American Economic Association

A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Green Investing and Sin Stock Exclusion

Olivier David Zerbib

,

Tilburg University

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Abstract

I demonstrate how the asset pricing formula deviates from the CAPM when a group of investors adopts sustainable investment practices involving financial exclusion and ESG screening. I characterize three premia: two exclusion premia, generalizing Merton (1987)'s [Journal of Finance, 42:483-510 (1987)] premium on neglected stocks, and a taste premium that disentangles the link between ESG and financial performance. By constructing an instrument that captures sustainable investors' revealed tastes for green stocks, I apply this model to green investing and sin stock exclusion and show that it significantly explains the cross-section of stock returns and outperforms the four-factor CAPM in several cases.

A Tool Kit for Factor-Mimicking Portfolios

Tengfei Zhang

,

Louisiana State University

Junbo Wang

,

Louisiana State University

Kuntara Pukthuanthong

,

University of Missouri

Richard Roll

,

California Institute of Technology

Abstract

We relate Factor-Mimicking Portfolios (FMP) to the beta-pricing model and propose that each FMP should minimize the mispricing component of its underlying factor. We also examine FMP construction when the underlying factor contains noise and offer a new method to resolve this issue. For both classical and our newly proposed method, we recommend enhanced necessary criteria. FMPs of several macroeconomic factors constructed by our method satisfy this criterion. We find that equity returns are priced by consumption growth, inflation, and the unemployment rate; and corporate bond returns are priced by consumption growth, industrial production, and the default spread.

Acquisitions and Technology Value Revision

Xiangshang Cai

,

University of Manchester

Amedeo De Desari

,

University of Manchester

Ning Gao

,

University of Manchester

Andreas Knetsch

,

RWTH Aachen University

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Abstract

This paper proposes an empirical approach that tries to capture investment horizons ex post. It is based on the intuition that future short-term profits have high predictive power over current investments levels, if current investments are short-term oriented. I utilize this method to analyze short-termist investment. Previous empirical work on short-termist investment has analyzed investment levels and concluded that investment policies are short-termist in case of underinvestment. Due to the nature of short-termism as an agency problem under asymmetric information, this approach relies on assumptions about the unobservability of investment levels to investors or about distinct investor irrationalities. My suggested method does not require these assumptions. Contrary to other measures of investment horizons, it relies on accounting information which is not observable to investors in the period of investment. It thus considers the necessity for asymmetric information highlighted by theoretical models. The empirical findings in this paper establish the validity of the introduced approach by relating it to an existing measure of investment horizons as well as multiple firm characteristics which are theorized to determine the level of short-termism plaguing firms. I observe that investment horizons are shorter for firms that inflate their reported income through real or accrual-based earnings management and for firms whose stock prices are more sensitive to earnings surprises. I also investigate which governance mechanisms are effective in curtailing short-termism. Managerial entrenchment, analyst coverage, institutional ownership, the effectiveness of the board of directors, and managerial long-term compensation all relate to longer investment horizons and thus reduce short-termism.

Bank Capital Requirements and Asset Prices: Evidence from the Swiss Real Estate Market

Olga Briukhova

,

University of Zurich and Swiss Finance Institute

Michele Pelli

,

University of Zurich and Swiss Finance Institute

Christoph Basten

,

University of Zurich

Abstract

In this paper we empirically study the effects of bank capital requirements on assets prices. In particular, we analyze the globally first activation of the Basel III countercyclical capital buffer (CCyB) by the Swiss National Bank in 2013. Since the Swiss sectoral implementation of the CCyB applies to residential mortgage lending only, we investigate the consequences of the intervention for the Swiss real estate market. As an identification strategy, we exploit the heterogeneity in treatment intensity across cantons, using data on the composition of mortgage suppliers in each canton. Our results suggest that the CCyB’s effectiveness in stabilizing asset prices crucially depends on the underlying financing structure of the market. We find that, being to a large extent financed by less mortgage-specialized universal or wealth management oriented banks, the cantons with a more overheated real estate market were less affected by the intervention. Additionally, we show that cantons with higher exposure to the CCyB treatment experienced mitigated price growth for single-family houses. However, the effect is not observed for condominiums, which are less dependent on mortgage loans and are more considerably financed by “deep-pocketed” institutional investors seeking positive yields. Our work raises important policy implications by shedding light on the intended and unintended effects of a novel macroprudential tool. For instance, in the presence of heterogeneous developments of real estate prices across regions, the CCyB requirements could be calibrated accordingly.

Global Demand Spillovers in Corporate Bond Issuance: The Effect of Underwriter Networks

Kerry Siani

,

Columbia University

Abstract

This paper studies how monetary policy shocks propagate across borders through bond issuance networks of firms, underwriters and investors. Using a difference-in-differences strategy, I find that the European Central Bank's quantitative easing program in 2016 spilled over to the U.S. corporate bond issuance market via an underwriting channel. U.S. firms connected to underwriters with more Eurozone investor clients faced greater orders for their bonds, achieved a lower cost of capital, and ended up issuing more bonds. The underlying mechanism is likely driven by costly search that underwriters face in locating potential investors, which incentivizes maintaining investor relationships for repeated business. As such, investor demand shocks transmitted through underwriters affect issuers heterogeneously based on preexisting issuer-underwriter-investor networks.

Banking on Demography: Population Aging and Financial Integration

Gazi Kabas

,

University of Zurich and Swiss Finance Institute

Sebastian Doerr

,

University of Zurich

Abstract

This paper argues that an integrated financial sector mitigates negative effects of population aging. We show that U.S. counties with an aging population see an increase in local deposits, reflecting higher saving rates of seniors. Banks use these deposits to increase credit supply. Using detailed data on mortgage lending, we find that banks channel deposits from aging ounties towards counties with a younger population. We find no evidence that banks engage in risky lending: they lend less to counties with a high share of sub-prime borrowers or low incomes, and do not lend disproportionately to low-income borrowers. The increase in credit supply has real effects. Counties with a higher market share of aging-exposed banks see an increase in house prices and building permits, as well as in firm formation. Results are robust to controlling for bank and county characteristics through granular fixed effects and an instrumental variable strategy.

Central Counterparty Exposure in Stressed Markets

Wenqian Huang

,

Bank for International Settlements

Albert Menkveld

,

VU University Amsterdam

Shihao Yu

,

VU University Amsterdam

Abstract

Time is valuable, particularly in stressed markets. As central counterparties (CCPs) have become systemically important, we need to understand the dynamics of their exposure towards clearing members at high frequencies. We track such exposure and decompose it which leads to the following insights. The composition of CCP exposure is fundamentally different in the tails. At extreme levels or during rapid increases, there is elevated crowding. This is the result of clearing members all concentrating their positions on a single security or a particular portfolio, desirable if motivated by hedging, worrying if due to speculation.

Do Commissions Cause Investment Adviser Misconduct?

Abstract

This paper analyzes how information costs causally affect the acquisition of private information and investment decisions. Using data on Chinese mutual fund managers' visits to geographically dispersed firm headquarters, I exploit the introduction of high-speed rail lines as a source of quasi-experimental variation in information costs. I show that exogenous travel time reductions substantially increase the frequency of visits and trading profits at the fund family--firm pair level. These effects are stronger for pairs with larger travel time reductions and persist over multiple years. Overall, my findings provide evidence for investors’ trade-off between the costs and benefits of private information.

