification demands of international investors. Using revealed preference, by decomposing fund performance into the home and world components, we find that international investors’ flows respond strongly to the world component, while not responsive to the home component, indicating a strong diversification demand. Funds that provide diversification benefits consistently exhibit lower alpha, tilting their portfolio towards stocks with a higher world and lower home beta. Among stocks with foreign ownership in the U.S. and international regions, a long-short strategy on positive world beta spreads yields significantly negative alpha. These findings underscore the influence of international investors' diversification demands on asset pricing.Big Data and Bigger Firms: A Labor Market Channel
Abstract
This paper investigates the impact of individual-level output data on labor redistribution towards large firms by analyzing the disclosure of employee output information through GitHub, the world's largest software management platform. GitHub tracks and publicly displays real-time individual contributions. In 2016, a policy change enabled GitHub users to display their total contributions more accurately on their profiles. Following this update, employees with 1 standard deviation higher GitHub contributions witnessed a 5% increase in job transitions to large firms, predominantly at the expense of smaller companies. While productive individuals left small firms for senior roles in larger companies, the latter retained them through internal promotions. The departure of productive workers led to an overall reduction in employment growth and productivity for small firms with more productive employees before the shock. Our findings highlight labor-related big data's role in amplifying large firms' dominance in recent years.Branching Out: The Role of Selection in Bank Branch Entry and Economic Growth
Abstract
"I study the relationship between bank branch entry and local economic growthby exploiting variation in completion across planned branches. Areas where a
branch was planned but withdrawn exhibit higher growth in light emissions, an
economic proxy, compared to similar areas (selection effect). However, locations
where a branch was opened do not significantly outgrow locations where a branch
was planned but withdrawn (treatment effect). Using zip code level business formations or SBA-7a loan amounts as outcome variables yields similar results. Selection effects outweigh treatment effects by a factor of between six to twenty-five. These findings challenge previous studies reporting positive treatment effects of bank branches, and instead emphasize banks’ skill in selecting locations poised for growth."
Breaking Network Barriers in the Era of Data-Driven Venture Capitalists
Abstract
Financial intermediaries are increasingly using digital data and machine learning techniques to inform their investment decision process. One underexplored advantage of data-driven approaches is the use of these technologies to expand investors' investment opportunity sets. This paper examines the impact of data technologies on sourcing deal flow in the Venture Capital (VC) industry. The VC industry is critical for financing young, innovative firms, yet traditional deal sourcing methods are often limited to established networks and geographic clusters. I find that after VCs adopt data technologies, they are more likely to invest in firms outside of their typical networks, as proxied by startups located in areas with low history of VC activity. Results are robust to isolating plausibly exogenous variations in VCs' pre-exposure to data technologies, specifically artificial intelligence, suggesting a causality between data technology adoption and these effects. In addition, I find that data-driven investments in areas with historically low VC presence stimulate entrepreneurial activity, suggesting potential policy implications for fostering regional innovation.Campaign Rallies, Perceived Uncertainty, and Household Borrowing
Abstract
This paper examines how political compaign visits during the 2016 U.S. presidential election influences perceptions of economic uncertainty and subsequent household financial behaviors. Using a difference-in-differences approach, I show that Clinton's rally visits reduced perceived economic uncertainty, particularly macro uncertainty. Each Clinton rally, on average, decreases perceived macro uncertainty by 0.1 standard deviation (SD), equivalent to an annual income increase by $17,850, and the immediate effect is similar to providing second-moment information about macroeconomics directly. The effects are stronger for individuals without college degree, who are likely to be less informed before the visits. However, the effects remain consistent across areas with different partisan preference, as proxied by the party vote share in the 2012 elections. Moreover, areas hosting rallies showed an increase in P2P and mortgage loan applications after Clinton's visits. Effects are stronger in areas having higher initial level of economic uncertainty, aligning with life-cycle models with precautionary motives, and the increase in borrowing are not solely driven by the supply side. In contrast, Trump's rallies did not significantly influence uncertainty perceptions or borrowing decisions. These findings shed light on a novel channel through which campaign information shapes real financial decisions, with effects contingent on the candidate involved.CEO’s Political Contribution and Rewards - Lei Chen - University of Melbourne
Abstract
Existing literature on company political connections often proxies these connections solely by company PAC contributions, overlooking the CEO's political contributions. This assumes that the CEO's contributions are driven by ideology and are not expected to generate benefits. This paper challenges that perspective, seeking to unravel the economic outcomes of the CEO's political contributions. Using various measures of CEO contributions, this study finds that CEO contributions significantly enhance a firm’s procurement contracts, after controlling for other firm political connections. Additionally, these contributions are associated with better firm performance, beyond the effects of increased procurement contracts, and higher CEO compensation, beyond the effects of improved firm performance. Thus, CEO contributions serve as an important channel to build firm political connections, bringing both corporate and personal benefits.Convenience Yields in Euros: Investment Mandates and Conditional QE
Abstract
I show that when governments borrow in euros through entities that are not formally sovereigns (such as supranationals) they all pay a common interest rate regardless of default risk, market size, or liquidity. This rate is significantly higher than for sovereign debt and more exposed to expectations about monetary policy. I develop a model consistent with these facts by exploring the role of investment mandates that reduce the size of potential investors in supranationals relative to equally safe governments. The smaller size of potential buyers translates into lower expected liquidity during crises such that supranationals must pay a premium even during normal times. This mechanism is driven by investors with potential liquidity needs during crises such as mutual funds. Expectations about asset purchases during crises, which I call conditional QE, can significantly compress this premium even if they are not targeted.Corporate Agility and Monetary Policy Transmission
Abstract
Corporate agility –ability to respond quickly and effectively to changing business environment– is crucial for firms’ success. While important, this concept is difficult to measure and use in quantitative research. By applying machine learning techniques, we develop a reliable measure of agility, and we analyse how agile firms manage exposure to monetary policy uncertainty, which is a significant and frequently occurring form of threat. Agile firms’ stocks are exposed significantly less to this uncertainty as they proactively apply risk management techniques to reduce their exposure. This has real consequences: agile firm’s investments get affected less by monetary policy tightening episodes.Corporate Debt Maturity and Output Price Dynamics
Abstract
"This paper examines firms’ optimal choices of debt maturity and their influences onpricing behaviors. To explore the link between firms’ debt maturity structures and pricing behavior, we leverage both a credit supply shock and a monetary policy shock. Using novel datasets, we present new evidence demonstrating that a heightened level of short-term debt ratio leads to sharp increases in firms’ output prices. The observed connection between short-term debt ratio and pricing behavior suggests that firms strategically sought to increase revenue to mitigate rollover risk when facing imminent debt repayment. Overall, our analysis highlights the important role played by debt maturity as a determinant influencing firms’ pricing decisions."
Corporate Finance with Asset Demand
Abstract
Investor demand for corporate bond and equity affects firms' financial and investment decisions. I develop a dynamic investment model with endogenous financing constraints in which differential bond demand and equity demand contribute to the firm's choice between bond and equity financing. Combining demand system asset pricing and dynamic investment models, I quantify the effects of asset demand on firms' leverage and real investment. Variations in asset demand generate capital misallocation; nevertheless, bond demand ameliorates capital misallocation when it does not fully coincide with equity demand. Applying this framework to study the impact of sustainable investing, I find that sustainable investing reduces leverage and increases real investment of sustainable firms.Data Breach Information, Hospital Financing, and Patient Outcomes
Abstract
I examine the costs and real effects of medical data breaches using a stacked difference-in-differences research design. I find that data breaches increase the cost of healthcare financing and examine three mechanisms that link data breaches to increased costs. Data breaches increase issuer credit risk, and hacks, specifically, decrease hospital revenues because patients substitute breached hospital services for the services of non-breached hospitals nearby. This substitution does not hurt the patients of breached hospitals but leads to worse outcomes for patients of nearby hospitals. Interestingly, although only hacks have an impact on hospital revenues, investors do not require an incremental premium for investing in bonds of hacked issuers. Lastly, I find evidence that the pricing of breached bonds is influenced by investor attention towards breaches. Altogether, my results suggest that investors are potentially uninformed regarding the nuances of different types of breaches and how the market responds to breaches may not necessarily reflect how the events actually affect breached entities.Decentralized and Centralized Options Trading: A Risk Premia Perspective
Abstract
On-Chain options refer to option contracts, that are traded directly on a Decentralized Exchange on the Ethereum blockchain. We explain the functioning of this new market form, so-called automated market making for options trading, and report a novel set of stylized facts. We provide a comprehensive analysis of On-Chain options and compare their attributes to their Off-Chain counterparts on centralized exchanges. We identify an On-Chain risk premium stemming from the positive disparity in implied volatility between On-Chain and Off-Chain options, attributing it to factors like the complex On-Chain fee structure, trading volume, and net demand pressure.Demand-Based Expected Returns
Abstract
"This paper proposes a theoretical framework for recovering investors’ subjectivebeliefs/expected returns using holdings data and option prices under the assumption
of no-arbitrage. We empirically document that the statistical properties of subjective
expected returns on the market differ wildly across investor type and depend crucially
on their portfolio composition. While expected returns estimated from price data alone
suggest that expected returns are highly volatile and countercyclical, including holdings
data can imply returns that are less volatile and procyclical. Using buy and sell orders on
S&P500 options, we show that the expected returns inferred from retail and institutional
investor beliefs increase in bad times when they become the net suppliers of crash
insurance in option markets, mirroring price-based estimates.Market makers’ expected
returns decrease during bad times when they become the net buyers of crash protection
when their constraints bind. Our findings are in line with the survey literature that
documents large heterogeneity in measures of expected returns."
Demonetized Q: Tobin Meets Jorgenson
Abstract
I show that the interest rate has a moderating effect on the relation between Tobin’s Q and investment. Specifically, including the nominal fed funds rate in the classic investment-Q regression significantly improves the model fit. Equivalently, I construct a novel measure named "demonetized Q", that is, the residual from the projection of the Tobin’s Q onto the nominal interest rate. I show that demonetized Q possesses much higher explanatory power for aggregate investment, both in level and in changes and robust across subsamples. Furthermore, I show that demonetized Q captures unique information about investment that bond’s Q from Philippon (2009) does not have. In addition, demonetized Q exhibits significantly stronger return predictability than average Q. The nominal fed funds rate could potentially capture stochastic variations in financial conditions or financial constraints that act like "investment wedges" in the sense of Chari, Kehoe, and McGrattan (2007) or "supply shocks" in the framework of Li and Liu (2023).Dilutive Financing
Abstract
This paper builds a dynamic model of corporate financing where financial slack arises from bargaining. When financiers with bargaining power extract rent from cash-strapped firms, firms---despite the absence of fixed transaction costs or search frictions---finance in lumps to bargain infrequently, and typically before exhausting internal funds to strengthen outside option. Continuation value directly amplifies rent, rationalizing large cash-holdings of `growth' firms. Firms with robust financing access preserve internal funding capacity that substantially exceeds the size of investment opportunities, whereas firms relying on concentrated financiers may externally finance investment despite sufficient funds yet forgo investment with even more funds.Disentangling the loan premium: The value of bank lending
Abstract
Schwert (2020) shows that firms borrowing from both banks and the corporate bond market pay a substantial premium on bank loans, raising questions about firms' bargaining power and banks' competition. In this paper, I show that a large portion of the bank loan premium can be explained as a payment to bank lenders for facilitating out-of-court restructurings. This suggests a value creation from bank lending activities. Using a sample of loans matched with bond quotes, I estimate a loan premium of around 95 bps. I examine the effect of a U.S. court ruling in 2014 that disrupted market expectations and disincentivized out-of-court restructurings. Following the ruling, more affected firms experience a dramatic decrease in the loan premium by 70-90 bps, due to fewer restructuring opportunities and diminished potential for avoiding bankruptcy costs. Additionally, I show that a minor portion of the premium compensates for the prepayment flexibility in the loan contracts.Disruptive Innovation and IPO Outcomes: Evidence from Machine Learning
Abstract
We develop a new text-based measure of a firm’s engagement in disruptive innovation that does not require data on R&D or patents. We compute a disruptive innovation score (DIS) for firms doing IPOs using textual analysis of prospectuses and a semi-supervised machine learning method. DIS strongly and positively predicts firms’ pre-IPO observable innovation activities, which validates our measure. We find that DIS positively predicts IPO outcomes such as initial return, trading volume, bid-ask spread, and price revision, consistent with disruptive innovation entailing high uncertainty and information asymmetry. These results are robust to a variety of controls, a propensity score matching approach, and the exclusion of technology stocks, the technology bubble period and the financial crisis period. DIS positively predicts one-year post-IPO abnormal return, and the initial returns of high DIS IPOs do not reverse over the next year, contradicting the hype hypothesis about technology stocks. Finally, DIS predicts post-IPO firm policies (such as lower leverage, higher cash holdings, and higher innovation activities) and higher firm valuation. Overall, our findings imply that disruptive innovation is not only a risky but also valuable activity for firms, and our text-based DIS measure captures disruptive innovation activities of IPO firms beyond R&D and patenting.Do ESG Investors care about carbon emissions? Evidence from securitized auto loans
Abstract
Securitized auto loans present a clean empirical setting to study the effects of ESG investing on equilibrium asset prices and quantities. I find that the convenience yield of ESG investments increased almost threefold from 0.14% in 2017 to 0.39% p.a. in 2022. The pass-through of this convenience yield to consumer interest rates can be substantial for captive lenders, with implied changes in consumer loan demand ranging from 1.05% to 4.77%. However, I document that the market's focus on firm-level ESG scores, rather than the collateral's CO2 emissions, lowers the cost of capital for high-emission auto ABS by 6 basis points; due to a positive correlation between ESG scores and CO2 emissions. ESG mutual funds allocate more capital to auto ABS from issuers with higher ESG scores, even if those securities finance higher-emission vehicles. These findings highlight that while green premia can have a meaningful impact, they do not necessarily increase the cost of emitting CO2.Does Options Trading Matter for Market Volatility and Hedging Effectiveness? Evidence from the 1936 Options Trading Ban on Futures Markets in the US
Abstract
Commodity options provide a useful tool for farmers to hedge against adverse price movements, but they can also be used as a tool for speculation, potentially increasing market volatility. This paper examines the effects of a 1936 ban on commodity options trading on both hedging effectiveness and price volatility, using newly collected data for Chicago and London futures markets and a difference-in-differences approach that exploits the fact that commodity options were banned in US but not in the UK. We find that in the short term, the volatility of grain futures prices in Chicago increased significantly post-ban. In the long term, our findings suggest that the ban decreased volatility by a significant margin, driven by the fact that there was no repeat of the severe manipulation of wheat markets that had occurred in 1933. However, this came at the cost of a reduction in hedging effectiveness in US grain futures markets.Does Sustainable Investing Dull Stock Reactions to Cash Flow News?
