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FIIE-11: International Capital Markets
Do Foreign Institutional Investors Improve Market Efficiency?
1Imperial College London; 2Tsinghua University
We study the impact of foreign institutional investors on global capital allocation and welfare using firm-level international data. Using MSCI index inclusion as an exogenous shock to foreign ownership, we show that greater foreign ownership leads to more informative stock prices and this effect arises more from increased price efficiency than from improved firm governance. We further show that the impact of capital flows on price efficiency is due to real efficiency gains, as opposed to better information disclosure. Finally, we show that foreign ownership increases market liquidity, reduces firms' cost of equity, and leads to subsequent growth in their real investments, thus improving overall welfare.
Unbundling and Analyst Competition: Evidence from MiFID II
Columbia Business School
Sell-side research is typically bundled with transaction, giving rise to potential conflicts of interests between sell-side analysts and their clients. What will happen if research is unbundled from transaction? We investigate this question under the context of MiFID II. We provide evidence that unbundling causes a decrease in firm's sell-side coverage. Such a drop does not come from small or mid-cap firms, but concentrates on large firms. Contrary to the conventional wisdom, decrease in coverage quantity is not accompanied with decrease in coverage quality. Our analyzes suggest a competition channel driving the results. Redundant sell-side analysts drop out (extensive margin) and analysts who stay have stronger incentives to produce high-quality research (intensive margin). Our findings offer new insights on how analyst incentives affect research quality, provide empirical facts for designing the optimal way to pay for information, and have wide implications for regulatory authorities contemplating a similar regulatory change.
Credit default swaps around the world: Investment and financing effects
1Seoul National University, Korea, Republic of (South Korea); 2Warwick Business School; 3UNC Kenan-Flagler Business School; 4NYU Stern School of Business
We analyze the impact of the introduction of credit default swaps (CDS) on real decision making within the firm, taking into consideration differences in firms’ local economic and legal environments. We extend the model of Bolton and Oehmke (2011) to take into account uncertainty whether the actions taken by the reference entity will trigger credit events for the CDS obligations. We test the predictions of the model in a sample of more than 56,000 firms across 50 countries over the period 2001–2015 and find substantial evidence that the introduction of CDS affects real decisions within the firm, including those regarding leverage, investment, and the riskiness of the firm’s investments. Importantly, we find that the legal and market environments in which the reference entity operates have an influence on the impact of CDS. The effect of CDS is larger in environments where uncertainty regarding CDS obligations is reduced and where CDS mitigate weak property rights. Our results shed light on the incomplete nature of CDS contracts in international capital markets, related to significant legal uncertainty surrounding the interpretation of underlying credit events.
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