Ambiguous Credit Information and Corporate Bond Prices

Hwagyun (Hagen) Kim

,

Texas A&M University

Ju Hyun Kim

,

Sungkyunkwan University, Texas A&M University

Heungju Park

,

Sungkyunkwan University

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Abstract

This paper connects credit information ambiguity to corporate bond prices. If investors dislike uncertain quality of credit information, theory implies that bond prices respond more to bad than to good news, and investors require higher premia for holding corporate bonds. Empirical results support the theory. Bond returns are predictable using the proposed ambiguity measures based on both time-series and cross-sectional variations in credit rating distributions. Credit information ambiguity explains up to 35% of corporate bond return premia and remains highly significant in various specifications that contain a battery of controls. Proposed credit ambiguity measures maintain predictability in multiple hypothesis testing.

Credit Supply Decomposition and Real Activity

Maximillian Littlejohn

,

University of California, Irvine

Abstract

This paper investigates the implications of sector-specific credit supply shocks on real economic activity in the United States during the past 66 years. These sectors include private households, non-financial corporations, and banks. Within a structural vector autoregression (SVAR) framework, I employ a unique sign-restriction strategy to identify one monetary policy shock, two aggregate macroeconomic shocks, and three credit supply shocks. I find evidence that credit supply shocks not only vary by the sectors in which they arise, but also by their consequences for business cycle dynamics. Credit shocks originating in the banking sector can explain up to 25% of output fluctuations while those arising in the household and corporate sectors can explain up to 15%. In addition, household and bank credit shocks may hold long-run consequences for inflation explaining up to 15% of its fluctuations. Within a historical context, the model identifies several periods where credit supply has been a significant driver of GDP. With respect to the recent financial crisis, the model uncovers a smaller role for credit shocks relative to aggregate supply shocks than is typically found in the literature. This supports recent empirical evidence suggesting that the early stages of the crisis were more reminiscent of an oil price shock recession.

Credit Variance Risk Premiums

Manuel Ammann

,

University of St. Gallen

Mathis Moerke

,

University of St. Gallen

Abstract

This paper studies variance risk premiums in the credit market. Using a novel data set of swaptions quotes on the CDX North America Investment Grade index, we nd that returns of credit variance swaps are negative and economically large. Shorting variance swaps yields an annualized Sharpe ratio of almost six, eclipsing its counterpart in xed income or equity markets. The returns remain highly statistically signicant when accounting for transaction costs, cannot be explained by established risk-factors, and hold for various investment horizons. We also dissect the overall variance risk premium into payer and receiver variance risk premiums. We nd that exposure to both parts is priced. However, the returns for payer variance, associated with bad economic states, are roughly twice as high in absolute terms.

Creditor Rights, Debt Capacity and Securities Issuance: Evidence from Anti-recharacterization Laws

Daniel Tut

,

Schulich School of Business- York University

Abstract

This paper examines the effects of improvement in creditors' rights protection on firms' financing choices and securities issuance. To address these issues, I exploit exogenous variation in creditors' rights protection induced by the staggered adoption of anti-recharacterization laws by some U.S. states. The laws enhance the ability of creditors to repossess collateral during bankruptcy. Using a difference-in-difference methodology to estimate the causal impacts; I find that: [1] the laws are positively related to debt capacity and debt maturity. Firms increase market leverage and substitute away from costly short-term debt financing into long-term debt financing [2] the laws are positively related to debt issuance [3] The laws are negatively related to equity issuance. My analysis further demonstrates that proactive securities issuers are significantly more responsive to the adoption of anti-recharacterization laws than passive securities issuers.

Intra-household Dynamics and CEO Corporate Risk-taking

Constantinos Antoniou

,

University of Warwick

Carina Cuculiza

,

University of Miami

Alok Kumar

,

University of Miami

Nagihan Mimiroglu

,

Maastricht University

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Paul Borochin

,

University of Miami

John Knopf

,

University of Connecticut

Luchun Ma

,

University of Connecticut

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Abstract

Abstract

This paper uses global data from 67 countries to investigate whether a natural disaster event cause creditor’s lending decision-making process to be affected by behavioral biases. To test this empirically, I construct a sample of 40,278 firms with 292,716 firm-year observations in 67 countries during the 14-year period from 2002 to 2015. Notably, this paper introduces a novel empirical approach that allows me to investigate if the attributes of a natural disaster event cause creditors to act suboptimal in their lending decision-making process. Specifically, I define two different empirical approaches: the uninformed and the fully informed approach. The uninformed approach assumes that creditors only uses the natural disaster event as their lexicographic heuristic in their business lending decision-making process. Creditors do not use detailed information about the natural disaster risk in their business lending decision-making process because of the high cost of data collection. The fully informed approach assumes that creditors use, in addition to the natural disaster event (the lexicographic heuristic), detailed information about natural disaster risk in their business lending decision-making process. This paper documents that the impact of a natural disaster on leverage depends on the used attribute of a natural disaster event. The results of this paper show that using attributes of a natural disaster event in combination with the lexicographic heuristic (the natural disaster event) causes creditors to make sub-optimal lending decisions. This finding also implies that a natural disaster event tend to bias the behavior of creditors, and that this bias tends to continue to exist even after considering the different types of natural disasters, and the cross-country differences in country specific factors such as the legal environment of a country and the level of financial development of a country.

Does Economic Policy Uncertainty Affect Analyst Forecast Accuracy?

Rumpa Biswas

,

University of New Orleans

Abstract

I investigate the dynamics of analyst forecast errors relative to economic policy uncertainty (EPU) and find a significantly positive relation between EPU and analyst forecast errors. EPU’s contribution to augment information asymmetry inhibits analysts’ ability to forecast leading to aggravated forecast errors. A doubling of EPU increases earnings forecast errors by 4.29 percentage points, and the volatility and dispersion in forecast errors are positively related to the EPU. This effect of EPU on forecast errors persists for 13 months with a gradually declining effect that is aligned with Oi–Hartman–Abel effect, a channel through which uncertainty can affect firms' financial activities, performance, and growth. Forecast errors are higher for firms with higher sensitivity to the EPU, and the uncertainty factor retains its significance when compared to the other risk factors. Additionally, firms with higher idiosyncratic risks show a higher sensitivity to the EPU.

Doing Safe by Doing Good: Risk and Return of ESG Investing in the U.S. and Europe

Christina E. Bannier

,

Justus Liebig University Giessen

Yannik Bofinger

,

Justus Liebig University Giessen

Bjoern Rock

,

Justus Liebig University Giessen

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Gordon Phillips

,

Dartmouth College

Jialun Yang

,

Tsinghua University

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Abstract

The Cultural Revolution deprived Chinese students their opportunity to receive higher education for 10 years when colleges and universities were closed. We examine the human capital cost of this loss of education on subsequent innovation by firms. We examine the innovation of firms that have CEOs who turn 18 during the Cultural Revolution thus sharply reducing their chances of attending college. Using multiple approaches to control for selection and endogenity, including an instrument based on a CEO’s Cultural Revolution exposure, we show that Chinese firms led by CEOs without college degrees spend less on R&D, generate fewer patents and receive fewer citations to these patents.

Electronic Trading and Traders

Pedro Tremacoldi-Rossi

,

University of Illinois at Urbana-Champaign

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Abstract

How did trading automation impact broker-dealer firms and workers? I leverage the high degree of financial regulation in the US to construct a linked employer-employee panel of traders, analysts, and brokerage firms and analyze the consequences of electronic stock trading on broker-dealer employment during the 2000s. These data provide rich information on workers’ employment history, experience, professional licenses and firms’ financial and operating condition and leverage, enabling to quantify how trading automation affected financial intermediation in the securities industry. Exploiting a regulatory change in stock markets that fostered speed-driven competition and local variation in IT stock, I show that electronic trading lead to substantial broker-dealer employment losses. Automation eliminated 100 trading jobs on average during 2007-2009 for each additional computer per worker existing before Regulation National Market System became effective. Through a series of tests, I show that these results are unlikely to be driven by the Great Recession or the rise in online brokerage services.