Abstract
"The growing importance of sustainability criteria for investment decisions suggests that cash-flow news may become less significant in determining stock prices. We examine this proposition through earnings announcements, showing that stocks owned by sustainable investors are 45%–58% less sensitive to earnings news. This reduced sensitivity is accompanied by lower trading volume and persists post-announcement, indicating a lasting impact on price formation rather than temporarymispricing. We investigate the reasons behind the weaker earnings response and find that it cannot be explained by differences in earnings news content, market anticipation, or ownership by other investor types. Calibrating a flexible present value framework reveals that lower earnings persistence in high-sustainable-ownership stocks accounts for a large part of the effect. However, our analysis
also implies a 1%–3% reduced discount rate for stocks with high sustainable ownership in order to fully align the model-implied price response with the observed data."
Drivers and Effects of Radical vs. Incremental Innovation Purchases
Abstract
I examine whether acquirers can exploit the stock of innovative ideas of targets in a sample of public-to-public M&A deals. I distinguish between radical innovation, which involves cutting-edge technologies that are influential for a wide range of future technologies, and incremental innovation, which leverages already established innovations in new ways. Using a new hand-collected database that has market values for radical and incremental innovations, I provide two sets of findings. First, the purchased innovations positively influence the sales growth of the new entity through the adoption of new technologies. Second, acquirers relying on scope and scale tend to pursue acquisitions focused on radical innovation, whereas cash-endowed acquirers gravitate towards incremental innovations.Dynamic Market Choice
Abstract
In practice, we find assets traded in the transparent centralized market and opaque decentralized market. To explain the traders' choices of venues, we develop a model of dynamic learning and dynamic market choices between the centralized market and decentralized markets. With heterogeneous trader value correlations, we find that when asset sensitivity or volatility is sufficiently low, traders prefer the decentralized market; when asset sensitivity or volatility is intermediate, switching between centralized and decentralized markets can be the optimal market choice; when asset values are sensitive to volatile fundamentals, assets are traded only in the centralized market. We provide empirical evidence in support of the model predictions. We discussed the welfare implications of various market designs under endogenous market choices. We find that introducing post-trade transparency in the decentralized market improves welfare. Surprisingly, introducing pre-trade transparency in the decentralized market may decrease welfare as it increases traders' incentives to choose a decentralized market earlier and hurts future traders in the centralized market.Economic Linkages from the Wisdom of Crowds
Abstract
Using text data from the Reddit platform, we construct inter-firm linkages based on shared threads and shared authors within social media. We find that firms linked via social media exhibit correlated fundamentals across various characteristics. The returns of Reddit peer stocks positively predict focal stocks’ future returns, suggesting sluggish dissemination of latent information within the social media network. This lead-lag effect is also robust to controlling for other firm characteristics and alternative inter-firm connections. Our findings suggest that social media activities contain collective perceptions of connectedness between firms, thereby providing an implicit representation of the financial network.Empirical Asset Pricing with Probability Forecasts
Abstract
We study probability forecasts in the context of cross-sectional asset pricing with a large number of firm characteristics. Empirically, we find that a simple probability forecast model can surprisingly perform as well as a sophisticated probability forecast model, all of which deliver long-short portfolios whose Sharpe ratios are comparable to those of the widely used return forecasts. Moreover, we show that combining probability forecasts with return forecasts yields superior portfolio performance versus using each type of forecast individually, suggesting that probability forecasts provide valuable information beyond return forecasts for our understanding of the cross-section of stock returns.Entrepreneur Experience and Success: Causal Evidence from Immigration Wait Lines
Abstract
This paper investigates the causal impact of entrepreneurs' prior experience on startup success. Employing within-country changes in Green Card wait lines to instrument for immigrant first-time entrepreneurs' experience, we uncover that startups led by more experienced founders demonstrate superior funding, patenting, and employee growth. Specifically, each additional year of founder experience leads to a 0.7 p.p. (1 p.p.) increase in the likelihood of a startup undergoing an IPO (growing to over 1000 employees), over the subsequent decade. The larger initial team size, facilitated by the improved ability to recruit former colleagues, explains the observed startup success. Our findings imply that each extra year of experience is worth $200,000, underscoring a critical consideration for policymakers in the design of startup incubators.Equity Flows Induced by Monetary Policy: The Roles of Financial Intermediation and Investor Performance Sensitivity
Abstract
We develop a theory and provide measurement of equity flows across heterogeneous financial intermediaries due to monetary policy. We build an analytical intermediary-based asset pricing model where a household delegates wealth between a bank and mutual fund. The model demonstrates that in response to contractionary monetary policy, mutual funds should experience equity outflows which are absorbed by bank balance sheets. We provide empirical evidence for this claim and show that mutual funds sell significant amounts of equity quantities after a contractionary shock. To clear asset markets, we find that banks market-make and purchase equity. We confirm that the outflows mutual funds experience are net worth declines by verifying that mutual funds do not rebalance assets across alternative asset classes in response to monetary policy. We emphasize the role of investor sensitivity to recent performance of their mutual funds as a mechanism which amplifies equity redistribution due to monetary policy. We find that performance-sensitive mutual funds experience additional outflows while such a channel does not exist for banks.Expansion of Deposit Insurance: Adverse Selection Following 2023 Banking Crises
Abstract
"We examine whether banks whose uninsured deposits were subject to greater risk of loss prior tothe March 2023 banking crisis used institutional mechanisms to expand their deposit insurance
coverage after the crisis. Based on a sample of almost 4,600 U.S. banks, we construct bank-level
measures of pre-crisis uninsured depositor risk using bank financial statements, unrealized security
losses, and estimates of unrealized loan losses due to interest rate risk. We then analyze whether
riskier banks sought higher post-crisis insured deposits using reciprocal deposits networks, insured
deposit sweep programs, fully-insured brokered deposits, and listing service deposits. We find that
riskier banks tended to employ reciprocal and sweep deposits, but not brokered or listing service
deposits, at greater rates relative to their lower risk peers. Reciprocal deposits were the favored
avenue of risky midsized (regional) banks while they and risky large banks also attracted more
insured sweep deposits. Overall, our results are indicative of adverse selection in the post-crisis
expansion of federal deposit insurance."
External Governance Responses to Major Environmental and Social Incidents
Abstract
We explore shareholder responses at the next director election following a firm's recent major environmental and social (ES) incidents. Our findings reveal that incumbent directors experience lower shareholder approval rates following major ES incidents. Dissenting director votes increase when ES incidents are financially material and unexpected. Post-ES incidents, female directors lose more support from shareholders, while membership in no board committee stands out in terms of receiving increased dissenting votes. Boards are more likely to respond to negative shareholder votes following major ES incidents by linking executive pay to short-term (but not long-term) sustainability goals. We find no evidence that increasing dissenting votes leads to improved long-term ES policies. This finding may underscore the necessity of establishing guidelines to clarify board accountability for sustainability practice. Institutional investors should consider providing more comprehensive rationales for their director voting decisions, so as to facilitate significant improvements in firms' sustainability practices.Financial Health Scoring and Personal Finances
Abstract
We investigate the effect of disclosing the financial well-being score from the Consumer Financial Protection Bureau on consumer financial behavior in an online experiment with American participants sourced through Prolific. We find that solely providing the score to participants does not influence their financial behavior as measured by risk taking or the marginal propensity to save. However, adding information on the national average significantly decreases risk taking and significantly increases the marginal propensity to save. In contrast, solely providing the score significantly decreases perceived financial security. Adding the national average mitigates this effect. Given their increasing promotion, distribution, and accessibility exploring the effects of financial well-being scores on consumer finances is highly relevant to policymakers, industry, and consumers. With our experiment we provide novel evidence on the effects of disclosing such information and add to the increasing literature on peer effects in consumer finance.From Preference to Influence: The Economics of Activist Investing
Abstract
Index funds provide investors with diversification benefits but usually hold relatively small stakes in their portfolio firms. Conversely, active funds often maintain significant shares, enabling them to influence portfolio firms and potentially generate externalities. In a model where investors trade off between diversification and concentration, I show that due to agency frictions between active fund managers and investors, the equilibrium level of externalities is lower when the likelihood of these externalities is higher. This is because active funds, in competition with index funds, must weigh the costs of generating externalities against attracting investment flows. Additionally, when investors are dispersed, active funds can act as a coordination mechanism, delivering externality levels that align with the diverse preferences of investors. This coordination can help mitigate the welfare loss associated with agency frictions.Firm-Level Labor-Shortage Exposure
Abstract
We use FinBERT to extract information from earnings conference call transcripts to develop a novel and reliable measure of labor shortage exposure. We demonstrate the validity of our measure by showing that states with higher levels of labor-shortage exposure experience lower future unemployment rates but higher wage growth and local labor market tightness, while firms with higher labor-shortage exposure have greater growth in future per-employee staff expenses. Firms with labor-shortage exposures experience lower earnings call CARs, future stock returns and operating performance. Firms respond to labor shortages by substituting labor with capital and R&D investments, and by producing more production-process patents. Such measures mitigate the negative effects on future performance. Our results demonstrate a fruitful application of machine learning to finance and provide insight into labor-capital substitution in response to increasingly expensive and scarce labor.From Availability to Affordability: The Role of Small Dollar Mortgage in Cash vs. Mortgage Property Price Disparities
Abstract
Following the Global Financial Crisis (GFC), the US housing market experienced an increase in all-cash transactions among low-cost properties, and higher cash discounts for these transactions. We highlight the attendant decline in small-dollar mortgage lending as a causal mechanism. Using the expansion of enforcement actions on mortgage fraud post-GFC as an instrument for local small credit supply, we find that a one-percentage-point decrease in small loan approvals increases cash discounts by 8.4%. The impact is larger in low-cost houses and disadvantaged communities. The results point to the cause for the observed overall decrease in relative prices for low-cost houses, highlighting the importance of small loan availability for wealth-building through homeownership among lower-income households.Funding Frictions and Credit Supply: Evidence from Savings and Loan Associations
Abstract
"Deposits are the cheapest source of funding for financial intermediaries. Howdo funding frictions curtail credit supply in the economy? I leverage a unique setting
where deposit rate ceilings reduced inflow of deposits at financial intermediaries from
1960s–1980s. Using financial report data from savings and loan associations (S&Ls)
and banks, I develop a novel method to measure the binding constraints of deposit
interest rate ceilings. My findings document that deposit rate ceilings induced downward
shifts in credit supply in the mortgage market. A 100-basis-point increase in the
binding constraint of deposit rate ceilings is associated with 8.22% annualized decline
in mortgage growth among S&Ls. This is in contrast to commercial banks which experienced
smaller contraction in mortgage lending due to access to alternative funding."
