American Economic Association

A New Keynesian Preferred Habitat Model with Repo

Qian Wu

,

Indiana University

Abstract

This paper documents different observations in the Treasury cash and repo markets during the Global Financial Crisis (GFC) and the Covid-19 pandemic. To account for these observations, I develop a New Keynesian Preferred Habitat model with repo assets, featuring market segmentation, financial frictions, and liquidity/safety preference. I show that there was a flight-to-liquidity demand for short-term Treasuries during the GFC and a flight-from-safety supply for long-term Treasuries during Covid-19. I then use the model to study the passthrough of monetary policies to asset prices and macroeconomic variables. The model equilibrium yields three key findings. Firstly, the excess return in the Treasury cash market involves risk premia and (in)convenience premia, while the excess return in the repo market includes only (in)convenience premia. Secondly, financial frictions attenuate the passthrough of conventional policy while strengthening that of QE and QT. Lastly, the efficacy of monetary policies is contingent upon the relative importance of the repo borrowing channel compared to the cash borrowing channel. These findings contribute to a deeper understanding of the monetary policy transmission mechanisms in the post-GFC era.

Anomalies and Links to Market: Supranational Evidence Abroad from New Market Efficiency Measures

Yanran Li

,

CUNY-Baruch College

Xi Dong

,

CUNY-Baruch College

Yan Li

,

Southwestern University of Finance and Economics

David Rapach

,

Federal Reserve Bank of Atlanta

Guofu Zhou

,

Washington University in St. Louis

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?

Nico Oefele

,

University of Western Australia

Dirk G. Baur

,

University of Western Australia

Lee A. Smales

,

University of Western Australia

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

Neil Hwang

View Abstract

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 the
polarization 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

Yueting Jiang

,

Xi Dong

,

CUNY-Baruch College

Massimo Massa

,

INSEAD

Zilong Niu

,

Southwestern University of Finance and Economics

Cathy Yuqing Yang

,

CUNY-Baruch College

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

Abhinav Gupta

,

University of North Carolina-Chapel Hill

Naman Nishesh

,

University of North Carolina-Chapel Hill

Sinh Thoi Mai

,

Hanken School of Economics

Gonul Colak

,

University of Sussex and Hanken School of Economics

View Abstract

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

Minseog Kim

,

University of Texas-Austin

Geunyong Park

,

National University of Singapore

View Abstract

Abstract

"This paper examines firms’ optimal choices of debt maturity and their influences on
pricing 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

Hulai Zhang

,

ESCP Business School

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Abstract

Does Sustainable Investing Dull Stock Reactions to Cash Flow News?

Steffen Hitzemann

,

University of Houston

An Qin

,

Rutgers University

Andrea G Tamoni

,

University of Notre Dame

Stanislav Sokolinski

,

Michigan State University

View Abstract

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 temporary
mispricing. 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."

Innovative Intangible Assets in M&As: The Impact of Radical and Incremental Innovations on Acquirer Firms

Daria Davydova

,

EPFL & Swiss Finance Institute

Abstract

In mergers and acquisitions, the acquirer must value the target’s innovative intangible assets
at deal closure and disclose them to investors. I build a novel database and classify these assets, which include patents as well as other technological innovations, into two categories. Radical innovations represent breakthrough technologies, and incremental innovations build on existing technologies. My empirical findings indicate that both radical and incremental innovations are valuable for acquiring firms. Acquired incremental innovations are associated with cost reductions, while acquired radical innovations contribute to future patents. The market however appears to discount the value of acquired innovations at the deal announcement date.

Dynamic Market Choice

Xian Wu

,

University of Wisconsin-Madison

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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.

Network through Social Media Connections

Huaixin Wang

,

Tsinghua University

Weichen Zhang

,

Tsinghua University

View Abstract

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

Songrun He

,

Washington University in St. Louis

Linying Lyu

,

Zhejiang University

Guofu Zhou

,

Washington University in St. Louis

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, delivering long-short portfolios whose Sharpe ratios are comparable to those of 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. Additionally, probability forecasts augment existing factor models and significantly improve tail risk forecasts. These results underscore the unique and valuable insights probability forecasts offer in understanding the cross-section of stock returns.