Ensemble Machine Learning and Stock Return Predictability

Hongwei Zhang

,

Tilburg University and Central University of Finance and Economics

Abstract

Many, even sophisticated, models cannot beat a simple mean combination of univariate stock market return forecasts. We introduce an ensemble machine learning method, which averages forecasts from sophisticated models (like BMA, WALS and LASSO) based on random subsamples and which learns from its mistakes by adaptively changing sampling distributions. Empirically, our novel method improves the simple mean forecast with statistically significant monthly out-of-sample R2 of around 2-3% and annual utility gains around 3%. Our approach benefits from predicting well in volatile periods and especially from extreme market drops. The forecasting gains of our new method stem from improved diversity among individual forecasts. We obtain similar gains in forecasting accuracy when we use our method to predict macro economic variables.

ESG Preference, Institutional Trading, and Stock Return Patterns

Jie Cao

,

Chinese University of Hong Kong

Sheridan Titman

,

University of Texas at Austin

Xintong Zhan

,

Chinese University of Hong Kong

Weiming Zhang

,

Chinese University of Hong Kong

Abstract

We explore how the trend towards socially responsible investing affects the predictability of stock returns. We look at a composite of 11 mispricing signals and find that they more reliably predict returns of stocks held by more socially responsible (SR) institutions. We conjecture that this is related to our observation that SR institutions are less likely to buy underpriced stocks with poor ESG scores or sell overpriced stocks with high ESG scores. We find that these patterns only emerge in recent years with the rise of ESG investing, and are not fully offset by ESG-neutral arbitrageurs due to funding liquidity constraints.

Falling Behind: Has Rising Inequality Fueled the American Debt Boom 1980–2007?

Moritz Drechsel-Grau

,

University of Mannheim

Fabian Greimel

,

University of Mannheim

View Abstract

Abstract

,

London Business School

Abstract

We show that U.S. life insurers used internal models to over-report the value of a large fraction of corporate bonds during the financial crisis. Reported credit spreads of bonds valued using internal models were substantially lower by 220 bps, as compared to bonds that are otherwise similar but valued using external sources. Misreporting is higher for bonds that are likely to be impaired and negatively affect regulatory ratios, for insurers that are constrained by regulatory capital, and for bond positions that are held by few insurers. Using novel data on U.S. state regulators, we document that misreporting is negatively correlated with the degree of supervision at the state level, but only for bonds held by multiple insurers. Supervision has limited impact on bonds held by fewer insurer due to the lack of reference prices available with state regulators. Consistent with these incentives, we show that insurers “corner the market" by holding a large fraction of a bond's issue, as this allows them to bypass regulatory scrutiny and facilitates the use of internal models. Our findings have implications for the micro-structure of a segment of the corporate bond market and for properly assessing the fragility of financial institutions in bad times.

Financial Policies and Internal Governance with Heterogeneous Risk Preferences

Shiqi Chen

,

University of Cambridge

Emese Lazar

,

University of Reading

Xiaohan Xue

,

University of Reading

Abstract

A new framework for the joint estimation and forecasting of dynamic Value-at-Risk (VaR) and Expected Shortfall (ES) is proposed by incorporating intraday information into a generalized autoregressive score (GAS) model, introduced by Patton, Ziegel and Chen (2019) to estimate risk measures in a quantile regression setup. We consider four intraday measures: the realized volatility at 5-min and 10-min sampling frequencies, and the overnight return incorporated into these two realized volatilities. In a forecasting study, the set of newly proposed semiparametric models is applied to 4 international stock market indices: the S&P 500, the Dow Jones Industrial Average, the NIKKEI 225 and the FTSE 100, and is compared with a range of parametric, nonparametric and semiparametric models including historical simulations, GARCH and the original GAS models. VaR and ES forecasts are backtested individually, and the joint loss the function is used for comparisons. Our results show that GAS models, enhanced with the realized volatility measures, outperform the benchmark models consistently across all indices and various probability levels.

Foreign Sentiment

Azi Ben-Rephael

,

Rutgers University

Xi Dong

,

City University of New York-Baruch College

Massimo Massa

,

INSEAD

Changyun Zhou

,

Baruch College, CUNY and The Graduate Center, CUNY

Abstract

We construct a direct measure of U.S. based foreign sentiment using flow shifts between U.S. and international mutual funds. Foreign sentiment predicts return reversals in international markets, while local sentiments predict reversals in local markets. Exploring this segmentation, we find that foreign sentiment predictability is driven by overreaction to non-U.S. local negative news, which increases with the foreignness of a country to U.S. investors. In contrast, non-U.S. local sentiment predictability is not driven by overreaction to the same news. A complementary analysis of the U.S. provides consistent results, suggesting that the U.S. is also not immune to foreign sentiment from international markets. Our findings shed light on a new behavioral explanation for how foreign sentiment is generated, in the spirit of Dumas et al. (2017) “foreign sentiment” concept.

Formal Institutions, Culture, and Initial Coin Offerings: A Cross-Country Analysis

Ozgur Arslan-Ayaydin

,

University of Illinois at Chicago

Prabal Shrestha

,

KU Leuven

James Thewissen

,

KU Leuven

Wouter Torsin

,

KU Leuven

Abstract

Investors and policymakers still have little knowledge of Initial Coin Offerings’ (ICOs) dynamics as a funding mechanism. It is unclear what factors determine their international diffusion, the amount of capital raised and even the market perception post-ICO. Based on 2,205 ICOs from 105 countries between 2015 and 2018, we draw on institutional theory to provide evidence that, in a context of high information asymmetry and regulatory uncertainty, a country’s institutional strength has a positive and significant effect on the number of ICOs, their probability of success, the amount raised and the token price volatility. We observe that this relationship is particularly relevant for countries with no or light regulations concerning ICOs. This indicates that, to some extent, institutions substitute for the regulatory void surrounding ICOs. The crux of our results is
that despite the decentralization and disintermediation features of ICOs, a country’s strong institutions support the development of ICOs, send a signal of trustworthiness to investors, and reduce the return volatility associated with ICOs. Furthermore, we also find some evidence showing that the positive relationship between institutional background and investors’ decision to contribute to an ICO project is moderated by cultural dimensions of uncertainty avoidance
and collectivism.

Friends with Threats: Credit Conditions Under Common Ownership

Luca X. Lin

,

IESE Business School, University of Navarra

Abstract

I show that firms are less likely to violate loan covenants as their shareholders hold more shares in their industry peers. This link is more pronounced for firms with higher financial risks and a stronger tendency to overinvest. When violations do occur, creditors pressure for smaller cuts in capital investments in firms with more such common owners. These results support the hypothesis that creditors benefit from better governance under common ownership. However, creditors pressure for substantially larger payout cuts in firms with high common ownership after violations. Shareholders with more common ownership are also more likely to exit in the quarters after violations. Such evidence suggests that better governance by common owners can come at the expense of heightened shareholder-creditor conflict when the firm approaches financial distress.

Golfing for Information: Social Interactions and Economic Consequences

Sumit Agarwal

,

National University of Singapore

Yu Qin

,

National University of Singapore

Tien Foo Sing

,

National University of Singapore

Xiaoyu Zhang

,

National University of Singapore

Abstract

This paper studies how company top managers acquire information through social interactions at golf courses to subsequently acquire land parcels at lower prices. Developers play golf together more often after the government makes a land sale schedule announcement. We find evidence rejecting the collusion hypothesis. The winning bids are 6% lower after interacting with top managers from other companies, while the subsequent property selling price is not significantly different. However, the lower land prices by informed bidders generate negative spillovers on neighboring properties. Our results imply that social interactions enable developers to realize higher profits, while the government loses land sale revenues.

