Conference Agenda

Overview and details of the sessions of this conference. Please select a date or location to show only sessions at that day or location. Please select a single session for detailed view (with abstracts and downloads if available).

Session Overview
Date: Monday, 21/May/2018
6:00pm - 8:00pmWelcome Reception
Peabody Museum 
Date: Tuesday, 22/May/2018
7:30am - 8:30amAFFECT Breakfast
Beinecke Terrace 
7:30am - 8:30amRegistration
1st Floor 
8:45am - 9:40amTUES01-1: Finance and Politics
Session Chair: Paola Sapienza, NWU-Kellogg
Session Chair: David Schoenherr, Princeton University
Room 2200 

Subnational Debt of China: The Politics-Finance Nexus

Hong Ru1, Dragon Yongjun Tang2, Haoyu Gao3

1Nanyag Technological University; 2University of Hong Kong; 3Central University of Finance and Economics

Using comprehensive proprietary loan-level data, we analyze debt borrowing and default of local governments in China. Contrary to conventional wisdom, policy bank loans to local governments have significantly lower default rates than commercial bank loans with similar characteristics. Due to the importance of policy bank loans for the advancement of local politicians’ careers, distressed local governments often strategically choose to default on loans from commercial banks. This selection became more pronounced after the abrupt ending of the “4-trillion” stimulus, when China started tightening local government borrowing. Our findings shed light on a potential approach to hardening budget constraints for local governments.

Ru-Subnational Debt of China-1109.pdf
8:45am - 9:40amTUES02-1: Real Effects of Corporate Financial Decisions
Session Chair: John Graham, Duke University
Session Chair: Song Ma, Yale University
Room 2210 

Cheap Trade Credit and Competition in Downstream Markets

Mariassunta Giannetti1, Nicolas Serrano-Velarde2, Emanuele Tarantino3

1Stockholm School of Economics; 2Bocconi University; 3University of Mannheim

Using a unique matched dataset of customers and suppliers, we provide evidence that suppliers offer trade credit to high-bargaining-power

customers to ease competition in downstream markets in which they have a large number of other customers. Differently from price discounts, trade credit can target

infra-marginal units and does not lower the marginal cost of the high-bargaining-power

customers. In equilibrium, the latter do not steal market share from the competitors and

the supplier can preserve profitable sales to low-bargaining-power

customers. We show that empirically trade credit is not monotonically increasing in past purchases, as is consistent with our conjecture that it targets infra-marginal units. Our results are not driven by differences in suppliers' ability to provide trade credit, customer-specific shocks or other endogenous location decisions.

Giannetti-Cheap Trade Credit and Competition in Downstream Markets-280.pdf
8:45am - 9:40amTUES03-1: Venture Capital and the Financing of Innovation
Session Chair: Ramana Nanda, Harvard Business School
Session Chair: Albert Sheen, University of Oregon
Room 2230 

When Investor Incentives and Consumer Interests Diverge: Private Equity in Higher Education

Charlie Eaton1, Sabrina Howell2, Constantine Yannelis2

1University of California Merced; 2New York University Stern School of Business

In sectors with intensive government subsidy, such as education, infrastructure, and health

care, short term profit maximizing incentives may not be aligned with customer interests. This paper studies the effect of private equity buyouts in the for-profit postsecondary education sector. Employing novel, hand collected data on 88 private equity deals and 1,332 school-level ownership changes, we find that private equity buyouts lead to expanded enrollment and higher profits, but also to higher per-student debt, lower graduation rates, lower loan repayment rates, and lower wages. The effects are driven by the top of the wage distribution drives the average effect. Our results may reflect selection, but we find operational changes that point to a treatment effect. Supporting a treatment channel, we show that following the expansion of federal credit limits for students, tuition and student debt at private equity owned schools rose faster than at other for-profit schools. The results indicate that superior capture of federal aid is an important channel through which private equity ownership translates to higher profits.