Entrepreneur Experience and Success: Causal Evidence from Immigration Wait Lines

Abhinav Gupta

,

University of North Carolina-Chapel Hill

Annie Deng

,

University of New South Wales

Ronald Masulis

,

University of New South Wales

Kingsley Fong

,

University of New South Wales

View Abstract

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

Moritz Nardini

,

Ludwig Maximilian University of Munich (LMU)

Emanuel Renkl

,

Technical University of Munich

Philipp Winder

,

University of St. Gallen

Christian Hildebrand

,

University of St. Gallen

Benjamin Loos

,

University of New South Wales

View Abstract

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

Yang Guo

,

London School of Economics and Political Science

Abstract

When market solutions fail to achieve socially optimal kinds and quantities of commodities, financial intermediation can serve as a platform to enhance welfare for investors with consumption preferences. This paper develops a model where an investor trades off between index and activist funds, balancing financial returns with the ability to influence portfolio firms. The analysis shows that activist funds, through conditional contracts designed to shape firm behaviour while maximizing revenue, can improve social welfare. Under specific conditions, welfare can even be restored to socially optimal levels.

Firm-Level Labor-Shortage Exposure

Jarrad Harford

,

University of Washington

Qiyang He

,

University of Sydney

Buhui Qiu

,

University of Sydney

View Abstract

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

Liu Ee Chia

,

Pennsylvania State University

Brent Ambrose

,

Pennsylvania State University

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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

Pauline Liang

,

Stanford University

View Abstract

Sijie Wang

,

Chinese University of Hong Kong-Shenzhen

Jiajie Xu

,

University of Iowa

Xiang Zheng

,

University of Connecticut

Abstract

We utilize granular data from the life science sector to study how VC activism affects strategic experimentation decisions. We show that pipeline prioritization, deciding the timing and selection of projects to advance, is prevalent in startup growth. Despite more interactions from smaller and more focused VCs, biotech startups invested by them 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 financial and quality reasons. For identification, we use limited partners' adoption of ESG objectives as instruments for affected VCs' portfolio attention. Lastly, we highlight conflicting experimentation preferences between general partners and founding teams due to investment horizon and portfolio cannibalization.

Impact of Culture in Peer to Peer Lending

hongju ren

,

Stevens Institute of Technology

Anand M. Goel

,

Stevens Institute of Technology

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
formal institutional mechanisms and participants in the peer-to-peer market use information
about clan culture as a proxy for economic factors. We find that lenders react rationally to
culture as a signal of creditworthiness, neither underreacting nor overreacting. Our results
suggest that cultural considerations improve the efficiency of financial decisions

Impact of Institutional Owners on Housing Markets

Zipei Zhu

,

University of North Carolina-Chapel Hill

Franklin Qian

,

University of North Carolina-Chapel Hill

Caitlin Gorback

,

University of Texas-Austin

View Abstract

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

Atreya Dey

,

University of Edinburgh

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

Khushboo Thakkar

,

University of North Carolina-Chapel Hill

View Abstract

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.

The inequality channel behind the rise of market-based finance

Dario Laudati

,

Columbia University

Abstract

"This paper studies the causes behind the rise of the financial sector observed in the United
States 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 Shocks and Firm-level Resilience: The Role of Pricing Power

Amra Hrustanovic

,

University of Zurich

Alexander Wagner

,

University of Zurich

Abstract

While stocks are theoretically expected to hedge against inflation, average resilience against inflation is weaker than predicted. We show theoretically and empirically that firms' net pricing power--toward both customers and key stakeholders like employees--is a critical factor in this relationship. Firms with above-median pricing power experience a one-quarter less negative market reaction to inflation shocks. Their free cash flows are more resilient, though analysts do not revise forecasts accordingly. Investors apply lower discount rates to these firms, indicating that they perceive them as less risky. A trading strategy on pricing power and inflation yields a significant FF3-alpha of 1.2%.