High-Frequency Trading, Endogenous Capital Commitment and Market Quality

Yenan Wang

,

Duke University

Abstract

I study market quality implications of the competition between traditional market making and high-frequency trading. A long-run traditional market maker responds to the competition from high-frequency traders by reducing both the spread and the amount of capital committed in market making. While a lower spread level is beneficial, less capital commitment deteriorates market quality. Specifically, the market's capacity to satisfy large demand is impaired. My model integrates price and quantity effects of high-frequency trading to better characterize its implications for market quality. I argue that focusing on spread alone is not always effective in measuring market quality. I further use this framework to analyze market quality implications of different high-frequency trading regulatory measures.

House Price Risks and Mortgage Choice

Lu Liu

,

Imperial College London

View Abstract

Abstract

The paper proposes a novel dimension of optimal mortgage choice, the length of the fixation period. Absent long-term fixed-rate products in most countries outside of the US, households are exposed to reclassification risk such as house price declines when they refinance at the end of the fixation expiry date, introducing uncertainty to the cost of life-time mortgage payments. In UK administrative data on mortgage originationd, I find that households' choice of fixation length reflects possibly competing hedging and affordability motives. Preliminary evidence further suggests that this leads to both adverse and ''advantageous'' selection into longer fixed rate mortgages from the perspective of a lender, with relevance for mortgage market design and macroeconomic policy.

How do Financial Contracts Evolve for New Ventures?

Danying Fu

,

University of Oxford

Tim Jenkinson

,

University of Oxford

Christian Rauch

,

Goethe University Frankfurt

Abstract

While previous papers have characterized various features of the financial contracts between entrepreneurs and venture capitalists, little is known about how the equity contracts evolve over the life of new ventures. Using the novel data set containing financial contract terms applying to different classes of stock, this paper is the first to focus on exploring the how the equity contract terms granted by the same investee private firms may vary across time, and determining the possible influencing factors. We find that there exists a default contract, for the terms adopt by different companies or used by the same companies in different funding rounds are surprisingly similar. Further, we notice, by analyzing the evolution patterns, that equity contracts change asymmetrically across different terms and at different stages of the investee firms. We also provide insights into the discussion on whether employing post-money valuation will definitely result in the over-valuation of start-ups. Our preliminary regression results show that the headroom, the new measure we developed as a proxy for the company’s financial flexibility, be negatively related to the dilution of common stockholders’ ownership of the company.

How Have Stock Markets Responded to 35 Years of Analyst Reports? Evidence from Machine Learning and Textual Analysis

Abena Owusu

,

Rensselaer Polytechnic Institute

Abstract

Using machine learning (ML) and contrasting with simple textual sentiment score and principal components analysis (PCA) methods, we examine the time series of content within over 700,000 sell-side analyst research reports from 1983 to 2017. We find that analyst reports have significantly changed across a variety of dimensions including length and content of four existing and two new dictionaries related to valuation and alternative metrics. We find that the naive net tone of reports only explains contemporaneous, not future, equity returns. On the other hand, we find that ML methods provide substantially different results from naive sentiment and PCA approaches on determining the impact of analyst reports on financial markets. We also examine the ability of reports to predict changes in firm short interest and volatility. Overall, we find that sell-side analyst reports have stronger impact on smaller cap stocks.

Identifying Empty Creditors with a Shock and Micro-Data

Hans Degryse

,

KU Leuven and CEPR

Steven Wei Ho

,

Columbia University

Zihan Ye

,

Pennsylvania State University

View Abstract

Abstract

Exploiting the exogenous rating changes of U.S. municipal bonds caused by Moody’s scale recalibration in 2010, this paper adopts a difference-in-differences approach to identify the inter-county economic effect of municipal credit ratings. I find a positive differential effect on county-level employment and wage income of 3%, following a rating upgrade in the neighboring county. This indirect inter-county effect of neighbor’s upgrade is independent, consistent, and comparable in economic magnitude with the direct effect of an upgrade on same-county outcomes. Four channels, working in parallel, explain the positive effect: government expenditure, commuting flow, economic spillover, and migration. Findings in this paper identify a new economic effect of municipal credit ratings that extends beyond the issuers’ geographic boundaries and into the neighboring counties.

Investor Attention and Market Return Predictability

Zhi Da

,

University of Notre Dame

Jian Hua

,

Baruch College

Chih-Ching Hung

,

Baruch College

Lin Peng

,

City University of New York-Baruch College

View Abstract

Abstract

We find that aggregated retail attention to individual stocks (ARA) strongly and negatively predicts future market returns. The predictability is robust and persists across a wide range of horizons from one day to four weeks ahead. A one standard deviation increase in ARA is followed by a negative market return of 26 basis points over the next five trading days, and the predictability is stronger during periods of high investor sentiment. In contrast, aggregated institutional attention or direct retail attention to the market factor do not exhibit this predictability. Our results suggest that the interaction of high retail attention to individual stocks and high investor sentiment drives marketwide overvaluation.

Investor Sentiment, Behavioral Heterogeneity and Stock Market Dynamics

Changtai Li

,

Nanyang Technological University

Sook Rei Tan

,

Nanyang Technological University

Sy Ha Ho

,

Recent studies have revealed that commodity currencies provide currency risk premiums, attracting carry traders. However, currency risk premiums may disincentive financial and nonfinancial institutions from investing in countries with commodity currencies due to the negative expected returns of hedging with currency futures contracts. We investigate four different hedging strategies for managing exchange rate risk: full, partial, no and cross-hedging. The cross-hedging strategy consists of using commodity futures contracts to hedge exchange rate risk. Our main findings based on nine commodity countries is that for many risk aversions cross-hedging is the optimal hedging strategy for exchange rate risk.

Is Innovation Always Beneficial? Externalities of Innovation on Product Market Relationship

CEO Employee Approval and Principal Agent Problems: Evidence from Employees' Choice Awards

Spencer Barnes

,

Florida State University

View Abstract

Abstract

This study examines the impact of chief executive officer (CEO) employee opinion on CEO myopia exploiting plausible exogenous variation from Glassdoor's "Top CEOs Employees' Choice" award list in both event study and regression discontinuity specifications. Award news results in a negative 1% cumulative abnormal return totaling on average a loss of 900 million dollars. However, exceptional CEO employee opinion generates value over time. Economic mechanisms include short-run expenses and long-term efficiency. Since superior CEO employee approval sacrifices current performance for future financial gains it decreases CEO shortsightedness serving as an agent monitoring device in a principal agent problem.

Jumps and the Correlation Risk Premium: Evidence from Equity Options

Nicole Branger

,

University of Muenster

René Flacke

,

University of Muenster

Frederik Middelhoff

,

University of Muenster

Abstract

This paper breaks the correlation risk premium down into two components: a premium related to the correlation of continuous stock price movements and a premium for bearing the risk of co-jumps. We propose a novel way to identify both premiums based on a dispersion trading strategy that goes long an index option portfolio and short a basket of option portfolios on the constituents. The option portfolios are constructed to only load on either diffusive volatility or jump risk. We document that both risk premiums are economically and statistically significant for the S&P 100 index. In particular, selling insurance against states of high jump correlation generates a sizable annualized Sharpe ratio of 0.85.