Homemade Unleverage, or: Do Households Care About the Employer’s Capital Structure?
Abstract
Exploiting a rich dataset of matched households and employers, I provide novel evidence on the impact of the employer's capital structure on employees' consumption and saving decisions. Notwithstanding receiving lower wages, households working for highly leveraged employers exhibit lower marginal propensities to consume, with this effect being driven by cutting in "luxury" goods and services. To establish causality, I look at employees' responses to negative industry-wide shocks and find that only those employed by high-leverage firms cut consumption, though I find no differential effect on wages. I reconcile these facts with a Diamond-Mortensen-Pissarides matching model, in which heterogeneous risk-averse employees bargain with heterogeneous employers to determine wages. Consistent with the model, I find that the consumption response is mainly driven by poorer households, for whom unemployment is more painful. Overall, evidence is suggestive that financial distress costs are being partially shifted to employees.Homeowners Responses to the New Price of Flood Insurance
Abstract
As climate risks intensify, the low demand for flood insurance has been a significant public policy concern. This study examines the demand for residential flood insurance following the implementation of a reform that adjusts pricing to more accurately reflect flood risk. Using a difference-in-differences analysis, we evaluate the impact of this pricing reform on flood insurance take-up rates. On average, a 1% increase in premiums reduces insurance take-up by 19%. We find that policyholders who experienced premium changes are more responsive in their take-up than those who did not. Lack of effect on renewal rates in high-risk areas may be attributed to mandatory insurance requirements. Renewal rates in low-risk areas are more responsive to premium changes than in high-risk areas. One explanation could be that policyholders rely on outdated risk information when making renewal decisions. These insights into the price sensitivity of homeowners help better understand how to improve pricing strategies and maintain equity and accessibility in the flood insurance program, potentially encouraging higher participation.How Climate Physical Risks and Transition Risks Affect Bank Lending
Abstract
This study examines how banks incorporate firms’ exposure to physical and transition risks, along with their interactions, when making lending decisions. Utilizing detailed firm-bank matched data from Denmark—which covers a wide range of firms, with a special focus on SMEs, and banks of various sizes—we find that banks generally reduce the growth of credit for firms exposed to higher physical and transition risks. We also see a nuanced response to the interaction of physical and transition risks from banks, which seem to favor firms with slightly lower combined risks. Additionally, small firms and those with high leverage and capital intensity are particularly impacted, experiencing a notable decline in credit growth. Lastly, the results primarily stem from the impact on the supply side of credit rather than the demand side.How Do ETFs Affect Stock Volatility?
Abstract
"This paper offers evidence supporting ETFs shield underlying from demand shocks.Because ETFs are designed with secondary markets, ETF trading can substitute trading in underlying, and thus absorb demand shocks that would otherwise move underlying prices. I find U.S. common stocks that would have been more heavily traded without equity ETFs display lower volatility from 2011 to 2021, consistent with ETF secondary market trading providing liquidity buffer to underlying.
Further, I show this liquidity provision channel complements the demand propagation channel established in the literature by differentiating ETF trading from ETF ownership. The effects from both channels are significant even after restricting volatility changes to these exogenously driven by the NASDAQ 100 index reconstitutions."
How Does VC Specialization Backfire in Startup Experimentation?
Abstract
"Prior research suggests that specialized VC funds with small portfolios benefit startup performance due to active investor engagement. Using project-level data from the life sciencesector, we investigate this argument through a novel channel of VC activism: the strategic
decision of project prioritization. We document that despite more interactions from smaller
and more focused VCs, their biotech startups are less likely to exit via IPOs. Consistent with
such activism prematurely prioritizing the research pipeline, startups backed by concentrated VCs exhibit slower progress in clinical trials and tend to discontinue projects due
to pipeline priority rather than other reasons. For identification, we use limited partners’
adoption of ESG objectives as instruments for affected VCs’ portfolio size and diversification. Lastly, we highlight conflicting experimentation preferences between general partners and founding teams due to investment horizon and diversification."
Impact of Culture in Peer to Peer Lending
Abstract
"We document that culture and cultural perception both influence financial decisions. We examine the impact of clan culture, an important dimension of Chinese culture, on individual lending behavior. Using data from RenRenDai, a leading peer-to-peer lending platform in China, we find that borrowers from regions with higher clan culture are more likely to get loans funded, attract larger bids from lenders, get loans funded faster, are less likely to default, and repay a larger fraction of their loans. These effects are more pronounced when borrowers are riskier, there is greater information asymmetry, and the legal environment is weaker. These results are robust to potential endogeneity concerns and to alternative measures of clan culture. We show that clan culture acts as a substitute for formalinstitutional mechanisms and participants in the peer-to-peer market use information about clan culture as a proxy for economic factors. Our results suggest that cultural considerations improve efficiency of financial decisions."
Impact of Institutional Owners on Housing Markets
Abstract
Since the Great Recession, the rise of single-family rental companies has changed the investor ownership landscape in the U.S. Using housing transaction data, we document the rise of Long Term Rental (LTR) companies, defined as inclusive of single-family rental, rent-to-own, and real estate private equity firms, by constructing a panel of national single-family housing portfolios between 2010 and 2022. We show that LTR growth outstripped all other investor types, such as builders, iBuyers, and small investors, over the last decade. These companies geographically concentrate their holdings in select census tracts and expand their local market shares over time. To estimate LTRs’ impacts on local housing markets, we construct a novel instrument predicting LTR entry, which we name the ``suitability index." In the cross-section, this instrument leverages differential revealed preferences in product characteristics across landlord types. In the time-series, we interact these differential product preferences with a proxy for falling property management costs over time. In the first stage, more suitable locations for LTRs experience higher growth in LTR shares: a one-standard-deviation increase in the instrument implies a 23% higher annual growth in LTR share relative to the baseline mean. We use this instrument for LTR market entry to estimate the causal impact of LTR market share on local house prices. We find that a one-standard-deviation above the mean increase in LTR share growth leads to an annual additional house price growth of 2.11pp and additional rent growth of 2.19pp. Finally, we discuss how the reallocation of homeownership across small and large landlords, as well as owner-occupants and investors, contribute to these price increases.Inattention to the Coming Storm? Rising Seas and Sovereign Credit Risk
Abstract
This study examines whether the sovereign credit market integrates information on coastal flooding and sea level rise (SLR) hazards. Using credit default swap spreads as measures of credit quality, I find that medium- to long-term risk for sovereigns with a significant portion of their population vulnerable to ex-ante coastal flooding increases in response to climate summit news. Additionally, I document that the market asynchronously incorporates changing vulnerabilities of regions into its risk assessment with such news. In- and out-of-sample predictability tests suggest that the market lags in integrating adverse trends in exposure under projections of SLR and population growth, indicating a lack of attention to complex climate information. Finally, I demonstrate that these projections have historically been inaccurate, leading to mispricing.Increased Creditor Protection and Trade Credit: Evidence from India
Abstract
Trade credit provides customers the flexibility to procure goods from their suppliers without immediate cash payment, serving as a fundamental form of short-term financing. If creditors are granted increased legal protection when a customer defaults, does the availability of trade credit increase or decrease? This is an important consideration since creditor rights can influence both the supply and demand of credit. This paper investigates this conundrum by leveraging a recent bankruptcy reform in India which increased legal protection of creditors. In a difference-in-differences setting, I find an uptick in the trade credit usage of firms closer to default. This effect is concentrated in small firms with limited growth prospects, poor working capital management and operating in industries with less reliance on inputs from other industries. However, this increase in trade credit usage among the less efficient subset of distressed firms is not accompanied by an offset in their profitability. These results underscore the importance of strong creditor rights in sustaining financially vulnerable firms, essential for economic resilience in developing economies.Inequality and the Rise of Finance
Abstract
"This paper studies the causes behind the rise of the financial sector observed in the UnitedStates from the 1980s. The growth of the financial sector is seen from the perspective of an
endogenous rise of non-bank financial institutions (shadow banking sector). The shadow
banking sector rises as a result of a domestic safe asset shortage. An increase in wealth
inequality induces a higher amount of savings to invest in the hands of the wealthier households
– the investors. Investors need to allocate their holdings between risky and safe assets.
Given a constrained supply of public safe assets, real interest rates decline to accommodate
the larger demand. A compression of the real interest rates reduces the costs of issuing debt
for the poorer households, and represents the incentive for the shadow banking system to
step in by transforming the debt of the poorer households into the private safe assets that
the investors demand. The model allows for an endogenous and non-mechanical feedback
loop between inequality and finance. The primitive increase in wealth inequality is obtained
through non-trivial dynamics generated by an exogenous decline in the labor share. The financial
sector rises in size and changes in structure as a result of secular macroeconomic
forces. The paper is quantitative in spirit with a few empirical exercises which corroborate
the model predictions."