Information Partitioning, Learning, and Beliefs

Pascal Kieren

,

Heidelberg University

Lukas Mertes

,

University of Mannheim

Martin Weber

,

University of Mannheim

View Abstract

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

Pietro Bini

,

Cornell University

View Abstract

Abstract

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

Zequn Li

,

Stevens Institute of Technology

Xiaoxia Lou

,

University of Delaware

Ying Wu

,

Stevens Institute of Technology

Steve Yang

,

Stevens Institute of Technology

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

Alice Eliet-Doillet

,

EPFL & Swiss Finance Institute

View Abstract

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

Amedeo De Cesari

,

University of Manchester

Marie Dutordoir

,

University of Manchester

Lingxiao Lynn Liu

,

University of Manchester

João Quariguasi Frota Neto

,

Alliance Manchester Business School

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

Mayur Choudhary

,

London Business School

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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

Menghan Wang

,

University of Hong Kong

Abstract

This paper examines how the disclosure of failure shapes innovation activities. Theoretically, mandatory failure disclosure can be socially beneficial through knowledge spillover, but privately costly due to the risk of information leakage. I study this question in the setting of clinical research, as it is one of the few areas where failure information is available. I exploit an expansion of mandatory disclosure requirements for clinical trial results as a positive shock to the availability of failure information. The number of new trials initiated increased following the policy change. The increase is driven by incremental innovations on existing drugs rather than developments of new drugs. Consistent with the knowledge spillover channel, trial sponsors benefit more in medical fields where they had less internal expertise prior to the policy change. Despite the proprietary costs for disclosing entities, my results support more mandatory failure disclosure, as the social benefits outweigh the costs.

Limit Order Clustering and Stock Price Movements

Xiao Zhang

,

University of Maryland

View Abstract

View Abstract

Abstract

"I study the effect of market fragmentation on the informativeness of prices. On the
one 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

Soohun Kim

,

Korea Advanced Institute of Science and Technology

Katie Moon

,

University of Colorado-Boulder

Jiyeon Seo

,

Korea Advanced Institute of Science and Technology

View Abstract

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

Jiacheng Liu

,

Purdue University

View Abstract

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 and Corporate Bond Momentum

Grace Liu

,

City University of Hong Kong

Junbo Wang

,

City University of Hong Kong

Chunchi Wu

,

State University of New York-Buffalo

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

Zhongtian Chen

,

University of Pennsylvania

Jiyuan Huang

,

University of Zurich

View Abstract

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

Sakif Rahman

,

University of Rochester

View Abstract

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

Lin William Cong

,

Cornell University

Guanhao Feng

,

City University of Hong Kong

Jingyu He

,

City University of Hong Kong

Yuanzhi Wang

,

City University of Hong Kong

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

Shawn Simpson

,

Morgan State University

Alex Tang

,

Morgan State University

Paul Rintamäki

,

Aalto University

View Abstract

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

Joel Houston

,

University of Florida

Sehoon Kim

,

University of Florida

Boyuan Li

,

University of Florida

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

Jie Cao

,

Hong Kong Polytechnic University

Amit Goyal

,

University of Lausanne

Yajing (Stella) Wang

,

Hong Kong Polytechnic University

Xintong (Eunice) Zhan

,

Fudan University

Weiming Zhang

,

IE Business School

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

Yibing Wang

,

King's College London

Steven Ongena

,

University of Zurich

Duc Duy Nguyen

,

Durham University

Tarik Driouchi

,

King's College London

Abstract

Using the staggered adoption of paid sick leave (PSL) mandates across US states, we document a 20% increase in the average household stock market participation following the enactment of a PSL policy. The effects are more pronounced among households facing greater health concerns, higher employment risks, and financially vulnerable households. Several mechanisms can explain our findings. PSL mandates offer households insurance-like protection, increase their income and wealth, and improve households’ future outlook. Our findings demonstrate that PSL laws create positive economic externalities by motivating households to invest in risky assets, a key factor toward building wealth.