Legal Origins and Institutional Investors' Support for CSR

Rob Bauer

,

Maastricht University

Jeroen Derwall

,

Maastricht University

Colin Tissen

,

Maastricht University

View Abstract

Abstract

Using data on approximately 2,500 environmental and social shareholder proposals, we show that institutional investors from civil law countries use their voting power to positively influence the CSR of common law firms. A one percentage point increase in civil law institutional ownership increases the percentage of votes in favor of U.S. environmental and social proposals by 0.70 percentage points. Exploring their motive for doing so, we provide evidence that institutional investors from civil law countries are more likely to support CSR for financial rather than social motives. In comparison to institutional investors from common law countries, we argue that institutional investors from civil law countries have a more enlightened view of value maximization: they believe that the creation of stakeholder value ultimately benefits shareholder value.

Leveraged Loans, Systemic Risk and Network Interconnectedness

Monica Billio

,

Università Ca' Foscari Venezia

Alfonso Dufour

,

University of Reading

Ana Sina

,

University of Reading

Simone Varotto

,

University of Reading

View Abstract

Abstract

Abstract

We investigate whether investors categorize stocks into an investment theme of disruptive innovation, i.e., “moonshots.” To identify moonshots, we estimate the absolute sensitivity of individual stock returns to Bitcoin returns using daily Bitcoin prices from 2013 to 2018. Stocks with high absolute Bitcoin sensitivity (ABS) experience temporary over-valuation and subsequent return reversal that exceeds −1% per month. The return patterns are not due to size, book-to-market, momentum, illiquidity, idiosyncratic volatility, expected idiosyncratic skewness, and maximum daily returns. Additional analysis suggests that retail investors drive the speculative trading in moonshot stocks.

Mortgage Credit and Housing Markets

Yushi Peng

,

University of Zurich; Swiss Finance Institute

Abstract

This paper investigates how mortgage credit conditions affect housing markets and the demand for homeownership. Using unique data on homeowners' listings and transactions from the largest Chinese real estate brokerage company, and exploiting policy-driven changes in mortgage credit conditions in China, I provide empirical evidence that higher mortgage interest rates and down payment requirements have a negative effect on housing demand and prices. Estimating a structural model of households' demand and supply of residential properties, I find that mortgage interest rates and down payment requirements negatively affect households' willingness to pay and the value of owning residential properties. With counterfactual experiments, I quantify how mortgage credit policies influence housing demand, supply, price, market liquidity, bargaining power and study the role of expectations in determining housing market outcomes.

Mutual Fund Market Timing: Daily Evidence

Jeffrey Busse

,

Emory University

Jing Ding

,

Tsinghua University

Lei Jiang

,

Tsinghua University

,

University of Utah

View Abstract

Botao Wu

,

New York University

Abstract

We uncover information asymmetry before federal open market committee (FOMC) announcements, and explain the pre-FOMC announcement drift in the stock market as a compensation for the information asymmetry risk. Using corporate bond transaction level data, we document extensive evidences of informed trading starting several days before the FOMC announcements. We show that U.S. corporate bond returns and yield changes in the blackout period preceding FOMC announcements can predict monetary policy surprises, with a 20% adjusted R-squared. Moreover, starting several days before the announcements, costumers buy (sell) corporate bonds more often and corporate bond prices surge (decline) before expansionary (contractionary) monetary policy surprises. Furthermore, consistent with the informativeness of corporate bond transactions, we show that lagged corporate bond customer-dealer trade imbalances can predict pre-FOMC stock market movements and explain pre-FOMC drift. Corporate bond yield changes Granger-cause stock market pre-FOMC movements, and this bond-to-stock granger causality does not exist for non-pre-FOMC periods. Finally, we show that stocks of companies with higher probability of default are more sensitive to the lagged corporate bond market movements.

Psychological Barrier and Cross-firm Return Predictability

Shiyang Huang

,

University of Hong Kong

Tse-Chun Lin

,

University of Hong Kong

Hong Xiang

,

University of Hong Kong

Abstract

We provide a psychological explanation for the delayed price response to news about economically linked firms. We show that the return predictability of economically linked firms depends on the nearness to the 52-week high. The interaction between news about economically linked firms and the nearness to 52-week high can partially explain the underreaction to news about customers, geographic neighbors, industry peers, or foreign industries. We further examine how anchoring on the 52-week high affects belief updating regarding analyst recommendation. We find that analysts react to news about economically linked firms but that anchoring on the 52-week high reduces such reactions.

Rainy Day Liquidity

Jingzhi Huang

,

Pennsylvania State University

Xin Li

,

University of Cincinnati

Mehmet Saglam

,

University of Cincinnati

Tong Yu

,

University of Cincinnati

Abstract

Being the largest stakeholder in the corporate bond market with a cash flow largely independent of capital market conditions, insurance firms can provide liquidity in stressful conditions. This paper models and presents evidence on this distinct role played by insurers. We find that insurers' corporate bond purchases improve bond liquidity while their bond sales do not. Liquidity improvement is stronger in "rainy days", e.g., during the financial crisis, among low-rated and poor-liquidity bonds. Further, insurers' funding and holding horizon positively affect the liquidity of the bonds they purchase, highlighting the link between funding ability and rainy day liquidity provision.

Real Effects of Shareholder Proposals in the Context of Climate Change

Greg Tindall

,

Florida Atlantic University

Abstract

Extant literature has struggled to identify real effects of shareholder proposals, finding them to depend on their context. Progressively, climate change has gathered interest at annual meetings where shareholders present proposals related to the subject. The literature explains circumstances in which diversification can serve as a defense. I find that firms in receipt of shareholder proposals related to climate change diversify more, mostly into related industries. I find mixed evidence on wealth enhancements of diversification spurred by these proposals. I address endogeneity concerns in a variety of ways. The robustness of my results suggest that shareholder proposals have a strong impact on diversification, at least in the context of climate change.

Regulation and Initial Capital Structure: Evidence from the JOBS Act

Khaled Alsabah

,

University of Colorado

Katie Moon

,

University of Colorado Boulder

Abstract

We examine capital structure implications of newly public firms' availing themselves of regulatory exemptions. Title I of the Jumpstart Our Business Startups (JOBS) Act provides newly public firms broad-scale regulatory relief but limits the benefits to a certain subset of firms named ``Emerging Growth Companies (EGCs)." One of the EGC criteria is based on a $700 million public float threshold. We find evidence that firms appear to manipulate their public float at IPO issuance by bunching around the threshold to be eligible for the EGC status. Firms staying below the threshold are more likely to substitute public equity with debt. We further find the leverage effect persists over time, although public-float bunching attenuates.

Safe Asset Migration

Chase Ross

,

Yale University

Abstract

Post-crisis reforms changed the location of safe asset production. I propose a pair of tests to identify who issues safe assets and which safe asset issuers opportunistically time issuance when the price of safe assets is high. Federal agency issuance both (1) responds to day-to-day fluctuations in demand for safe assets—measured via the convenience yield—and (2) is an important determinant in the subsequent price of safe assets. Agencies issue more the day after an unexpected increase in the convenience yield, and an unexpectedly large agency issue decreases the convenience yield the next day. The Federal Home Loan Bank system is a newly crucial safe asset producer. The FHLBs' ability to produce safe assets depends on their implicit government backing, a potential source of concern for future policymakers.

Same Bank, Same Client but Different Pricing: How do Flat-fees for Mutual Funds affect Retail Investor Portfolios?