Inflation Hedging and Pricing Power
Abstract
Historically, the average stock has been a surprisingly poor hedge during inflationary periods. We show theoretically and empirically that the relative pricing power of firms, that is, both in relation to customers and to other stakeholders such as employees, is an important, but hitherto understudied driver of hedging properties. The negative market reaction to inflation shocks is mitigated by a half for firms with above-median pricing power. Free cash flows of firms with high pricing power are more resilient after inflation shocks. However, analysts do not incorporate this in their forecasts. Instead, the greater inflation-resilience of pricing power seems to be due to lower perceived risk. Specifically, investors apply lower discount rates to firms with greater pricing power. Overall, our findings suggest that stock market participants can benefit from hedging effects when owning high pricing power shares in inflationary periods.Information Partitioning, Learning, and Beliefs
Abstract
We experimentally study how information partitioning affects learning and beliefs. Holding the informational content constant, we show that observing small pieces of information at higher frequency (narrow brackets) causes beliefs to become overly sensitive to recent signals compared to observing larger pieces of information at lower frequency (broad brackets). As a result, partitioning information in narrow or broad brackets causally affects judgements. Observing information in narrow brackets leads to less accurate beliefs and to worse recall than observing information in broad brackets. As mechanism, we provide direct evidence that partitioning information into narrower brackets shifts attention from the macro-level to the micro-level, which leads people to overweight recent signals when forming beliefs.Insurance Companies, Asset Managers and Economies of scale
Abstract
External advisers are increasingly common in the insurance sector, with BlackRock Financial Management Inc. being the most prominent, advising over 47 life insurers in the past six years. This study explores the implications of insurers relying on the same external adviser, particularly in terms of portfolio similarity among insurers. Using cosine measures, I find that insurers with the same advisors have portfolios that are three times more similar compared to those of unrelated insurers. Similar trends are observed between insurers and corporate bond mutual funds managed by the same advisors. To address concerns about endogeneity, I further analyze the SMCCF (Secondary Market Corporate Credit Facility), also managed by BlackRock during the Covid-19 crisis. I show that the SMCCF portfolio is significantly more similar to the portfolios of insurers advised by BlackRock than to those of other insurers. The findings suggest that external advisors may leverage economies of scale by purchasing similar assets for their clients. Importantly, increasingly similar portfolios among insurers and between insurers and other investors raise important concerns about growing systemic risk in the insurance industry. [work in progress]Intellectual Property Protection and Staying Private Longer
Abstract
Why are U.S. firms staying private longer? I analyze how the legal protection of a specific type of intellectual property - trade secrets - affects a firm's decision to undergo an initial public offering (IPO). My identification strategy exploits the staggered adoption of the Uniform Trade Secret Act (UTSA) in 50 U.S. states and the Federal enactment of the Defend Trade Secret Act in 2016 (DTSA). Between 1980 and 2015, the UTSA delayed IPOs and prolonged private tenure by 9 to 13 months. This accounts for approximately 15% to 21% of the overall larger increase in the duration of firms remaining private in the U.S. during the same timeframe. The DTSA made firms to stay private for 16 months longer. The primary factor driving these findings is the enhanced appeal of trade secrets over the other types of intellectual property protection including patents. Unlike patents, trade secrets do not require disclosure of information and offer the greatest advantages when the firm is private.Intergenerational Effects of Debt Relief: Evidence from Bankruptcy Protection
Abstract
Using bankruptcy filing information for parents matched to administrative data on their children and leniency of the randomly assigned judges as an instrument, we document the effect of parental bankruptcy protection on children's income and intergenerational mobility. We find that children whose parents receive Chapter 13 bankruptcy protection earn $1,755 (or 5.6%) higher annual income relative to those whose parents file for but do not receive protection. Our results are increasing in the duration lapsed from filing and over the life cycle of children. Parental bankruptcy protection leads to higher income by 2.8% at age 20, 8.8% at age 25 and 35.4% at age 40. Back-of-the-envelope calculations suggest that for one dollar of debt relief granted to parents through Chapter 13 protection their children earn two dollars more in adjusted present value of lifetime earnings. Children of parents who receive protection are more likely to be in the top tercile of income distribution, which is driven by an increase in intergenerational upward mobility for children whose parents receive protection rather than an increase in downward mobility for those whose parents were denied protection. These results highlight the potential role of bankruptcy protection and debt relief more broadly in helping improve intergenerational mobility for low-income distressed households. Finally, our results are most consistent with higher investment in education and skill-development as the mechanism contributing to these findings. We do not find support for neighborhood effects driving our estimates.Intergenerational Effects of Financial Crises. Evidence from the Panic of 1873
Abstract
I investigate the long-term impacts of financial crises on the socioeconomic outcomes of households. My research focuses on the first 'Great Depression,' which began with the Panic of 1873 in the United States. Utilizing spatial variation in the crisis's severity and linked census and administrative records from 1870 to 2000, I trace the economic outcomes of descendants based on their ancestors' exposure levels to the crisis. The findings reveal that disparities between descendants have persisted across four generations. Descendants of ancestors who had higher exposure to the crisis exhibit lower levels of education, income, and wealth. These effects are particularly pronounced for descendants of ancestors in the bottom third of the wealth distribution. Household heads in the severely affected regions shifted to lower-skilled occupations and moved to more rural locations, thus limiting opportunities for future generations.Interpreting Cross-Section Returns of Machine Learning Models: Firm Characteristics and Moderation Effect through LIME
Abstract
Our study introduces a novel framework to interpret machine learning asset pricing models through the Local Interpretable Model-agnostic Explanations (LIME) method. This methodology illuminates how the inclusion of LIME local coefficients, representing the interaction among characteristics within ML models, modifies the relationship between a firm characteristic and stock returns. The empirical results underscore the significance of incorporating moderation effects into portfolio analysis. Our results present that certain firm characteristics exhibit varying long-short portfolio performance across LIME groups, suggesting their predictive power is specific to certain asset segments. These findings deepen our understanding of the complexities in cross-sectional stock returns, uncovering the detailed dynamics between firm characteristics and their return effects, and distinguishing our research from existing studies.Involuntary Disclosures through Climate Litigations: Impact on Investors and Corporate Policies
Abstract
"I study the role of involuntary disclosures in steering environmental governance.Using a sample of climate litigations filed between 2012 and 2019, I examine whether these
litigations shed new light on defendant firms’ climate risks and whether this information
is relevant enough to trigger investors’ reactions and impact corporate policies. I find that
on average climate litigations have no significant effect on firm value or emissions, and
do not lead to divestments by green institutional investors. However, cases that attract
investors’ attention do lead to significant reductions in emissions for the defendant firms.
In contrast, I find little evidence that climate litigations contribute to self-disciplining
effects on non-targeted peer companies."
Is the gig up? The impact of worker-status reclassification regulation on shareholder value
Abstract
We examine the shareholder value effects of recent US and EU worker-status reclassification regulations (WSRR) requiring companies to classify gig economy workers as regular employees. Using a policy event study methodology on a global sample of gig economy companies, we document negative average stock price reactions to announcements of WSRR events. Stock price reactions are more favorable for gig economy companies with a higher ex ante financial flexibility and better labor conditions, suggesting shareholders anticipate WSRR to affect firms’ costs and reputation. Corroborating the shareholder expectations reflected in the event study results, difference-in-differences estimations indicate gig economy companies have higher costs, a higher leverage, worse credit ratings, and improved labor conditions following WSRR. Our findings, which withstand several robustness tests, highlight the existence of substantial economic benefits for gig economy companies of relying on precarious labor and inform the policy debate on worker-status legislation.Judicial Selection and Production Efficiency: The Role of Campaign Finance
Abstract
This paper studies the effect of campaign finance on judicial selection and production efficiency. Using the Supreme Court's surprise verdict in the Citizens United v. FEC case in 2010, which generates exogenous variation in campaign finance laws, I document that the removal of such bans led to a 61% ($ 200,000) increase in the average electoral expenditure of judicial candidates and increased competition in State Supreme Court judge elections. The judicial bench also becomes populated with more business-friendly judges. State courts decide the majority of labor, contract, and administrative law disputes, and the State Supreme Court has the power to set legal precedents. Therefore, shifts in the judicial bench of the State Supreme Court affect the legal environment and the contracting choices of firms and labor. I document that labor productivity measured as value added per worker increased by 8 % in treated states with judicial elections. For sectors more reliant on contract enforcement, labor productivity is higher in states with judicial elections. Overall, removing constraints on electoral finance improves competition in judicial elections, the judicial bench becomes more business-friendly, and enhances production efficiency due to the alleviation of contract-enforcement frictions.Learning from failure: The role of disclosure on innovation
Abstract
This paper examines how the disclosure of failures shape innovation activities. I exploit an expansion in mandatory disclosure requirements for clinical trial results—from only trials on approved products to all applicable trials, including those on unapproved ones—as a positive shock to the availability of failure information. There is a significant increase in the number of new trials initiated, which becomes evident one year after the policy change and persists in the following years. This increase is driven by trials on existing drugs rather than novel drugs, suggesting a “fast-follow” strategy. Textual analysis of trial summaries further supports the learning effect and the importance of disclosing trial results. Consistent with the knowledge spillover channel, sponsors benefits more in medical areas where they had less internal expertise prior to the policy change. However, mandatory disclosure of failures carries proprietary costs, especially for innovative ones whose private knowledge becomes accessible to competitors. Sponsors with a higher risk of losing informational advantages are less inclined to initiate new trials under such disclosure requirements. This paper contributes to the discussion on mandatory disclosure of innovation outcomes, under the trade-off between the social benefits from knowledge spillover and the proprietary costs borne by the innovating entities.Limit Order Clustering and Stock Price Movements
Abstract
Stocks with prices slightly above round numbers (e.g., $6.1) tend to increase in the next period, while those slightly below (e.g., $5.9) tend to decrease. A long-short strategy based on daily closing prices yields a daily return of 24.6 basis points (or 61% per annum). This pattern is extremely robust across different stock price levels, sizes, liquidity, exchanges, sub-periods, intraday half-hour periods, and international samples. We demonstrate that an excessively large volume of limit orders, which tend to cluster at round numbers (e.g., $6.0), supports stocks with prices just above and resists those just below these round levels, resulting in differential subsequent price movements. Our findings highlight the profound impact of investors placing orders at psychologically appealing round numbers on random price movements and market efficiency.Local, Regional, and Global Asset Pricing?
Abstract
"Uncovering the underlying structure of global factor returns and assessing whether assets are priced on a local, regional, or global level are important tasks to understand the dynamics of asset pricing.I am the first to assess the regional extent of factor dynamics or the optimal level of aggregation by comprehensively analyzing factor dependencies in 35 countries. Following a data-driven approach I identify three-factor regions along geographical and economic lines. With regards to asset pricing, I grant novel insights that the performance of local asset pricing models is largely driven by the local market factor and that optimal models contain local, regional, and global factors, challenging current findings that local models perform best. The findings offer guidance for international asset pricing tests, deepen understanding of factor return dynamics, and provide evidence of the efficacy of global pricing models."
Market Concentration, Capital Misallocation, and Asset Pricing
Abstract
Superstar firms that dominate markets due to their large size and high markups can deter efficiency in capital allocation across firms. This paper empirically studies the asset pricing implications of superstars through the channel of capital misallocation, measured by cross-sectional dispersion in the marginal product of capital (MPK). I decompose this measure into three components: misallocation among superstars, misallocation among other firms, and misallocation between these two groups, referred to as "MPK spread". Shocks to the MPK spread are negatively priced in the cross-section of stock returns. Stocks negatively exposed to these shocks outperform stocks positively exposed to these shocks by 4.8% per year. In the long run, shocks to the MPK spread negatively predict consumption growth, industrial production growth, employment growth, and stock market excess returns. In the short run, shocks to the MPK spread negatively predict the innovation growth of non-superstar firms. These findings imply that shocks to capital misallocation between superstar and non-superstar firms capture an important macroeconomic risk factor.Market Fragmentation and Price Informativeness
Abstract
"I study the effect of market fragmentation on the informativeness of prices. On theone hand, a higher degree of fragmentation may harm price informativeness because
it lowers expected gains from trade and disincentivizes information production. On
the other hand, it can benefit the aggregate informativeness since prices become less
correlated. I develop a tractable trading model with two markets and two competing
speculators who produce information about the fundamental value of a firm. The
principal-agent framework of Holmstrom and Tirole (1993) allows me to stress the link
between the informativeness of prices and the optimal managerial compensation"
Market vs Social norms: Evidence from ESG fund flows
Abstract
Environmental, Social, and Governance (ESG) funds, designed to integrate nonfinancial considerations into investment strategies, can result in unintended consequences by additionally emphasizing their focus on financial performance. We employ innovative textual analysis methods on fund prospectuses to assess the degree of emphasis that funds place on ESG factors versus traditional financial returns. Our analysis uncovers a noteworthy phenomenon within ESG-focused funds: ESG fund managers' emphasis on traditional monetary metrics leads to an increase in fund flow's sensitivity to monetary performance. Paradoxically, this heightened sensitivity to monetary performance may hinder the long-term objectives of ESG investments. These findings underscore the importance of thoughtful communication strategies for ESG funds.Measuring the Economic Impact of AI through Forward-Looking Firm Communications
Abstract
I present a novel measure of the economic impact of AI using forward-looking man- agerial assessment contained in firm filings and earnings calls. I establish five new facts: (1) AI interest is rapidly growing among US firms, with significant cross-industry differences. (2) GPT annotations reveal that most of the firms view AI impact as moderately positive, with most of the expected economic impact on labor and investment. (3) AI is more likely to augment workers rather than displace workers. (4) AI-adopting firms are more efficient, profitable, and valued higher while having lower leverage and paying out less. (5) Non-creative knowledge tasks (e.g., Information recording) are more likely to be automated rather than augmented by AI. This paper contributes to measuring and understanding the economic interactions between AI and the business sector.Media Coverage and Corporate Bond Momentum
Abstract
This paper shows that media information induces momentum in corporate bonds. Using a comprehensive media coverage dataset from RavenPack News Analytics, we find that bonds with high media coverage exhibit stronger momentum than those with low media coverage. This media-based momentum concentrates on non-investment-grade (NIG) bonds. Media tone enhances the effect of news coverage, and informed trading of bonds with high media coverage leads to stronger momentum in the short run. Momentum reverses in the long run with bonds of higher media coverage experiencing more pronounced reversals. Our results provide a novel explanation for the momentum in NIG bonds.Memory and Beliefs in Financial Markets: A Machine Learning Approach
Abstract
This paper shows that memory shapes investor beliefs and influences trading activities in financial markets. Using earnings forecasts by financial analysts as proxies for investor beliefs, we extract their memory and recalls by training a machine learning memory model. The extracted recalls strongly predict stock returns. Additionally, dispersion in recalled episodes predicts investor disagreement and trading volume, indicating that memory can be a powerful microfoundation for disagreement. We further document new facts about memory that are directly elicited from market data. Compared to an optimal benchmark trained to fit realized earnings, investor memory is distorted in two key ways. First, investors over-recall distant episodes in regular times but under-recall them during crisis times. Second, investor memory overweights the importance of past earnings forecasts, while the optimal benchmark mainly considers other firm fundamentals beyond earnings. These distortions in memory predict both forecast errors and key behavioral biases, including the presence of overreaction and underreaction.Mortgage Credit Regulation based on Data Quality: Evidence from Automated Underwriting
Abstract
In this paper, I study the credit market outcomes and economic consequences of restrictions placed on algorithm based loan evaluations due to inaccurate statistical risk assessments resulting from a decline in data quality. I exploit an exogenous policy change in a major automated mortgage underwriting system which eliminated such restrictions placed on a subset of loan applicants. Utilizing novel data and a differences-in-differences strategy, I find that the policy change leads to an increase in mortgage credit access without any noticeable impact on credit risk. This change accounts for 26% of the increase in approval rates, with stronger effects where there is limited human interaction in the loan application process and where lenders have greater incentives for mortgage securitization. Further evidence suggests greater benefits to racial minorities and for borrowers facing financial frictions in availing alternate mortgage products due to lender litigation. While homeownership rates rise with spillover effects through lower rent growth in the more exposed areas, exposed banks end up crowding out commercial credit. My findings highlight the significance of automated mortgage underwriting for creditworthy and credit-constrained borrowers, which has important economic implications.Mosaics of Predictability
Abstract
Existing studies on asset return predictability focus on aggregate performance. We examine the oft-overlooked grouped heterogeneity in return predictability across different assets and macroeconomic regimes. A novel tree-based asset clustering methodology is introduced to partition the panel of asset-return observations according to return predictability, using high-dimensional asset characteristics and aggregate time-series predictors. When implemented on U.S. equities over the past five decades, we find that some characteristics-managed (dollar trading volumes, unexpected earnings, earnings-to-price, and cashflow-to-price) and/or macro-based (dividend yield and default yield) clusters are more predictable, resulting in a heterogeneous predictive model with outperformance. Finally, less predictable clusters generally exhibit lower risk-adjusted investment performance, revealing an important empirical link between return predictability and trading profitability.Muddy Waters Research and U.S. Stock Market Reaction
Abstract
In this study, we investigate whether investors react to nonconventional research reports instead of traditional audit reports in the United States. Prior studies have explored market responses to various audit-related factors, such as qualified audit reports, reportable events disclosure, going concern audit reports, adoption of new IFRS Standards, and analyst coverage and recommendations. For this study, nonconventional reports refer to independent investigative reports issued by third-party research firms. Specifically, the analysis focuses on Muddy Waters Research Company, a specific third-party research firm. The data used in the study are obtained from the Securities and Exchange Commission, CRSP, Compustat, and Muddy Waters Research Company. We employ a market model event study to examine investor reactions. The results indicate a significant negative market response to the independent investigative reports issued by Muddy Waters Research Company similar to the response to conventional reports.Navigating Bequests: The Strategic Role of Financial Advisors in Bequest Motives
Abstract
"Using data from DHS (Dutch Household Survey) between 2005 to 2021, we show the role which financial advisors play in driving bequest decisions. Specifically, we find that reliance on financial advisors for household financial decisions increases the likelihood of bequeathing by 1.7%. These results hold when we include insurance ownership as a proxy for reliance on insurance advisors. Additionally, we identified the 2013 collapse and bank run of SNS Bank as a shock to reliance onfinancial advisors and show that treated individuals that have SNS Bank checking, deposit or savings account prior to the event see a fall in their bequest intentions post event period. Last, we also use a special module survey in HRS in 2016 to confirm our results and we find that individuals who rely on financial advisors for money management advice is 18.6 percentage points more likely to make a will, and 13.68 percentage points more likely to leave an inheritance of more than $10,000."