Eaton-When Investor Incentives and Consumer Interests Diverge-563.pdf
8:45am - 9:40amTUES04-1: Corporate Governance
Session Chair: Alon Brav, Duke University
Session Chair: Slava Fos, Boston College
Room 2400 

Board Quotas and Director-Firm Matching

Daniel Ferreira1, Edith Ginglinger2, Marie-Aude Laguna2, Yasmine Skalli2

1London School of Economics; 2Université Paris–Dauphine

We study the impact of board gender quotas on the labor market for corporate directors. We find that the annual rate of turnover of female directors falls by about a third following the introduction of a quota in France in 2011. This decline in turnover is more pronounced for new appointments induced by the quota, and for appointments made by firms that regularly hire directors who are members of the French business elite. By contrast, the quota has no effect on male director turnover. The evidence suggests that, by changing the director search technology used by firms, the French quota has improved the stability of director-firm matches.

Ferreira-Board Quotas and Director-Firm Matching-904.pdf
8:45am - 9:40amTUES05-1: Trading, Prices, and Household Finance
Session Chair: Eduardo Davila, New York University
Session Chair: Joel Hasbrouck, New York University
Room 2410 

What Drives the Trend and Behavior in Aggregate (Idiosyncratic) Variance? Follow the Bid-Ask Bounce

David Lesmond1, Xuhui {Nick} Pan1, Yihua Zhao1, Roberto Stein2

1Tulane University; 2University of Nebraska–Lincoln

We theoretically establish a market microstructure bias embedded in the estimate of industry-adjusted idiosyncratic variance and empirically show that the bid-ask spread eliminates the observed time trend in aggregate idiosyncratic variance (Campbell, Lettau, Malkiel, and Xu, 2001). These results are robust across various exchanges, various risk-based measures of idiosyncratic variance, and through time. Two natural experiments illustrate that an exogenous shock to the bid-ask spread is associated with a subsequent decline in the aggregate idiosyncratic variance. The microstructure hypothesis dominates any of the alternative explanations, including uncertainty about profitability, earnings shocks, or growth options, for the trend in idiosyncratic variance.

Lesmond-What Drives the Trend and Behavior in Aggregate-436.pdf
8:45am - 9:40amTUES06-1: Credit
Session Chair: Olivier Darmouni, Columbia Business School
Session Chair: Daniel Green, Massachusetts Institute of Technology
Room 4200 

The Marginal Propensity to Consume Over the Business Cycle

Tal Gross1,3, Matthew J. Notowidigdo2,3, Jialan Wang4

1Columbia University; 2Northwestern University; 3National Bureau of Economic Research; 4University of Illinois at Urbana-Champaign

This paper estimates how the marginal propensity to consume (MPC) varies over the business cycle by exploiting exogenous variation in credit card borrowing limits. Ten years after an individual declares Chapter 7 bankruptcy, the record of the bankruptcy is removed from her credit report, generating an immediate and persistent increase in credit. We study the effects of “bankruptcy flag” removal using a sample of over 160,000 bankruptcy filers whose flags were removed between 2004 and 2011. We document that in the year following flag removal, credit card limits increase by $780 and credit card balances increase by roughly $290, implying an “MPC out of liquidity” of 0.37. We find a significantly higher MPC during the Great Recession, with an average MPC roughly 20–30 percent larger between 2007 and 2009 compared to surrounding years. We find no evidence that the counter-cyclical variation in the average MPC is accounted for by compositional changes or by changes over time in the supply of credit following bankruptcy flag removal. These results are consistent with models where liquidity constraints bind more frequently during recessions.

Gross-The Marginal Propensity to Consume Over the Business Cycle-785.pdf
8:45am - 9:40amTUES07-1: Returns-Empirics
Session Chair: Kent Daniel, Columbia University
Session Chair: Owen Lamont, Wellington Capital
Room 4210 

Leverage and Cash Based Tests of Risk and Reward with Improved Identification

Ivo Welch

UCLA Anderson School of Management

Leverage offers not only its own directional implications for both risk and reward, but also facilitates superior tests of risk-reward theories: Leverage can change with and without corporate intervention, sometimes even discontinuously. In better-identified contexts, it is more difficult to blame omitted factors, contamination, information, or corporate responses. The evidence suggests that changes in leverage increase volatility but decrease average returns. These effects appear in the large panel of U.S. stock returns, survive progressively better empirical identification, and even hold in equity issuing and dividend payment quasi-experiments.