Benjamin Loos

,

University of Mannheim

Steffen Meyer

,

University of Southern Denmark & Danish Finance Institute

Charline Uhr

,

Goethe University Frankfurt

Andreas Hackethal

,

Goethe University Frankfurt

Abstract

What happens when a bank introduces a flat-fee pricing scheme for trading mutual funds to its brokerage clients while leaving everything else unchanged? Only 1.26% of clients adopt the fee scheme. Adopters have been using financial advice and are less prone to inertia. Difference-in-differences analyses of previously advised clients reveal that flat-fee clients seek and follow more advice and improve their portfolio efficiency. A second field experiment, with a large branch bank replicates the main results. We suggest that flat-fees increase trust in advisor quality and reject alternative explanations, like cost-advantages, sunk-cost fallacy, novelty effects or advisor (time) fixed effects.

Security Design and Credit Rating Risk in the CLO Market

Dennis Vink

,

Nyenrode Business Universiteit

Mike Nawas

,

Nyenrode Business Universiteit

Vivian van Breemen

,

De Nederlandsche Bank

Abstract

In this paper, we empirically explore the effect of the complexity of a security’s design on hypotheses relating to credit rating shopping and rating catering in the collateralized loan obligation (CLO) market in the period before and after the global financial crisis in 2007. We find that complexity of a CLO’s design is an important factor in explaining the likelihood that market participants display behaviors consistent with either rating shopping or rating catering. In the period prior to 2007, we observe for more complex CLOs a higher incidence of dual-rated tranches, which are more likely to have been catered by credit rating agencies to match each other. Conversely, in the period after 2007, for CLOs, it is more likely that issuers shopped for ratings, in particular opting for a single credit rating by Moody’s, not by S&P. Furthermore, contrary to what market participants might expect, investors do not value dual ratings more than single ratings in the determination of the offering yield at issuance. Looking at the explanatory power of credit ratings for a dual rated CLO, the degree to which investors increase their reliance on credit ratings depends to a large extent on the disclosure of an S&P rating, not Moody’s. This suggests that investors recognize credit rating risk by agency in pricing CLOs. In sum, the policy implication is that, to effectively regulate CLOs, the regulatory environment ought to differentiate between complex and non-complex CLOs.

Slowly Unfolding Disasters

Mohammad Ghaderi

,

University of Houston

Mete Kilic

,

University of Southern California

Sang Byung Seo

,

University of Houston

View Abstract

Abstract

We develop a model that endogenously generates slowly unfolding disasters not only in the macroeconomy, but also in financial markets. Due to imperfect information, disaster periods in the model are not fully identified by investors ex ante at the onset, but ex post using the peak-to-trough approach as in the data. Bayesian learning leads to a gradual reaction of equity prices to persistent consumption declines during disasters, consistent with the empirical evidence. We show that this mechanism is crucial in explaining the VIX, the variance risk premium, and risk premia on put-protected portfolios, addressing the shortcomings of traditional disaster risk models.

Human Interactions and Financial Investment: A Video-Based Approach

An (Allen) Hu

,

Yale University

Song Ma

,

Yale University

Abstract

Economic decisions are often made after human interactions. This paper proposes a flexible and extendable empirical framework to study micro-level human interactions and their connections to financial investment decisions. We project human interactions to three dimensions—visual, vocal, and verbal, and construct easily interpretable metrics along these dimensions using machine learning algorithms with videos as data input. The framework and methodology are applied to pitch videos in which entrepreneurs pitching investors for funding. We find that startup founder(s)’s behaviors differ significantly in their pitches. Venture investors are more likely to invest in startup teams that show more warmth and positivity (happy, passionate), but startup teams showing such features underperform conditional on investment. These features in human interactions carry more weight when evaluating female entrepreneurs, but women are often neglected when presenting together with their male teammates. We do not find strong evidence supporting that human interactions allow venture investors to extract additional valuable information about entrepreneurs on net.

Speculator Spreading Pressure and the Commodity Futures Risk Premium

Yujing Gong

,

University of Warwick

Arie E. Gozluklu

,

University of Warwick

Gi H. Kim

,

University of Warwick

Abstract

This paper investigates the impact of speculative trading on the commodity futures risk premium. We focus on speculators’ spread positions, and study the asset pricing implications of spreading pressure on the cross-section of commodity futures returns. Spreading pressure negatively predicts futures excess returns even after controlling for well-known determinants of futures returns such as basis-momentum. The spreading pressure factor-mimicking portfolio carries a significant risk premium of 21.55% per annum after commodity market financialization. Our single-factor model provides a better cross-sectional fit than the existing factor models. We show that spreading pressure reflects speculators’ expectation on the change in the slope and curvature of futures term structure, and our spreading pressure is explained by innovations in real economic uncertainty.

Speed of Financial Contagion and Optimal Timing for Intervention

Diana Mikhail

,

Carnegie Mellon University

Abstract

What constitutes timely intervention during a systemic crisis? Intervention that is 'too early' may not be appropriately designed due to the uncertainty surrounding the systemic nature of the crisis and may trigger panic. Intervention that is 'too late' may exacerbate the severity and duration of the crisis and ultimately prove ineffective in limiting financial contagion. In this paper, I develop a model to study optimal timing for intervention in a Core-Periphery interbank network of the financial system. Optimal timing for intervention during a cascade depends on two trade-offs: resilience of nodes against maturity of liabilities ('speed of financial contagion') and welfare of defaulting nodes against the cost of a systemic bailout. I find that faster contagion necessitates more immediate intervention and there is a threshold of speed beyond which immediate intervention becomes optimal. A 'too-interconnected-to-fail' effect arises endogenously in my model where a systemic bailout is warranted earlier when core nodes default even when it is more expensive. This finding is robust even when core nodes contribute less welfare to the financial system.

Systemic Cyber Risk

Rustam Jamilov

,

London Business School

View Abstract

Abstract

Cyber risk is a new and rapidly emerging form of operational threat that scales with digital automation and may cause significant disruptions to the financial market infrastructure. In this paper, I present a case that firm-level cyber attacks can have substantial aggregate implications. First, using multiple datasets on reported cyber incidents I build a time-varying value-weighted index of systemic cyber risk (SCR). Following positive shocks to SCR, firm-level stock returns (volatility) fall (rise) by roughly 2% (3%). Using spatial autoregressions identified with high-dimensional stock market networks, I find that up to 70% of the overall effect is due to second-order network effects. In the aggregate, positive shocks to SCR lead to significant reductions in market returns, spikes in corporate bond spreads, as well as increases in common proxies of aggregate uncertainty such as the VIX and the economic policy uncertainty index. Second, in order to study the social cost of cyber crime (SCCC), I build a dynamic general equilibrium model with heterogeneity, idiosyncratic risk, and costly endogenous default. In the model, heterogeneous bankers are subject to idiosyncratic stochastic volatility shocks - cyber attacks. The model is calibrated using the newly assembled dataset and can match the annual worldwide SCCC which ranges from $300 billion to over $1 trillion.

Does Safety Uncertainty Affect Acquisitions?

Tung Nguyen

,

University of Surrey

Dimitris Petmezas

,

Sabine Bernard

,

University of Mannheim

Benjamin Loos

,

University of Technology Sydney

Martin Weber

,

University of Mannheim

Abstract

Most papers investigating the disposition effect implicitly assume it to be constant over time and use data that only cover boom periods. However, drivers of the disposition effect (preferences and beliefs) are rather countercyclical. We use individual investor trading data comprising several boom and bust periods (2001-2015). Our results show that the disposition effect also moves countercyclical, i.e. is higher in bust than in boom periods. Our findings are driven by individuals realizing more gains in bust periods. Investors are, in relative (absolute) terms, 25 (4.6) percent more likely to realize a gain in bust than in boom periods.