Passive Investing and Market Quality

Philipp Höfler

,

Goethe-Universität Frankfurt

Christian Schlag

,

Goethe-Universität Frankfurt

Maik Schmeling

,

Goethe-Universität Frankfurt

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

Chunxiao Lu

,

University of Melbourne

View Abstract

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

Glades McKenzie

,

Florida State University

April Knill

,

University of South Carolina

Omrane Guedhami

,

University of South Carolina-Columbia

Sadok El ghoul

,

University of Alberta - Saint-Jean

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 Homophily in Supply Chain Relationships

Ting Dai

,

Hong Kong University of Science and Technology

Yonghao Zhai

,

Singapore Management University

Zhihong Chen

,

Hong Kong University of Science and Technology

View Abstract

Abstract

This paper investigates how political ideology affects supply chain networks amid rising U.S. corporate polarization. Using data on corporate employees’ political contributions and supply chain relationships, we present three key findings. First, homophily in political ideologies significantly increases supply chain relationship formation, especially under high information asymmetry. Second, this ideological alignment yields economic benefits: suppliers offer better trade credit terms and direct more innovation resources toward politically aligned customers. Third, firms with politically aligned suppliers demonstrate better operational performance such as enhanced market value and profitability. Using the Sinclair Broadcast Group’s staggered geographic expansion as an exogenous shock, we establish causality between ideological homophily and supply chain partner selection. Our study extends the organizational behavior literature by showing how ideological similarities between firms create economic value through reduced transaction costs and improved coordination.

Predictability of Firm-Level Stock Crash Risk

Gregory Gillis

,

University of Hawaii at Manoa

View Abstract

View Abstract

Abstract

Leveraging recursive demeaning, we find that ETF’s benchmark-adjusted return increases with lagged fund size. One standard deviation increase in fund size is associated with an increase in monthly performance by 4.5-9.6 basis points. Economies of scale are more pronounced in funds with high tracking errors. In contrast, the scale effect is weakened for higher Morningstar rating funds. Liquidity and turnover that affect scale economies in active funds are unlikely to play a role in passive funds. Returns to scale are present over time without systematic differences between normal and illiquid periods. Our results highlight the importance of size in ETFs.

Rewiring supply chains through climate policy

Emanuela Benincasa

,

University of Zurich

Olimpia Carradori

,

University of Zurich

Miguel Ferreira

,

NOVA University Lisbon

Emilia Garcia-Appendini

,

Norges Bank

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

Lyren Ye Lu

,

Imperial College London

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

Jialin Qian

,

Georgia State University

View Abstract

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

Kai Maeckle

,

University of Mannheim

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

Gen Li

,

University of British Columbia

View Abstract

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

Agathe Sadeghi

,

Stevens Institute of Technology

zachary feinstein

,

Stevens Institute of Technology

View Abstract

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

Yun-Soo Kim

,

Korea Advanced Institute of Science and Technology

Yeonggyu Yun

,

University of Wisconsin-Madison

View Abstract

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

Umang Khetan

,

University of Iowa

Abstract

,

University of Leeds

Danilo V. Mascia

,

University of Leeds

Costas Lambrinoudakis

,

University of Leeds

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

Jun Tu

,

Singapore Management University

Jingshu Wen

,

University of Oxford

Fan Zhang

,

Bentley University

Haofei Zhang

,

Nankai University

View Abstract

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

Ke Bi

,

University of Edinburgh

Leonidas Barbopoulos

,

University of Edinburgh

Yue Liu

,

University of Edinburgh

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 Pricing Format in Housing Bargaining