Welch-Leverage and Cash Based Tests of Risk and Reward with Improved Identification-482.pdf
8:45am - 9:40amTUES08-1: Corporate Bonds, Municipal Bonds, CDS, and Equity Valuation
Session Chair: Stefano Giglio, Yale University
Session Chair: Fabrice Tourre, University of Chicago
Room 4220 

Term Structures of Credit Spreads with Dynamic Debt Issuance and Incomplete Information

Luca Benzoni1, Lorenzo Garlappi2, Robert Goldstein3

1Federal Reserve Bank, Chicago; 2University of British Columbia, Sauder School of Business; 3University of Minnesota, Carlson School of Management

We investigate credit spreads and capital structure dynamics in a model in which management has private information regarding firm value and is able to issue both equity and debt to service existing debt. Rather than choosing to default,

managers of investment-grade (IG) firms who receive bad private signals conceal this information by servicing existing debt via new debt issuance. As such, firms with IG-commensurate spreads have zero jump-to-default risk

(and hence, command zero jump-to-default premium), at least until their debt capacity is fully utilized and spreads have increased to "fallen angel" status. These predictions match observation well.

Benzoni-Term Structures of Credit Spreads with Dynamic Debt Issuance and Incomplete Information-574.pdf
8:45am - 9:40amTUES09-1: Investment Theory
Session Chair: Vish Viswanathan, Duke University
Session Chair: Brian Weller, Duke University
Room 4230 

Institutional Investors, Heterogeneous Benchmarks and the Comovement of Asset Prices

Andrea M. Buffa1, Idan Hodor2

1Boston University; 2Hebrew University

We study the equilibrium implications of a multiple asset economy in which asset managers are each subject to a different benchmark. We demonstrate how heterogeneous benchmarking endogenously generates a mechanism through which fundamental shocks propagate across assets. Heterogeneous benchmarking reduces short-run return correlation, and may even lead to negative asset comovement. An asset that is included in a benchmark can not only comove negatively with assets included in a different benchmark, but also with assets belonging to the same benchmark. Our results, which are obtained in closed-form, are in line with the weakened correlation across industry-sector portfolios and investment styles over short horizons, and provide new testable implications on the established “asset-class” effect. The presence of institutional investors with different benchmarks also triggers additional price pressure amplifying return volatility.

Buffa-Institutional Investors, Heterogeneous Benchmarks and the Comovement-628.pdf
9:55am - 10:50amTUES01-2: Finance and Politics
Session Chair: Paola Sapienza, NWU-Kellogg
Session Chair: Scott Baker, NWU-Kellogg
Room 2200 

Corporate Cash and Political Uncertainty

Candace Jens1, Beau Page2

1Tulane University; 2Tulane University

Firms hold more cash in advance of gubernatorial elections and less cash immediately following elections. Two to four quarters before elections, cash-over-assets for election-state firms is 0.45%, 0.33%, and 0.24% larger than cash holdings for firms in non-election states. Cash holdings are 0.44% lower immediately following elections. This cash buildup is not caused by changes in firms' investment or payout policies, but instead by managers making value maximizing decisions around predictable gubernatorial elections. We show there is no similar cash buildup before spikes in the EPU index, which measures less predictable uncertainty, and smaller drawdowns following high-EPU periods.

Jens-Corporate Cash and Political Uncertainty-755.pdf
9:55am - 10:50amTUES02-2: Real Effects of Corporate Financial Decisions
Session Chair: John Graham, Duke University
Session Chair: Erik Gilje, Wharton School, University of Pennsylvania
Room 2210 

The Impact of Obamacare on Firm Employment and Performance

Heitor Almeida, Ruidi Huang, Ping Liu, Yuhai Xuan

University of Illinois at Urbana-Champaign

We study the impact of Obamacare on firm employment and performance using hand-collected firm-level employee health insurance data. We show that Obamacare is associated with a significant increase in health insurance premia for employees in company-sponsored health insurance plans. Perhaps because of this increase in cost, companies with a large fraction of employees on their health insurance plans prior to Obamacare actively reduce enrollment in these plans after the law was enacted. We also find evidence that these same companies shift their employment composition from full-time employees to part-time, temporary, or seasonal workers, who are not covered in employer-sponsored health insurance plans. We do not find any evidence of deterioration in performance in companies that were more exposed to the increase in health insurance premia, perhaps because these companies adjust to the new regulation by changing the composition of employment towards part-time employees.