The Effect of Conflict on Lending: Empirical Evidence from Indian Border Areas

Mrinal Mishra

,

University of Zurich and Swiss Finance Institute

Steven Ongena

,

University of Zurich

Abstract

,

Erasmus University Rotterdam

Abstract

We find that commodity futures returns contain information relevant to stock market returns and macroeconomic fundamentals for a large number of countries. Commodity futures returns predict stock market returns in 59 out of 70 countries and macroeconomic fundamentals in 62 countries. This predictability is not concentrated in the Energy and Industrial Metals sectors, as it is economically and statistically significant across all sectors. Surprisingly, we find that the role of countries' dependence on commodity trade is limited in its ability to account for this predictability. This holds true even when considering new measures that take into account indirect exposures through financial and trade linkages between countries. We find much stronger evidence of predictability being related to the ability of commodities to forecast inflation rates. Overall, our evidence is consistent with commodity markets having a truly global information discovery role in relation to financial markets and the real economy.

The Real Effects of Distressed Bank Mergers

Valeriya Dinger

,

University of Osnabrueck

Christian Schmidt

,

University of Mannheim

Erik Theissen

,

University of Mannheim

Abstract

In this paper we revisit the question whether negative shocks to banks have adverse real economic effects. We analyze German savings banks and propose a new identification strategy. We consider distressed mergers and interpret them as exogenous shocks to the (initially non-distressed) acquiring bank. We find that in the years after a distressed merger (i) the performance of acquiring savings banks deteriorates; (ii) the shock is transmitted to firms in the acquirer's region who cut back their investments and (iii) the overall macroeconomic dynamics in the region of the acquirer deteriorates, leading to lower investment and employment growth. To justify a causal interpretation of our results we perform several additional tests that establish the exogeneity of the shock to the acquiring bank with respect to local economic dynamics.

The Role of Investor Attention in Seasoned Equity Offerings: Theory and Evidence

Thomas Chemmanur

,

Boston College

Karen Simonyan

,

Suffolk University

Yu Wang

,

Boston College

Xiang Zheng

,

Boston College

Abstract

Models of seasoned equity offerings (SEOs) such as Myers and Majluf (1984) assume that all investors in the economy pay immediate attention to SEO announcements and the pricing of SEOs. In this paper, we analyze, theoretically and empirically, the implications of only a fraction of investors in the equity market paying immediate attention to SEO announcements. We first show theoretically that, in the above setting, the announcement effect of an SEO will be positively related to the fraction of investors paying attention to the announcement and that there will be a post-announcement stock-return drift that is negatively related to investor attention. In the second part of the paper, we test the above predictions using the media coverage of firms announcing SEOs as a proxy for investor attention, and find evidence consistent with the above predictions. In the third part of the paper, we develop and test various hypotheses relating investor attention paid to an issuing firm to various SEO characteristics. We empirically show that SEO underpricing, the post-SEO equity market valuation of firms, and institutional investor participation in SEOs are all positively related to investor attention. The results of our identification tests show that the above results are causal.

The Term Structure of Credit Spreads and Institutional Equity Trading

Efe Cotelioglu

,

USI Lugano and Swiss Finance Institute

View Abstract

Abstract

This paper empirically investigates the role of long-term institutional investors in information diffusion from the credit market to equities. The results show that a 1-percent increase in CDS slope is associated with a 0.114 percentage point increase in the sales of the long-term institutions. However, changes in CDS slope do not significantly predict short-term institutional trading. My findings provide evidence that a low CDS slope predicts improved creditworthiness, which in turn, is transmitted to the equity market through the trading of long-term institutions.

Taking Sides on Return Predictability

David McLean

,

Georgetown University

Jeffrey Pontiff

,

Boston College

Christopher Reilly

,

Boston College

View Abstract

Abstract

,

ESADE Business School

Menatalla El Hefnawy

,

ESADE Business School

Lenos Trigeorgis

,

University of Cyprus, King's College London and MIT

Abstract

This paper investigates whether the time-series volatility of book-to-market (BM), called value uncertainty (UNC), is priced in the cross-section of equity returns. A size-adjusted value-weighted factor with a long (short) position in high-UNC (low-UNC) stocks generates an annualized alpha of 6-8%. This value uncertainty premium is driven by outperformance of high-UNC firms, and is not explained by established risk factors or firm characteristics, such as price and earnings momentum, investment, profitability, or BM itself. UNC is correlated with macroeconomic fundamentals and predicts future market returns and market volatility. We provide a rational asset-pricing explanation of the uncovered UNC premium.

The Zero Lower Bound and Financial Stability: A Role for Central Banks

Tatjana Schulze

,

University of Oxford

Dimitrios Tsomocos

,

University of Oxford

Abstract

Macroprudential policy objectives have taken a new place in central bank pref- erences next to the prime objectives of monetary policy – stabilizing inflation and output. When deciding to raise interest rates from the zero lower bound (ZLB), central banks must take into account the effects of an increase in nominal interest rates on financial stability not only via bank profitability but also via aggregate default in the economy. We develop a general equilibrium model with a financial sector, an autonomous central bank, and collateral default to analyze (a) how mon- etary and macroprudential policy objectives affect optimal policies, and (b) how a lift-off from the ZLB affects liquidity and default (i) when the central bank cares only about monetary policy objectives, and (ii) when the central bank cares also about macroprudential policy objectives. A lift-off from the ZLB exacerbates default but mitigates default-induced deflation when the central bank has control over one instrument for each policy objective. A dual mandate without considering financial stability concerns increases the variance in targeted policy outcomes across states of nature. Pursuing macroprudential policy objectives on top of the dual mandate makes optimal monetary policy less pro-cyclical in our model.

Propensity to Accumulate Wealth, Portfolio Choice, and Asset Prices

Carina Cuculiza

,

University of Miami

View Abstract

Abstract

I examine how heterogeneous wealth accumulation motives affect household asset allocation decisions and asset returns in the United States. I find that households with a stronger propensity to accumulate wealth allocate more wealth to risky assets and are more likely to participate in the stock market. They also use financial markets to smooth their idiosyncratic income shocks, leading to lower income inequality, higher stock prices, and lower expected returns in areas where wealth accumulation motives are strong. Overall, these findings suggest that heterogeneity in the propensity to accumulate wealth can have social and economic implications.

Tit for Tat? The Consequence of Personal Information Misuse in Debt Collection

Li Liao

,

Tsinghua University

Zhengwei Wang

,

Tsinghua University

Congyi Zhou

,

Tsinghua University

Abstract

We examine consumers’ behavioral response to the misuse of personal information in the special case that personal contact data is employed to collect consumer loans without consumer authorization. Without controlling for endogeneity, this collection practice seems to reduce the default rate by 35%. However, using the fact that some borrowers are not collected due to excessive workloads for the collectors to develop our identification strategy, we find that the collection practice actually increase the default rate by 51%. Cross-section results suggest that the misuse of personal data has elicited negative reciprocity; that is, borrowers retaliate by deliberately choosing to default. Furthermore, based on online consumption data, we did not find evidence supporting that the increased default rate is related to declined repayment ability.

Tweeting in the Dark: Corporate Tweeting and Information Diffusion

Isabella Wolfskeil

,

Bocconi University

Abstract

Is there a link between corporate information dissemination on social media and valuations? Are social media reshaping the diffusion of corporate information? After constructing a novel and comprehensive dataset of over 7 million tweets posted by S\&P 1500 firms, I adopt text analysis methods and find that firms with negative earnings surprises have higher announcement returns if they tweet about earnings news. This result is concentrated among firms with higher retail investor ownership and larger social media networks. I also find evidence that firm-initiated tweets increase investors' fundamental information acquisition and the speed of information diffusion to investors. These findings are broadly supportive of the view that of the view that social media help facilitate price discovery after news releases. The results are consistent with models of investor sentiment, where investor sentiment is generally attributed to retail investors or noise traders (e.g., De Long et al. (1990), Lee et al. (1991), Shleifer and Vishny (1997)) and with models that use investor inattention to explain underreaction in returns (e.g., Barber et al. (2008), Cohen and Frazzini (2008), DellaVigna and Pollet (2009), Hirshleifer and Teoh (2003)).