Negative Capital Shock, Overseas Buyers, and Housing Market
Abstract
While local policies regarding foreign capital inflows into residential housing markets typically oscillate between promoting wealth effects and ensuring housing affordability, the majority of current literature focuses on the positive demand shocks to examine the necessity of implementing restrictions on foreign capital. In this paper, we explore the implications of a negative capital shock from China on local housing markets. By leveraging China's implementation of stricter foreign exchange purchase quota management for its citizens as an exogenous negative demand shock on foreign Chinese buyers in the US single-family homes market, our analysis reveals substantial effects on local housing assets. Not only did the volume of house transactions by foreign Chinese buyers significantly decline compared to other foreign ethnicities (Indian and Russian), but house prices also significantly dropped in neighborhoods that are popular among Chinese buyers. Furthermore, the elasticity of house supply implied by such a negative demand shock is higher than that found in existing literature, which primarily utilizes positive demand shocks to estimate the elasticity.Endogenous Matching in the Private Debt Market
Abstract
I study how the organizational structure of a firm affects capital allocation within the booming private debt industry. Focusing on business development companies (BDCs), important nonbank lenders, I document that perpetual-life BDCs lend more bilaterally to smaller and riskier borrowers while finite-life BDCs participate in larger deals with multiple lenders. I show that this two-sided endogenous matching can arise from a search-theoretic model, where the lender's perpetual-life incentivizes both counterparties to engage more in bilateral lending. With perpetual-life lenders, the borrower trades off a lower loan rollover risk for a higher coupon rate. This effect is 37 basis points when instrumenting the fund structure. Stronger lending relationships also provide borrowers more stable credit and support employment growth.One Hundred and Thirty Years of Corporate Responsibility
Abstract
U.S. history has been punctuated by time-varying attitudes and shifting public discourse about the externalities and responsibilities of business. Applying natural language processing (NLP) techniques that account for context evolution in historical news text, we develop a monthly time-series index dating back to the late 19th century that measures public attention to environmental and social (E&S) issues related to business (ESIX).We explore the properties of ESIX and relate it to macroeconomic fluctuations, asset prices, and corporate decisions. Public attention to social issues around business arises during times of macroeconomic and social instability, whereas attention to environmental issues is heightened during times of relative prosperity. At the firm-level, positive exposure to such public attention is associated with lower future stock returns. Heightened E&S concerns reduce the level of corporate investments and weaken the link between corporate investments and Tobin’s q in the short-run (i.e., 1-2 years out), but ultimately improve both the level and efficiency of corporate investments in the long-run (i.e., up to 10 years out). These findings indicate that markets are unable to fully price the long-term real effects of the demands for corporate responsibility.Opioid Crisis and Firm Downside Tail Risks: Evidence from the Options Market
Abstract
This paper explores how the opioid crisis exposure affects firm downside tail risks implied from equity options. Using a large sample of U.S. public firms from 1999 to 2020, we find that firms headquartered in regions with higher opioid death rates face higher downside tail risks, i.e., the cost of option protection against left tail risks is higher. The effects are reversed following exogenous anti-opioid legislations, supporting a causal interpretation. Further analysis shows that the opioid crisis heightens firm risk by reducing labor productivity. The effects that occur through a labor channel are stronger for firms with higher labor intensity, lower labor supply, and lower workplace safety.Paid Sick Leave Mandates and Household Portfolio Choice
Abstract
The United States is the only industrialized country without universal access to paid sick leave. Using the staggered difference-in-differences adoption of paid sick leave in the US, we find that paid sick leave mandates significantly increase household stock market participation. We show that the results be explained by three non-mutually exclusive explanations: (1) insurance-like protection, (2) subjective expectations, and (3) wealth accumulation. We show various tests to demonstrate the validity of our results, including the parallel trend, heterogenous treatment effect, and a large set of placebo and robustness tests. This paper sheds new light on the economic benefits of the public safety net on household financial decision-making.Passive Investing and Market Quality
Abstract
We show that an increase in passive exchange-traded fund (ETF) ownership leads to stronger and more persistent return reversals in the cross-section of US equities. Removing return components unrelated to liquidity strengthens the effect on short-term reversals, suggesting that passive ETF ownership decreases liquidity. Exploiting exogenous variation from reconstitutions in the Russell indices allows us to further examine the causal impact of passive ETF ownership on stock liquidity as well as other factors of interest. We find that more passive ETF ownership causes higher bid-ask spreads, more exposure to aggregate liquidity shocks, and higher idiosyncratic volatility. We assess whether market participants also price these effects by making use of option-implied tail risk measures, which capture the jump risk in returns. Our findings confirm that stocks with more passive ETF ownership are more prone to extreme price movements in line with recent theoretical work suggesting that passive investments make demand curves for stocks substantially more inelastic. Finally, we examine potential drivers of our results by decomposing a stock’s return variation into different types of information. We show, again using index reconstitutions, that higher passive ETF ownership reduces the importance of firm-specific information, consistent with the view that passive funds crowd out active investors who trade on fundamental information. In addition, passive ETF ownership increases the importance of transitory noise which we attribute to heightened exposure to market-wide sentiment shocks and short-term noise trading.Political Connection, Corruption, and Demand-Driven Stock Returns
Abstract
I show that shifts in fund demand significantly impact stock returns. Using a reduced-form structural model and a characteristic-based demand asset pricing system, I investigate the price impact of firm-level political connections on stock returns through public fund demand, particularly after the 2012 anti-corruption campaign in China. Firstly, political connections have an insignificant direct effect on stock returns as an additional pricing factor but significantly and negatively affect stock returns through the fund demand channel, highlighting the importance of public fund demand. Meanwhile, the demand shifts in public funds significantly contribute to the decline in concurrent stock returns: public funds generally reduce holdings of stocks with higher political connections, especially those headquartered in provinces with elevated corruption indices, following the anti-corruption campaign announcement. By controlling for size and value factors that traditionally account for anomalies in Chinese stock returns, I reveal that non-fundamental demand shocks play a significant role not captured by political risk factors. This demand-based analysis introduces a novel perspective, distinct from conventional political risk literature that focuses on discount rate or cash flow-based analyses, and provides causal evidence for the decrease in stock returns during periods marked by unexpected political events.Political Connections and Carbon Emission Disclosures: A Cross-Country Examination
Abstract
Using a novel dataset containing details on 192 politically connected firms across 50 countries, we explore how political connections affect a firm’s decision to voluntarily disclose carbon emissions in an international setting. Our baseline results reveal that politically connected firms disclose significantly less of their carbon emissions, on average, compared to their unconnected peers. These results are driven by firms in countries with more corrupt governments, where connections provide more value to firms. We find that appointed politicians allow their connected firms to obfuscate their carbon emissions while elected politicians do not. Further, firms connected to politicians outside of their home country do not change their carbon emissions disclosure while firms connected to politicians in their home country significantly reduce such disclosure. Our results are consistent with connected firms receiving protection from government litigation and receiving benefits that offset the value of disclosing environmental performance, suggesting that political connections diminish such disclosure, undermining the push for universal environmental disclosure.Political Ideology Alignment on Supply Chain
Abstract
This study examines the influence of a firm’s political preference on its supply chain relationships. Following political theory’s prediction that common political ideologies cluster together to form political coalitions and individuals are more inclined to cooperate with those who share their political ideology, we find a firm (supplier) sharing the same political ideologies with its potential customers is more likely to build a supply chain relationship. The firm (supplier) will provide more favorable trade credit arrangements and increase relationship-specific innovations for customers who have the same political ideology. Such alignment can also ease the R&D investment burden by reducing the firm (supplier)’s R&D expenditures and the total number of new patents. Additionally, banks are observed to lower loan spreads for the borrower who is the supplier of the bank’s client and shares the same political ideology with that client. Further, we find this political affiliation effect was particularly pronounced during the influential period of the Trump administration (2015-2021). The market reacts positively when the supply chain relationship of the focal firm and its political ideology same customer becomes public information. This research highlights the importance of political ideology in supply chain relationship management, extending beyond traditional considerations of production quality and pricePredictability of Firm-Level Stock Crash Risk
Abstract
Utilizing a combination of indicators for both rapid past debt and return growth at the firm-level, I explore whether this strong macroeconomic predictor of financial crisis onset can add explanatory and predictive power to stock price crash risk for an individual firm. I find that average crash occurrence strongly increases with a delay, starting two years after a firm simultaneously exhibits both traits, and remains significantly elevated with swings in economic magnitude. When using continuous measures that capture stock price distributions, negative tail skewness and down-to-up volatility show peaking crash risk two years after the overheating of credit balances that coincide with rapid return growth, which subsequently subsides towards the unconditional in the following years, lending credence to the predictability of a stock price crisis. This measure exhibits predictive power over the entire 60 years tested in this paper. Some evidence suggests this occurs due to the overpricing of stocks on the market along the self-fulfilling prophecy philosophy, where improvements in information asymmetry may contribute to the delayed increase in crash risk.Price Discovery in High-Frequency Equity Markets: Evidence from Retail and Institutional Trades
Abstract
Using high-frequency trades and quotes (TAQ) data, I quantify the information content of retail and institutional trades in equity markets. I find evidence of a heterogenous price impact among retailers and institutionals. Consistent with theory, I show that information frictions, illiquidity, and information drive differences in the price impact of retail and institutional investors. A size-neutral trading strategy on institutional investors' price impact yields sizeable returns, beats the market, and is not explained by established risk factors. Furthermore, I find that episodes of coordinated trading by Robinhood investors reduce the price impact of institutional investors. This is consistent with indirect liquidity provision from retailers to institutionals via wholesalers due to internalization of retail trades.Production Technology, Information Acquisition and Disclosure, and Asset Prices
Abstract
We develop a model in which investors trade a long-lived asset whose dividend is contingent on a firm's production and show that a more efficient real economy can lead to a less efficient financial market. With a higher real production efficiency, measured by a larger output elasticity of capital, the sensitivity of the firm's income to its capital input decision increases. Investors who are uncertain about the firm's future decision thus perceive a higher risk of the asset's resale price and trade less aggressively. Consequently, the asset's price informativeness, trading volume, liquidity, and the investors' information extraction (the asset's risk premium, return volatility, and the investors' information production) decrease (increase). We also identify a new channel through which firms' information disclosure lowers financial price informativeness. Suggestive evidence of the negative relationship between production efficiency and market efficiency is provided.Push to Read and Trade
Abstract