Haaris Mateen

,

University of Houston

Franklin Qian

,

University of North Carolina-Chapel Hill

Ye Zhang

,

Stockholm School of Economics

Tianxiang Zheng

,

University College London

Abstract

This study investigates how different listing price formats influence bargaining outcomes in the U.S. housing market. Using nationwide listing-level data spanning 20 years, we analyze the strategic use of precise prices (e.g., $351,432), charm prices (e.g., $349,900), and round prices (e.g., $350,000) and their effects on final sales price and transaction speed. We develop a theoretical framework to explain why sellers adopt specific pricing formats and provide empirical evidence to support our hypotheses. Our findings reveal that precise prices signal informed sellers and are associated with higher final sales prices. Charm prices act as cheap-talk signals, leading to faster sales but at slightly lower prices. Round prices, often used by inexperienced or uninformed sellers, attract more aggressive counteroffers from buyers. By combining a repeated sales approach with a national-scale, data-driven analysis, this study offers novel insights into the strategic effectiveness of pricing formats in the housing market bargaining process. Our results contribute to the understanding of how sellers' pricing strategies shape bargaining dynamics and outcomes, providing valuable implications for both market participants and policymakers.

The Real Cost of Benchmarking

Sebastian Hanson

,

Stanford University

Christian Kontz

,

Stanford University

View Abstract

Abstract

This paper provides causal evidence that benchmarking-induced asset price distortions have real effects on corporate investment. We document that increased benchmarking over the past 20 years fundamentally changed the cross-section of stocks' CAPM βs. We establish causality using exogenous variation in stocks' benchmarking intensity around Russell index reconstitutions. Stocks' CAPM βs increase upon index inclusion with larger effects for stocks which experience larger benchmarking intensity increases. 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. We find consistent results at the industry level using long-differences from 2000 to 2016. At the aggregate level, increase in CAPM βs caused by benchmarking largely offset the decline in the risk-free rate over the past 20 years and can explain 57% of the missing investment puzzle.

The Real Effects of China’s Carbon Dioxide Emissions Trading Program

Xiangzhen Li

,

Tsinghua University

Hao Wang

,

Tsinghua University

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 investment and expanded production workforce, while their climate decisions are influenced by state ownership and regional heterogeneity.

China’s Global Ownership

Hong Ru

,

Nanyang Technological University

Yaojun Ke

,

Nanyang Technological University

Jennie Bai

,

Georgetown University

Luc Laeven

,

European Central Bank

Abstract

Assembling a comprehensive micro-level dataset of China’s ownership in 154,699 firms across 159 countries between 2012 and 2021, we evaluate the scale, patterns, and motivations behind China’s overseas investments and assess their real impact on target firms and the spillover effects on non-Chinese-owned peer firms in the same country and industry. Our findings show that China's global ownership has grown at an annual rate of 22%, reaching a 1.72% global share by 2021. China tends to target firms with strong innovation, abundant natural resources, and those integrated into its supply chains. After acquisition, target firms tend to expand in firm size by 10.4% and increase R&D investments by 4.9% on average compared to non-target peer firms. However, these investments fail to result in higher patent output and instead lead to declines in operational efficiency and profitability, highlighting a disconnect in the innovation process and inefficient investment under Chinese ownership. This impact is especially pronounced when Chinese shareholders are affiliated with the government or state-owned enterprises. Notably, these findings stand in stark contrast to the outcomes of acquisitions by other economies such as the United States, Japan, and India.

The Rise and Fall of Investment: Rethinking Q theory in Equilibrium

Xinwei Li

,

INSEAD

Xinyu Liu

,

INSEAD

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

Heitor Almeida

,

University of Illinois

Timothy Johnson

,

University of Illinois

Sebastiao Oliveira

,

University of Illinois

Yucheng Zhou

,

University of Illinois

View Abstract

Teresa Serra

,

University of Illinois

Abstract

The tick size, representing the minimum price increment in a financial market, can influence pricing efficiency. We examine its role in price discovery between futures and options in the Chicago Mercantile Exchange corn and soybean markets. Futures markets have a tick size twice that of options, often resulting in one-tick quoted spreads. This limits traders’ ability to improve the best bid or offer price, reducing their capacity to incorporate information into the price. With larger tick sizes and despite thin and costly trading, we find that options are more informative than futures on average. Price-improving quotes from options traders enhance information impounded into prices, suggesting that an unconstrained tick size may enhance price discovery.