Almeida-The Impact of Obamacare on Firm Employment and Performance-248.pdf
9:55am - 10:50amTUES03-2: Venture Capital and the Financing of Innovation
Session Chair: Ramana Nanda, Harvard Business School
Session Chair: Arthur Korteweg, University of Southern California
Room 2230 

Squaring Venture Capital Valuations with Reality

Will Gornall1, Ilya Strebulaev2

1University of British Columbia; 2Stanford Graduate School of Business

We develop a valuation model for venture capital-backed companies and apply it to 135 U.S. unicorns -- private companies with reported valuations above $1 billion. We value unicorns using financial terms from legal filings and find reported unicorn post-money valuation average 50% above fair value, with 15 being more than 100% above. Reported valuations assume all shares are as valuable as the most recently issued preferred shares. We calculate values for each share class, which yields lower valuations because most unicorns gave recent investors major protections such as a IPO return guarantees (14%), vetoes over down-IPOs (24%), or seniority to all other investors (32%). Common shares lack all such protections and are 58% overvalued. After adjusting for these valuation-inflating terms, almost one-half (65 out of 135) of unicorns lose their unicorn status.

Gornall-Squaring Venture Capital Valuations with Reality-272.pdf
9:55am - 10:50amTUES04-2: Corporate Governance
Session Chair: Alon Brav, Duke University
Session Chair: Todd Gormley, Washington University in St. Louis
Room 2400 

Does Board Size Matter?

Dirk Jenter2, Thomas Schmid3, Daniel Urban1

1Technical University of Munich; 2London School of Economics; 3University of Hong Kong

This paper uses minimum board size requirements in Germany to assess whether large boards reduce firm performance. Since 1976, the legally required minimum size of the supervisory board increases from 12 to 16 directors as German firms pass 10,000 domestic employees. There is a sharp increase in board size at this threshold, indicating that the mandate is binding for many firms. Using a regression discontinuity design around the threshold and a difference-in-differences analysis around the law’s introduction, we find robust evidence that forcing firms to have large boards lowers performance and value. At the threshold, operating return on assets drops by 2-3 percentage points and Tobin’s Q by 0.20-0.25, with similar declines for treated firms after the law’s introduction.

Jenter-Does Board Size Matter-499.pdf
9:55am - 10:50amTUES05-2: Trading, Prices, and Household Finance
Session Chair: Eduardo Davila, New York University
Session Chair: Mark Egan, Harvard Business School
Room 2410 

Investment in Human Capital and Labor Mobility: Evidence From a Shock to Property Rights

Christopher Clifford, William Gerken

University of Kentucky, United States of America

We show that the assignment of property rights to client relationships affects employee behavior in the industry for financial advice. Our identification comes from staggered firm-level entry into The Protocol for Broker Recruiting. The Protocol effectively transfers the ownership of the client relationship from the firm to the employee. We document that entering into the Protocol increases employee labor mobility among member firms. Further, upon Protocol inclusion, we find that employees are less likely to generate customer complaints, more likely to invest in their own general human capital, but less likely to invest in firm-specific human capital. We use detailed employee-employer matched data for the universe of financial advisors to show these effects hold within the same job spell and across advisors within the same county at the same time. Our results suggest that limiting labor mobility may limit employee incentives to invest in human capital.

Clifford-Investment in Human Capital and Labor Mobility-855.pdf
9:55am - 10:50amTUES06-2: Credit
Session Chair: Olivier Darmouni, Columbia Business School
Session Chair: Sonia Gilbukh, New York University
Room 4200 

Do Financial Constraints Cool a Housing Boom?