In the digital age, individual investors increasingly rely on mobile apps for real-time market updates. This study examines the impact of mobile push notifications on investor behavior, distinguishing the effects of the notifications from the news content itself. Utilizing a natural variation where approximately 7% of push notifications fail to reach investors due to technical issues, I create a quasi-experimental setting. My preliminary results indicate that push notifications significantly shape investor behavior, prompting both passive news consumption and active stock research. Notably, successful notification delivery enhances news reading time and stock click rates, particularly for stocks included in investors' watchlists, portfolios, or focus lists.Returns to scale in passive management: Evidence from ETFs
Abstract
This article empirically analyzes the nature of returns to scale in passive fund management. Employing the recursive demeaning approach, we first document that fund benchmark-adjusted returns, both before and after fees, increase with lagged fund size. The increasing returns to scale are present in not only S&P 500 ETFs but also the universe of equity ETFs. Economically, one standard deviation increase in fund size is associated with an increase in fund performance by 9.6 basis points (or about 115 bps annually). The size performance relation is more pronounced in funds that are active in trading and funds with high tracking errors, suggesting that these positive scale effects are related to activeness. Moreover, the positive economy of scale is stronger for high-fee and higher-liquidity ETFs. When relating business-cycle variation, returns to scale are greater when the stock market is illiquid and during the recession. In contrast, Morningstar's rating, investor awareness, and sophistication are unlikely to explain the findings. Our newly gained results highlight the importance of sizes in passive funds and elucidate the literature on scale economies, which is still a subject of debate.Rewiring supply chains through climate policy
Abstract
We show that climate transition risks can have a significant effect on supply chains. We find that suppliers exposed to the California cap-and-trade program are more likely to lose customer relationships and less likely to establish new ones. These supply chain adjustments are driven by a loss of competitiveness due to the program, as the effects are more pronounced when suppliers face more competitive pressure and produce less specific inputs. This rewiring of supply chains is consistent with carbon leakage as customers exposed to the program through production networks experience increased scope 3 emissions.Save more or less? The impact of government health insurance change on saving behavior
Abstract
This research shows an overall decreasing effect on saving after the introduction of Serious Sickness Insurance (SSI) with a China survey dataset. I build a three-period model showing that SSI can influence saving via two driving forces: reducing precautionary savings for medical expenditures; increasing saving for a longer life expectancy. I employ staggered difference-in-difference estimators to show that the empirical results agree with the prediction of the model. Both the decrease in medication expenditure and longer life expectancy increase the utility of the insured. The effects are different across wealth, household registration type, and age groups. The actual most beneficial group is the wealthiest quantile, which is different from the initial goal when setting the policy.Scientific Talents and Firm Growth: Evidence from Scientific Breakthroughs
Abstract
This paper studies the impact of corporate scientists on firm growth in the context of scientific breakthroughs. Leveraging a comprehensive publication database and a text-embedding large language processing tool, I develop a measure for corporate scientific human capital. Analysis of three major scientific breakthroughs of the 21st century reveals that firms affected by these breakthroughs and possessing a higher stock of relevant scientific human capital demonstrate superior performance following these breakthroughs. Corporate scientists create value mainly through the knowledge spillover channel. Specifically, corporate scientists engage more in patenting after scientific breakthroughs in firms affected by the breakthroughs and endowed with substantial scientific human capital. These firms also generate a greater number of impactful patents and are more likely to be early adopters of citing scientific papers in their patents compared to their peers. Additionally, these firms are more successful in attracting star scientists after breakthroughs. This study highlights the crucial role of corporate scientists in connecting basic science with industrial innovation in a modern economy that increasingly relies on intangible assets and human capital.Short-Termist Carbon Emissions
Abstract
Carbon abatement investments are inherently long-term in nature. Therefore, short-term profit pressure may distort these investments. Consistent with this idea, firms that just meet analysts' short-term profit targets have about 4.3 to 4.99 percentage points higher growth in carbon emissions than firms that just miss. I estimate a quantitative model with endogenous carbon emissions and short-term incentives for managers. Removing short-term incentives reduces firms' profits by 0.43% and carbon emissions by 2.19%. In aggregate, short-termist carbon emissions are as large as total U.S. aviation emissions in 2022. My estimates suggest that short-termism is welfare-reducing via the carbon emissions channel.Spatial Extrapolation in The Housing Market
Abstract
This paper introduces “spatial extrapolation,” a concept that refers to how economic expectations for one region are formed by extrapolating from the economic outcomes of another geographic area. We demonstrate this unique form of extrapolation by analyzing the purchasing behavior of out-of-town (OOT) homebuyers. Using data from approximately 3 million OOT housing transactions in the U.S. between 2002 and 2017, we find that a 50% increase in five-year hometown house prices leads OOT buyers to pay 2% more for OOT properties. The higher the hometown house price growth, the lower the realized returns and purchase discounts obtained by OOT buyers. To rule out the wealth effect, the paper designs two strategies. First, we classify renters, migrants, and second-home (SH) buyers to control the wealth increase from hometown properties. Second, we estimate geographic heterogeneity in extrapolative beliefs. We find that OOT buyers from higher extrapolation hometowns increase their purchase prices more after the hometown house price growth. Overall, our research highlights the potential spillover effects of extrapolation into other asset markets and provides evidence that extrapolative expectations have broader effects than previously recognized.Statistical Validation of Contagion Centrality in Financial Networks
Abstract
In this paper, we introduce a novel centrality measure to evaluate shock propagation on financial net- works capturing a notion of contagion and systemic risk contributions. In comparison to many popular centrality metrics (e.g., eigenvector centrality) which provide only a relative centrality between nodes, our proposed measure is in an absolute scale permitting comparisons of contagion risk over time. In addition, we provide a statistical validation method when the network is estimated from data, as is done in practice. This statistical test allows us to reliably assess the computed centrality values. We validate our methodology on simulated data and conduct empirical case studies using financial data. We find that our proposed centrality measure increases significantly during times of financial distress and is able to provide insights in to the (market implied) risk-levels of different firms and sectors.Stock Mispricing and Dual Holders' Loan Pricing
Abstract
We investigate how dual holders who simultaneously hold loans and equity shares of a firm respond to stock mispricing of the firm. Using the fire-sales shock driven by mutual fund outflows as a measure of stock mispricing, we find that dual holders provide loans with lower spreads to the firms under the fire-sales shock. The result is driven by dual holders’ incentive to support the firm as long-term investors. We establish causality by exploiting mergers between financial institutions. In a firm-level analysis, we find that dual holders’ loan provisions offset the negative effects of the fire-sales shock on corporate investments.Synthetic Dollar Funding
Abstract
Despite their higher cost and hidden leverage, off-balance sheet foreign exchange (FX) swaps play a critical role in providing US dollar funding to large global banks. Yet, the frictions that lead banks to rely on these instruments and their asset pricing implications are not well understood. This paper shows that FX swaps emerge as alternative ("synthetic") funding instruments when banks face negative funding shocks from cash-market investors, such as US money market funds. The resulting increase in swap demand, combined with limits to arbitrage, leads to substantial deviations from covered interest parity (CIP) – the breakdown of a fundamental no-arbitrage pricing condition. I show a causal impact of banks’ swap demand on CIP deviations using an instrumental variables strategy that exploits idiosyncratic variation in money market funds’ investment in bank-level debt. This shift in aggregate demand is absorbed by non-bank users of FX derivatives in the form of higher hedging costs: I estimate the elasticity of non-bank investors' hedging demand to swap prices and find only a partial adjustment in quantities traded. My results indicate that frictions in the global market for the US dollar can provide a demand-based explanation for CIP deviations.Taking the Road Less Traveled? Market Misreaction and Firm Innovation Directions
Abstract
We propose that public investors react differently to patent issuance news depending on its novelty, and this misreaction exerts real impact on the firms' future innovation. Using textual analyses of patent documents to measure patent novelty, we find that investors under-react to the issuance of path-breaking innovations while overreact to the trend-following ones. We rationalize the empirical patterns with a bounded-rationality model where investors cannot figure out the true novelty of a patent at issuance due to cognitive limits. We verify the key model mechanism by showing that firms which receive noisier signals (firms with more retail traders) exhibit stronger misreaction. This misreaction is economically significant because novel patents bring higher economic value to the firm and have higher social value than non-novel patents. We also find that firms, on average, follow up less on their novel technology and issue fewer future novel patents, after an issuance of novel innovation. Using price pressure from mutual fund redemptions as an instrument, we present causal evidence that novel firms change innovation directions from novelty-seeking to copycat innovations following disappointing returns. The findings highlight that investor misreaction to patent novelty has a real impact on future innovation directions by steering firms away from higher-valued, groundbreaking research.Tax Incidence in Consumer Financial Markets: Evidence from Auto Leases
Abstract
Using a novel dataset on auto leases and a tax policy change by the state of Georgia, we estimate the tax pass-through rate and study its determinants. We find that (1) auto dealers (not lenders) capture a substantial portion of this tax subsidy and (2) consumers spend about 50% of their subsidy to upgrade and lease a more expensive vehicle. In contrast to prior literature on consumer credit markets, we find no evidence that demand factors including credit score and past experience affect this pass through rate. Our findings suggest that the market structure of auto lease market is the main driver of the heterogeneity in the pass-through rateThe Economics of Patent Licensing: An Empirical Analysis of the Determinants and Consequences of Patent Licensing Transactions
Abstract
In this paper, we investigate the economics of patent licensing using a large and unique sample of patent licensing transactions from the ktMINE Patent License Agreement Database. We address three key research questions for the first time in the literature: the characteristics of licensor and licensee firms driving the former firms to license patents to the latter; the patent characteristics driving a licensor's decision to retain, sell, or license certain patents; and the consequences of patent licensing transactions for licensor and licensee firms. Our findings indicate that licensors prefer licensing to downstream firms while avoiding firms with similar patent portfolios. Licensors retain patents closer in technological distance to their own portfolios and sell those farther away, while licensing out patents that are in-between the two. Licensees, on the other hand, prefer to license in patents closer to their own patent portfolios. Both our baseline analysis and a difference-in-differences analysis around the National Technology Transfer and Advancement Act of 1995 show that patent licensing transactions are efficient: they increase the Tobin’s Q of both licensors and licensees. However, the channels of equity market value creation for licensors and licensees are different: while licensors’ increases in Tobin’s Q are greater for firms that can charge higher licensing fees, exposure to new technologies is a source of value increase for licensees. We further find that licensors increase their R&D expenditures and generate more patents following licensing transactions, suggesting that they use some of their proceeds from licensing transactions to enhance their innovation productivity. Licensees, on the other hand, introduce more new products and increase their innovation efficiency subsequent to licensing transactions, suggesting that they are able to learn from using the patents they license.The Effect of U.S. Monetary Policy on Foreign Firms: Does Debt Maturity Matter?