Time Series Reversal: A Payment Cycle Friction

giuliano graziani

,

Bocconi University

View Abstract

Abstract

"This paper shows that the U.S. equity market reverts the liquidity-driven trading induced
by 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

Edward Halim

,

Nanyang Technological University

Yohanes Riyanto

,

Nanyang Technological University

Nilanjan Roy

,

City University of Hong Kong

Yan Wang

,

Nanyang Technological University

View Abstract

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

Federico Baldi Lanfranchi

,

EPFL & Swiss Finance Institute

View Abstract

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 and Credit Divergence

Zhiheng He

,

Tsinghua University

Yang You

,

University of Hong Kong

View Abstract

View Abstract

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

Anni Wang

,

University of Nevada-Reno

Yifei Li

,

University of Nevada-Reno

Qun Wu

,

University of Nevada-Reno

View Abstract

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

Mohit Desai

,

University of North Carolina-Chapel Hill

View Abstract

View Abstract

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 demand
from 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?

Leo Stanek

,

University of Minnesota

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?

Chuyi Zhang

,

University of Hong Kong

Tse-chun Lin

,

University of Hong Kong

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.

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AFA PhD Student 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)

A New Keynesian Preferred Habitat Model with Repo

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Anomalies and Links to Market: Supranational Evidence Abroad from New Market Efficiency Measures

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Are Stablecoins the Money Market Mutual Funds of the Future?

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Auditor Screening in the Presence of Social Polarization

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Balance Sheet Constraints of Prime Brokers on Hedge Fund Performance: Evidence from GSIB Surcharge

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Bank Funding to Nonbank Financiers: Risk-sharing or Regulatory Arbitrage?

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Behind Dollar Savings in Mutual Funds: Are Shifting Sands Threatening Financial Stability?

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Betting Against Others' Beta

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Big Data and Bigger Firms: A Labor Market Channel

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Branching Out: The Role of Selection in Bank Branch Entry and Economic Growth

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Breaking Network Barriers in the Era of Data-Driven Venture Capitalists

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Campaign Rallies, Perceived Uncertainty, and Household Borrowing

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CEO’s Political Contribution and Rewards - Lei Chen - University of Melbourne

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A new safe asset in euros? Not without a large investor base

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Corporate Agility and Monetary Policy Transmission

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Corporate Debt Maturity and Output Price Dynamics

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Data Breach Information, Hospital Financing, and Patient Outcomes

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Decentralized and Centralized Options Trading: A Risk Premia Perspective

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Demand-Based Expected Returns

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Demonetized Q: Tobin Meets Jorgenson

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Dilutive Financing

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Why Do Firms Pay More for Bank Loans? The Role of Renegotiation

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Disruptive Innovation and IPO Outcomes: Evidence from Machine Learning

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Do ESG Investors Care About Carbon Emissions? Evidence From Securitized Auto Loans

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Does Options Trading Matter for Risk Management? Insights from the 1936 Options Ban on US Futures Markets

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Does Sustainable Investing Dull Stock Reactions to Cash Flow News?

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Innovative Intangible Assets in M&As: The Impact of Radical and Incremental Innovations on Acquirer Firms

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Dynamic Market Choice

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Network through Social Media Connections

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Empirical Asset Pricing with Probability Forecasts

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Entrepreneur Experience and Success: Causal Evidence from Immigration Wait Lines

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Monetary Transmission in Equity Markets: Evidence from Financial Intermediaries

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Expansion of Deposit Insurance: Adverse Selection Following 2023 Banking Crises

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External Governance Responses to Major Environmental and Social Incidents

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Financial Health Scoring and Personal Finances

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From Preference to Influence: The Economics of Activist Investing

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Firm-Level Labor-Shortage Exposure