Understanding the Onshore versus Offshore Forward Rate Basis: The Role of FX Position Limits and Margin Constraints

Hyeyoon Jung

,

New York University

View Abstract

Dongmei Li

,

University of South Carolina

Ran Tao

,

University of Reading

Chris Brooks

,

University of Reading

Adrian Bell

,

University of Reading

View Abstract

Abstract

A well-known asset pricing anomaly, the ``MAX" effect, measured by the maximum daily return in the past month, depicts stocks' lottery-like features and investor gambling behaviour. Using the comprehensive stock-level Dow Jones (DJNS) news database between 1979 and 2016, we consider in a empirical setting how the presence of news reports affects these lottery-type stocks. We find an augmented negative relationship between MAX stocks without news and expect returns, whereby MAX with news coverage generates return momentum. The differing future return relationships between MAX stocks with and without news appears to be best explained by information uncertainty mitigation upon news arrival. Overall, our findings suggest that news plays a role in resolving information uncertainty in the stock market.

Which Post-Crisis Regulations are Constraining Banks' Market Making? Evidence from Strategic Accounting Classifications

Dennis Hamilton

,

University of Iowa

View Abstract

Abstract

Banks increased held-to-maturity (HTM) classiﬁcations by more than $600 billion between 2010 and 2016 despite binding sale restrictions that render HTM securities illiquid. They accepted this friction in order to protect regulatory capital ratios from Basel III’s expanded marking to market of ﬁxed income security portfolios. I ﬁnd the unprecedented rise in restrictive HTM classiﬁcations crowds out dealer inventories, resulting in constrained market making capacity and reduced liquidity provisions by banks. Ultimately, market liquidity worsens for securities most frequently classiﬁed as HTM. Contemporaneous regulations are ruled out through analyses of treated and control banks, dealers, asset classes and mortgage-backed securities.

Who Has Skills in Trading Options?

Jianfeng Hu

,

Singapore Management University

Antonia Kirilova

,

Singapore Management University

Seongkyu (Gilbert) Park

,

Hong Kong Polytechnic University

Doojin Ryu

,

Sungkyunkwan University

Abstract

This paper uses account-level transaction data in Korea’s index options and futures to examine
option trading skills by different types of investors. We first investigate how common option
trading strategies are used. We find that (i) retail investors, both domestic and foreign, are more
likely to use simple option strategies, while institutional investors are more likely to use
complicated strategies; (ii) volatility trading is used more often than the other classic options
strategies; (iii) a small number of accounts, both institutional and retail, generate large volumes
of trades using sophisticated and well hedged positions. Then we examine the association
between trading strategies and account performance. Our results show that (i) foreign investors
are similar to domestic investors; (ii) for both retail and institutional investors, those using
volatility strategies outperform their peers and mainly gain from selling volatilities, although
subject to large downside risk; (iii) retail investors who use simple one-directional strategies
underperform, but institutions are able to gain from such strategies, possibly due to
informational advantages. Our findings suggest that skilled options traders use volatility and
complicated strategies, but country domicile is less important.

Why Do Institutional Investors Oppose Shareholder Activism? Evidence from Voting in Proxy Contests

Yanran Liu

,

University of Pittsburgh/Indiana University

View Abstract

Abstract

I show that the relationship between the U.S. Treasury yield curve and macroeconomic risk fluctuates over time. I establish this result by introducing time-varying volatility and variance risk premia in a tractable term structure model. Based on my model, I characterize the joint behavior of the yield curve and macroeconomic risk captured by inflation and unemployment gap from 1971 to 2019. First, I find that the macroeconomic contribution to short-term yield volatility is high in the 1970s, low during the Great Moderation starting in the mid-1980s, and high again after the financial crisis. Second, investors are increasingly anchoring short-rate expectations to macroeconomic risk. Third, deflation fears increase term premia during the financial crisis. Finally, I show that macroeconomic shocks do not explain the yield curve inversion in 2019. My results suggest that the recent inversion is not a warning of an imminent recession and thus should not trigger monetary policy easing.

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AFA Ph.D. Student Poster Session

Saturday, Jan. 4, 2020 8:00 AM - 8:30 PM (PDT)

A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Green Investing and Sin Stock Exclusion

Abstract

A Tool Kit for Factor-Mimicking Portfolios

Abstract

Acquisitions and Technology Value Revision

Abstract

Alternative Facts in Peer-to-Peer Loans? Borrower Misreporting Dynamics and Implications

Abstract

Ambiguous Text

Abstract

An Empirical Investigation of Short-Termist Investment: The Case of Corporate Investment Horizons

Abstract

Bank Capital Requirements and Asset Prices: Evidence from the Swiss Real Estate Market

Abstract

Global Demand Spillovers in Corporate Bond Issuance: The Effect of Underwriter Networks

Abstract

Banking on Demography: Population Aging and Financial Integration

Abstract

Central Counterparty Exposure in Stressed Markets

Abstract

Do Commissions Cause Investment Adviser Misconduct?

Abstract

Common-Ownership and Portfolio Rebalancing

Abstract

Competition and Product Development Innovation: The Case of Newly Launched Trademarks

Abstract

Competition, Non-Patented Innovation, and Firm Value

Abstract

Consuming Dividends

Abstract

Costly Information Acquisition and Investment Decisions: Quasi-Experimental Evidence

Abstract

Ambiguous Credit Information and Corporate Bond Prices

Abstract

Credit Supply Decomposition and Real Activity

Abstract

Credit Variance Risk Premiums

Abstract

Creditor Rights, Debt Capacity and Securities Issuance: Evidence from Anti-recharacterization Laws

Abstract

Intra-household Dynamics and CEO Corporate Risk-taking

Abstract

Data Economy and M&A

Abstract

Disastrous Selling Decisions: The Disposition Effect and Natural Disasters

Abstract

Distance Effects in CMBS Loan Pricing: Banks versus NonBanks

Abstract

Distinct Roles of Risk and Uncertainty: Evidence from Trading around U.S. Macro News

Abstract

Do Banks Assist Corporate Tax Avoidance? Evidence from Simultaneous Debt-Equity Holding

Abstract

Do Boards Have Style? Evidence from Director Style Divergence and Board Turnover

Abstract

Do Creditor Rights affect Financial Contracts? Evidence from the Anti-Recharacterization Statute

Abstract

Do Digital Coins Have Fundamental Values? Evidence from Machine Learning

Abstract

Do Firms Leave Workers in the Dark Before Wage Negotiations?

Abstract

Do Natural Disasters Bias Creditors?

Abstract

Does Economic Policy Uncertainty Affect Analyst Forecast Accuracy?

Abstract

Doing Safe by Doing Good: Risk and Return of ESG Investing in the U.S. and Europe

Abstract

Will Fund Managers Survive to the Advent of Robots? An Optimal Contracting Approach

Abstract

Platform Enterprises: Financing, Investment, and Network Growth

Abstract

Education and Innovation: The Long Shadow of the Cultural Revolution

Abstract

Electronic Trading and Traders

Abstract

Ensemble Machine Learning and Stock Return Predictability

Abstract

ESG Preference, Institutional Trading, and Stock Return Patterns