Abstract
We provide novel evidence that corporate debt maturity plays an important role in the transmission of U.S. monetary policy to foreign firms. Exploring the ex-ante maturity structure of long-term debt to predict firms' financial position in a given year, we show that firms with a high proportion of long-term debt maturing right after a contractionary shock experience a more pronounced decrease in investment and sales compared to other firms. We find that firms in emerging economies are much more affected by these shocks compared to those in advanced economies, and the amplification effect of U.S. monetary policy shocks is present only in emerging economies. Our findings suggest that refinancing constraints can significantly amplify the international transmission of U.S. monetary policy.The Impact of Air Pollution on the Cost of Issuance of Municipal Bonds
Abstract
"I show that pollution increases municipal bonds’ offering yields and yieldspreads, indicating increased financial constraints on municipalities. I establish
this by utilizing an instrument variable based on the expansion of Clear Air Act
regulations, which led to a quasi-random variation in the county’s subsequent
exposures to small particulate matter (PM2.5). Counties facing elevated air
pollution levels tend to offer higher yields when issuing municipal bonds compared
to counties with cleaner air. This yield increase is particularly pronounced
for bonds that carry greater repayment obligation risk. In addition, long-term
bonds are subject to higher pricing in response to air pollution risks, suggesting
that the market places a premium on such risks for extended durations. Air pollution adds to the financial constraints of municipalities through the following
channels: the county’s GDP growth, debt burden, and property tax."
The Impact of Climate Policies on Financial Markets: Evidence from the EU Carbon Border Adjustment Mechanism
Abstract
The introduction of the EU Carbon Border Adjustment Mechanism (CBAM) has triggered statistically significant negative stock market responses for firms within the EU. Comparing EU customers that have non-EU suppliers in CBAM-affected industries with their nontreated peers in the control group, we find an extra cumulative abnormal return of up to -1.3 percentage points over our main five-day event window around December 13, 2022. Both the suppliers' locations and their industries are key determinants of the treatment effects. We also document sizeable treatment effects for supplier firms and for other event dates.The Impact of Social Media Influencers on the Financial Market Performance of Firms
Abstract
Despite the huge growth in the number of influencers and their use by firms, there is a lack of analysis of how social media influencers affect the financial market performance of firms. Anecdotal evidence suggests mega influencers can impact the stock prices of firms via social media. We ask whether such an effect is generalizable to all mega influencers and other financial market characteristics of firms. Using a hand-collected dataset of 16,156,419 mega influencer posts on Instagram, we find that mega influencers affect investors’ attention, volatility and trading volume but not stock returns. It takes top influencers with extreme sentiment posts to affect returns and, even here, the effect is short-lived.The Invisible Handshake: State Pensions and Corporate Political Contributions
Abstract
We investigate whether US politicians exchange favors with corporations by influencing public pension fund investments, as anecdotal evidence suggests that U.S. politicians may influence public pension fund investments to obtain more corporate campaign contributions. We find that listed firms with higher state pension ownership donate significantly more to politicians and committees from the state. Using news articles from Reuters, we find that politicians’ names tend to co-occur with both pension and campaign donations, especially those from states with high levels of corruption. Contrary to politicians’ alleged concern for pension performance and funding shortfalls, we find that political influence hurts both state pension and portfolio firm performance. These effects are stronger for states with higher corruption index values, for firms with worse corporate governance, for donations to super PACs, and after the Supreme Court loosened soft money restrictions in 2010. Exploiting state-level variation on soft money restrictions, our difference-in-differences tests show that campaign finance freedom increases the campaign donations that politicians receive from state pension portfolio firms. The results suggest a new mechanism for political rent-seeking, which may exacerbate U.S. public pension funds’ underperformance and unfunded liabilities.The Noise Share of the 52-Week Price-Peak Effect on Mergers and Acquisitions
Abstract
What is the role of different types of information in the target share price on the effect of 52-week high on takeover premia? We find that a higher fraction of noise in the target share price amplifies the reliance on the target’s 52-week high price in determining the offer price in corporate takeovers. Conversely, none of the separate private, public and market information plays a significant role in this context. Interestingly, the punishment to the bidder for paying the target relying on the target 52-week high price disappears after considering the noise in the target share price. This suggests that bidders’ reliance on the target’s 52-week high price may not always be irrational. Moreover, the increased likelihood of deal success by paying over the target 52-week high price is reduced in the presence of increased noise in the target’s share price. This indicates that target shareholders might not be that satisfied with receiving a noisy reference price. Further results confirm that the percentage of noise, indicating undervalued targets to bidders with information advantages, drives the offer price’s reliance on the target’s 52-week high. In summary, the target reference point effect does not work uniformly but depends crucially on the underlying percentage of noise in the target share price and the reliance on the target 52-week price might not always be irrational.The Numbers Game: Effects of Listing and Counteroffer Pricing Format in Housing Bargaining
Abstract
Using confidential offer-level data from the US housing market, this paper analyzes the impact of various listing and counteroffer pricing strategies on the housing bilateral bargaining process. We observe that sellers tend to cluster their listing prices around “charm” numbers (e.g. 349,999) while buyers’ counteroffers mainly cluster around round numbers (i.e., 350,000). Through the repeated sales approach, we explore the benefits and costs of these pricing strategies. Compared to listings with precise prices, listings with special prices (i.e., either round prices or charm prices) tend to sell faster but at lower prices than those with more precise prices. Although this indicates “cheap talk” signaling benefits, charm prices systematically dominate round prices. Charm listing prices typically lead to a higher likelihood of sale, achieving higher sales prices, and quicker transactions compared to round listing prices. With respect to the effects of buyer counteroffer pricing strategies, our analysis reveals that round counteroffer prices frequently result in lower sales prices and faster deals, albeit at an increased risk of negotiation breakdown. Furthermore, we identify a “mimicry effect”: buyers mirroring the precision level of sellers’ charm or precise listing prices significantly lower the risk of impasse, even though it may lead to higher sales prices and longer negotiation periods. Overall, our findings offer novel insights into the strategic effectiveness of different pricing formats in the housing market bargaining process.The Real Cost of Benchmarking
Abstract
This paper provides causal evidence that benchmarking-induced asset price distortions have real effects on corporate investment. We exploit exogenous variation in stocks' benchmarking intensity around Russell index reconstitutions to establish causality. We find that increased exposure to benchmark-linked capital flows causes stocks' CAPM β to rise. Firm managers perceive this as an increase in their cost of capital and reduce investment. Treated firms have 7.1% less physical and 8.4% less intangible capital after six years. At the aggregate level, the asset price distortions caused by benchmarking can explain 10.7% lower capital accumulation from 2000 to 2016. Our findings highlight how benchmark-linked investing affects capital allocation in the real economy.The Real Effects of China’s Carbon Dioxide Emissions Trading Program
Abstract
China’s emissions trading system applies a salient two-stage emissions intensitybased compliance quota allocation scheme significantly different from the cap-and-trade systems prevalent in developed economies. It was designed to accommodate the country’s socioeconomic complexities and implemented following a learning-by-doing approach. Compliance firms increased green investment and expanded production workforce, while their climate decisions are influenced by state ownership and regional heterogeneity. State-owned enterprises (SOEs) and firms in regions with less liberal markets increased hiring, but not investment; non-SOEs and firms in more liberal markets expanded investment only. Compliance firms maintained productivity and operating efficiency; however, ordinary workers’ real wages were reduced, more prominent in SOEs.The Ripple Effects of China’s Global Ownership
Abstract
We document the rise in China's global corporate ownership across 162 countries over the past decade using detailed firm level data, and assess its real impact on target firms, its spillover effect on non-Chinese-owned firms in the same country and industry, and its spillback effect on ultimate owners’ firms in China. We find that China’s global ownership increased at a rate of 30 percent per annum to reach a global share of 1.2 percent as of 2019. After being acquired by Chinese shareholders, target firms tend to increase R&D investments by 16.4% on average, gain larger market shares, become less profitable, and hold less cash, while also becoming more integrated into China-related supply chains. In contrast, competing firms in the same country and industry exhibit reduced R&D investments and diminished market share. These effects are more pronounced when the acquiring firms are affiliated with the Chinese government and state-owned entities, consistent with a strategic emphasis on R&D by the Chinese government. We also find that government-related entities target natural resource sectors strategically. Lastly, we identify a significant spillback effect, whereby Chinese firms augment domestic R&D investment following overseas investment in R&D-intensive firms, indicative of knowledge transfers.The Rise and Fall of Investment: Rethinking Q theory in Equilibrium
Abstract
This paper provides an exposition of how shocks to the supply of investment drive the joint dynamics of investment and Q. In absence of shocks to the marginal cost of investment (i.e., the supply of investment), shocks to the marginal value of investment (i.e., the demand for investment) determine both equilibrium investment and Q, resulting in a conventionally expected monotonic relation along the constant upward-sloping investment supply curve. In presence of non-trivial shocks to the marginal cost of investment, however, there is no longer a one-to-one relation between investment and Q. In essence, Q is to investment as price is to quantity in any demand-supply system. This paper theoretically demonstrates that, in a general dynamic model of investment, shocks to the investment demand induce a positive comovement between investment and Q when the marginal cost of investment is monotonically increasing, while shocks to the investment supply induce a negative comovement of investment and Q when investment is sufficiently inelastic to supply shocks. The elasticity of investment to demand and supply shocks critically depends on their respective persistence. This paper shows with numerical simulations that the correlation between investment and marginal/average Q critically depends on the relative volatility of and the persistence of supply shocks. A modest level of volatility of supply shocks is able to generate low or even negative correlations between investment and Q.The Role of Equity Financing Constraints in the Transmission of Monetary Policy
Abstract
We show that equity financing constraints play a unique role in the amplification of monetary policy shocks. Employing a text-based metric of financial constraint that distinguishes between a company’s emphasis on equity versus debt financing, we show that equity-focused constrained firms endure more substantial declines in stock prices and implement deeper cuts in capital expenditures and R&D when faced with a contractionary monetary policy shock. Equity-focused constrained firms significantly reduce equity issuance in response to tighter monetary policy. Conversely, debt-focused constraints do not seem to play an economically significant role in magnifying the impact of monetary policy shocks. Our findings suggest that a pecking order theory describes the choice of the form of finance, with firms preferring debt finance to equity, and hence firms resorting to equity finance being more financially constrained.The Value of Information from Sell-side Analysts
Abstract
"I investigate the value of information from sell-side analysts through textual analysis of a largecorpus of their written reports. To quantify the dollar value of analyst information to a strategic
investor, I leverage an imperfect competition insider trading model from Back et al. (2000). The
aggregate annualized expected profit from receiving tips regarding the contents of an average
S&P 100 constituent stock’s forthcoming analyst reports is approximately $6.89 million. Using
embeddings from state-of-the-art large language models, I demonstrate that textual information in
analyst reports explains 10.19% of contemporaneous stock returns out-of-sample, a value that is
both statistically and economically more significant than quantifiable analyst forecast revisions and
traditional NLP approaches. A Shapley value decomposition is then performed to determine how
different topics contribute to moving the market. The results show that income statement analyses
from analysts account for more than half of the value of their reports."
The Zero-Beta Rate Revisited
Abstract
"The zero-beta rate is an important concept in asset pricing due to its implicationsfor the security market line, beta anomaly, risk-free rate, etc. This paper revisits the
estimation of the zero-beta rate and argues that existing methods produce high and volatile zero-beta rates arising from two channels: model misspecification and errorin-variables. Any model misspecification leads a non-uniqueness of the zero-beta rate. Measurement errors in betas increase noise in the estimation. Simulation analysis shows that both channels are quantitatively important for increasing the mean and volatility of the estimated zero-beta rate. In addition, I propose a new perspective on evaluating empirical factor models based on the theoretical result that a correctly specified model should feature a unique zero-beta rate. The new tests show that prominent factor models in the literature (e.g., Fama-French, q-factors, IPCA models) are misspecified."
Tick size and price discovery: Futures-options evidence
Abstract
"The tick size, representing the minimum price increment in a financial market, canlead to market price inefficiencies when large. We examine the role of the tick size
in price discovery between futures and options in the Chicago Mercantile Exchange corn and soybean markets. Futures contracts, which have a tick size twice as large as that of options, typically exhibit one-tick quoted spreads due to their binding tick sizes, while options allow for price-improving quotes given their less binding tick size. We find that despite thin and costly trading, options are as informative as futures. Price-improving quotes offered by options traders enhance information impounded into prices, suggesting that relaxing the binding tick size can enhance price discovery."
Time Series Reversal: A Payment Cycle Friction
Abstract
"This paper shows that the U.S. equity market reverts the liquidity-driven trading inducedby the payment cycle within a month. The aggregate reversal is robust to transaction costs
and out-of-sample tests as it concentrates on liquid and high-priced stocks and during
expansion periods. The findings lead to a novel interpretation of reversal: the pattern
measures the liquidity not efficiently provided in the market rather than investors’ cognitive
bias or compensation for market-making."
Trading on Hearsay: The Role of Rumors and Influencers’ Investment Horizon in Shaping Asset Prices
Abstract
We design an asset market experiment to explore the truth-telling incentives of a privately informed investor capable of swaying followers' investment decisions. Confirming recent theoretical results, we find that the influencer's investment horizon is a significant predictor of their propensity to spread rumors. Short-term influencers are inclined to disclose their private information truthfully, while long-term influencers often resort to rumormongering. Truthful disclosures, particularly when aligned with subsequent information arrivals, have a higher short-term price impact, which benefits the influencer. Consequently, followers tend to trust short-term influencers more, with this trust strengthening progressively over time. Conversely, long-term influencers' communications are largely ignored. Moreover, truth-telling among short-term influencers increases with the transparency of the trading mechanism.Transaction-cost-aware Factors
Abstract
"Investors actively optimize for trading costs when making portfolio decisions. Yet, prominent asset pricing factors aiming to summarize the investor opportunity set follow fixed rebalancing rules that overlook the cost of trading. I propose a class of transaction-cost-aware (TCA) factors --- explicitly optimized to explain net-of-cost returns --- that bridge this gap.TCA construction controls how aggressively factor portfolios adjust when the underlying characteristics change. Standard factors rebalance in full, irrespective of whether marginal expected returns cover trading costs incurred. My methodology finds the optimal balance between these two forces.
TCA factors generate higher risk-adjusted returns net of costs than unoptimized factors based on the same characteristic. Spanning regressions of TCA factors on their unoptimized counterparts consistently deliver positive alphas. Further, models that employ TCA factors come closer to spanning the feasible efficient frontier for investors facing non-zero transaction costs. These performance gains carry over out-of-sample and are robust to cost-mitigation techniques proposed in the previous literature.
Construction inefficiencies addressed by TCA factors significantly impact asset pricing inference. The benefits of TCA construction are heterogeneous and most apparent for high-turnover factors, such as momentum. Such factors appear unprofitable after costs if constructed suboptimally but regain prominence in the TCA setting. Therefore, asset pricing tests on unoptimized factors can reach incorrect conclusions on which economic characteristics matter for the cross-section of expected returns."
Trust, Credit Divergence, and Economic Growth
Abstract
High-trust countries were associated with more private-sector credit in 1985 stronger subsequent growth since then, despite the worldwide converge trend of other growth correlates. To explain such distinctive credit divergence, we model trust as the collective reputation of borrowers and study how trust shapes credit and economic growth. Our theory highlights distrust as a self-fulfilling prophecy: borrowers in a "low-trust" equilibrium opt for strategic default, driving up population-average default rates and borrowing costs, further reducing credit demand, and creating stronger economic incentives for default. Financial deregulation benefits high-trust countries more as trust enforces good behaviors in equilibrium. Empirically, distrust persistently predicts less formal lending, lower GDP growth, and 50% predictability attributed to slower credit expansion. Financial liberalization fosters higher GDP growth in high-trust countries but the opposite in low-trust countries.Unpackaging ESG: Evidence from 401(k) Investment
Abstract
We study how investors respond to scandals related to three distinct aspects of ESG--E(nvironmental), S(ocial) and G(overnance)--in their retirement savings. Using data on 401(k) investments, we show that nearby ESG scandals correlate with increased ESG fund additions and flows, possibly through ``evoking' their existing sustainable preferences. Investors with different characteristics respond heterogeneously to E, S and G scandals. In magnitude, old investors are twice as likely as young investors to add ESG funds to their portfolios after the shock of social scandals. In specific scandals, low-income investors care about human rights, while only young and rich investors care about environmental issues. Investors also have clear leanings on ESG funds, resulting in an overweighting of funds with higher environmental and social scores and a lack of attention to governance elements. Overall, our results suggest the need to incorporate distinct E, S, and G concerns into heterogeneous preference models.Value versus Values: Can Stock Liquidity Save the Planet?
Abstract
The fundamental challenge to the literature of sustainable investing is the difficulty of disentangling value from values (Starks 2023). While values investors are willing to sacrifice financial returns to prioritize nonpecuniary objectives, value investors concern about whether environmental issues drive firm value, that is, improve the firm’s risk-return prospects. By leveraging an exogenous liquidity shock, the tick size pilot (TSP) program, that disproportionately affects the financial prospects of value investors vis-à-vis values investors in the treated firms, we show that value investors play a significant role in driving environmental policies. During the TSP, treatment firms show a decline in the environmental rating. Green institutional investors tend to divest in response to portfolio firms’ environmental incidents. Such divesting intensity becomes less pronounced for treatment firms during the TSP period. The TSP-induced decline in environmental ratings is larger for firms with an ex-ante greater exposure to exit threats.Venture Capital Response to Government-Funded Basic Science
Abstract
Science-based R&D can deter venture capitalists due to high technical risk. We study whether mission-oriented public funding, which supplies basic science as a public good, fosters VC investments. Our quasi-natural experiment is the BRAIN Initiative (BI), a government-funded program with the goal of mapping the human brain. Using a large language model, we first show the large spillover effects of BI in neurotech. In a difference-in-differences analysis, we find an increase in VC investments in neurotech startups accompanied by higher valuations and more successful VC exits following the BI. The channels driving these results suggest reduced technical risk: 1) increased supply of high-skilled academic labor; 2) more innovation, including breakthrough patents; 3) enhanced integration with complementary technologies, especially AI and big data, which aligns with the BI's data-driven mission. Our results suggest the supply of government-backed science and scientists can spur follow-on private investments in emerging technologies.Vertical Integration, Supply Chain Disruptions, and Corporate Yield Spreads
Abstract
Vertical integration can reduce transaction costs and increase a firm’s control along the supply chain, thereby mitigating supply chain risk and leading to lower yield spreads. However, vertically integrated firms may suffer from asset specificity, which can create investment uncertainty and rent extraction, thus resulting in higher yield spreads. We find that firms with greater vertical integration (VI) exhibit lower bond yield spreads. Specifically, a one-standard-deviation increase in VI correlates with an 17 basis points decrease in yield spreads without control variables, and a 4 basis points decrease in yield spreads when accounting for a set of yield spread determinants. This effect is more pronounced for companies facing elevated supply chain risk, supporting the supply chain risk channel. Amid global supply chain disruptions such as the COVID-19 pandemic and the U.S.-China trade war, vertical integration takes on an even more important role in reducing credit spreads. Our findings suggest that firm-level vertical integration can effectively hedge supply chain risk, representing a novel mechanism not previously considered in bond pricing studies.What Drives Bank Credit Lines? Wholesale Funding and Bank Liquidity Creation
Abstract
"Liquidity creation is one of the primary functions of banks, and bank credit lines orcontingent commitments are the single largest source of it. In this paper, I propose a novel channel linking banks’ credit line commitments to wholesale funding. Using banks’ regulatory data, I empirically document that banks with greater wholesale funding ratios lend more using off-balance sheet commitments. Causal estimates rely on two identification strategies (1) membership dates of banks to the Federal Home Loan Bank (FHLB) system in a staggered difference-in-differences (DiD) exercise and (2) shift-share instrument design. Estimates from these exercises suggest a 1% increase in wholesale funding leads to 0.3-0.4% increase in contingent commitments. I rule out reverse causality in a standard DiD design using an exogenous regulatory change – introduction of FIN 46 – which materially impacted banks’ supply of credit line commitments. The mechanism relies on maintenance of costly liquidity buffers. I show that banks with greater wholesale funding shares keep higher liquidity buffers to avoid refinancing risks. Economic efficiencies emerge as long as negative wholesale funding shocks don’t coincide with credit line drawdowns similar to the synergy argument in Kashyap, Rajan and Stein (2002). These results run contrary to the prevailing deposit-based theories of banks’ commitment lending and have important implications for banks’ ""specialness"" in commitment lending, aggregate liquidity risk, and post-2008 decline in credit lines to US firms."
When Political Connections Backfire: Social Protests, Asset Damage, and Firms' Response
Abstract
Analyzing over 1.1 million corporate assets, I find that assets of politically connected firms are significantly more likely to sustain damage during social protests compared to unconnected firms' similar assets located within the same municipal district. Conditional on sustaining damage, the extent of damage to connected firms is also greater. Additionally, during protests, connected firms attempt to obscure their government ties by having their connected corporate officers prevent their resumes from appearing in Google search results or edit their resumes, seemingly to downplay their past government positions. Lastly, the paper documents that connected firms, even those undamaged during protests, often sever political ties afterward, evidenced by a significant increase in the likelihood of involuntary turnover among connected corporate officers within a year, a pattern that persists even in within-firm estimations. Overall, my findings introduce a novel mechanism through which political connections incur costs, with its economic significance demonstrated by its effect on firms' decisions to dismiss connected corporate officers.When the Thin Bench Gets Thinner: Investment Bank Consolidation and Municipal Finance
Abstract
Do investment banks possess market power, and does their consolidation have anticompetitive effects? Using the geographically fragmented municipal bond underwriting market as a natural laboratory and a stacked difference-in-differences specification, I find that the underwriting spread rises by 5.3 basis points after within-market M&As from a sample mean of 103.0 basis points. The effects double for more significant M&As and triple in concentrated markets. While issuers become less likely to use credit ratings, bond insurance, or financial advisors, suggesting some efficiency gains to the M&As, these are insufficient to offset the rise in the underwriting spread. Effects hold when I examine M&As that are less likely to be driven by local economic dynamics and are absent in my placebo tests of cross-market M&As, commercial bank M&As, or withdrawn M&As. Using Census data, I confirm the detrimental effects of investment bank consolidation on local government financial health. My findings provide a novel perspective on bank antitrust regulations that traditionally focused on deposit-taking and lending activities.Where does gamma hedge drive the intraday market move?
Abstract
"This study examines how option market makers’ inelastic demand for delta-neutral hedges impacts the intraday fluctuation of the underlying asset price. Their short gamma imbalance in the trading book exposes them to both gamma and theta risk, resulting in a nonlinear gamma loss and constant theta profit. When they carry a short gamma position, option replication requires delta rebalancing at any price, creating inelastic demand for the underlying asset. This study hypothesizes that the creation of inelastic demand occurs when the trading book’s PnL gets negative, and so it explores the breakeven ranges of gamma and theta PnL as inflection points that cause inelastic demand and intraday momentum for the underlying stock. Empirical findings show that breaking this threshold range has a pronounced impact on the underlying intraday momentum. Furthermore, this study broadens its test to see whether option demandfrom active institutions influences asset prices via MM’s gamma hedge channel. Overall, this research contributes to a deeper understanding of the underlying market’s dynamics, as well as the inelastic hedging demand for option market making via a delta-neutral hedge."
Who Wins and Who Loses when Firms Stay Private Longer?
Abstract
How much does reducing of the number of firms in public equity markets harm investors? How much has the value firms can get from going public changed in the past few decades? I develop a dynamic supply and demand model of the firm entry/exit choice for public markets to relate firm benefits from being public to firm characteristics. Firms face a dynamic discrete choice problem on whether to be in public markets, with the benefits of being public a function of their characteristics, demand elasticities for their characteristics, and various regulatory and cost of capital changes. This structural analysis allows me to not only break down the causes of the transformation in US public equity markets, but also to say what the consequences of them have been for firms and investors. I find that a private firm's implied option value of going public has fallen by over half since the pre-Sarbanes era, but that the harm to investors in public equity markets is minimal. The reduction in my model is mostly caused by an increase to fixed costs of being a public company in the post-Sarbanes era.Why and How Do Analysts Make Multiple Forecasts in a Day?
Abstract
Recent studies find that equity research analysts face cognitive constraints, and their earnings forecasts become less accurate when they issue multiple forecasts on the same day (“forecast clustering”). Knowing such a behavior leads to lower forecast quality, it remains a puzzle why these analysts increasingly choose to cluster forecasts on the same day. We find that forecast clustering is closely related to rising workloads, the need for timely forecasts following concurrent earnings announcements, and distractions from news about other portfolio firms. Forecasts for firms important to the analysts’ careers or containing significant news are less likely to be clustered, suggesting strategic effort allocation by analysts. Our findings suggest that investors who rely most on written research by analysts should carefully assess the quality of analyst reports produced under increasing workload nowadays.JEL Classifications
- G0 - General