Lu Han1, Chandler Lutz2, Ben Sand3, Derek Stacey4

1Rotman School of Management, University of Toronto; 2Copenhagen Business School; 3York University; 4Ryerson University

In this paper we exploit a natural experiment arising from the 2012 Canadian law change that restricts access to mortgage insurance to homes under one million dollars ($1M), which effectively increases the minimum downpayment from 5% to 20% for homes of million dollars or more. Our empirical analysis is motivated by a directed search model that features auction mechanisms and fi nancially constrained bidders. We model the regulation as a tightening of the fi nancial constraint faced by a subset of prospective buyers. This prompts some sellers near the $1M segments to strategically adjust their asking price to $1M, which attracts both constrained and unconstrained buyers. Competition between bidders dampens the impact of the policy on sales prices. Using transaction data from the Toronto housing market, we fi nd that the policy causes a sharp bunching of homes listed at the $1M and a corresponding increase in the bidding intensity, which together result in muted response in the sales price. Despite failing to cool the boom in the million dollar segment, the policy improves borrowers creditworthiness by reallocating million dollar homes to those who are less constrained by the 20% downpayment. Everything considered, our analysis points to the importance of designing macroprudential policies that recognize the strategic responses of buyers and sellers in terms of listing, searching and bidding.

Han-Do Financial Constraints Cool a Housing Boom-389.pdf
9:55am - 10:50amTUES07-2: Returns-Empirics
Session Chair: Kent Daniel, Columbia University
Session Chair: Bryan Kelly, Yale University
Room 4210 

Are Cross-Sectional Predictors Good Market-Level Predictors?

Joseph Engelberg1, R. David McLean2, Jeffrey Pontiff3, Matthew Ringgenberg4

1University of California, San Diego; 2Georgetown University; 3Boston College; 4University of Utah

Firm-level variables that predict cross-sectional stock returns, such as price-to-earnings and book-to-market, are often aggregated and used to predict time-series market returns. We extend this literature and limit the data-snooping bias by using a near-complete population of the literature’s cross-sectional return predictors. Our tests reject the null of no predictability at the annual horizon in-sample. Moreover, we find the literature has ignored several cross-sectional variables – such as change in asset turnover and co-skewness – that contain strong in-sample predictability. When we consider out-of-sample testing, however, we find little evidence that cross-sectional predictors make good market-level predictors.

Engelberg-Are Cross-Sectional Predictors Good Market-Level Predictors-1139.pdf
9:55am - 10:50amTUES08-2: Corporate Bonds, Municipal Bonds, CDS, and Equity Valuation
Session Chair: Stefano Giglio, Yale University
Session Chair: Liying Wang, University of Nebraska
Room 4220 

Structural Changes in Corporate Bond Underpricing

Florian Nagler1, Giorgio Ottonello2

1Bocconi University; 2Vienna Graduate School of Finance

We show that in the aftermath of the financial crisis underpricing of corporate bonds increases because underwriters systematically place bonds to relationship investors. We argue that the post-crisis decrease in inventory-carrying capacities incentivizes underwriters to secure future intermediation by outsourcing bonds to related investors, who require in exchange increased underpricing. We isolate the strength of underwriter-investor relations by employing a novel empirical identification strategy based on institutional investors’ past holdings of underwriters’ own bonds. The relationship channel fully captures the increase in underpricing from the pre-crisis to the post-crisis period. Furthermore, it shows that relationship investors are net sellers of newly issued bonds in the post-crisis period. The results are informative about implications of post-crisis regulation.

Nagler-Structural Changes in Corporate Bond Underpricing-379.pdf
9:55am - 10:50amTUES09-2: Investment Theory
Session Chair: Vish Viswanathan, Duke University
Session Chair: Yajun Wang, University of Maryland at College Park
Room 4230 

Commodity Financialization and Information Transmission

Itay Goldstein2, Liyan Yang1

1Rotman School, University of Toronto; 2Wharton School, University of Pennsylvania

We study how commodity financialization affects information transmission and aggregation in a commodity futures market. The trading of financial traders injects both fundamental information and unrelated noise into the futures price. Thus, price informativeness in the futures market can either increase or decrease with commodity financialization. When the price-informativeness effect is negative, the futures price bias can increase with the population size of financial traders. Commodity financialization generally improves market liquidity in the futures market and strengthens the comovement between the futures market and the equity market. We find that operating profits and producer welfare move in opposite directions in response to commodity financialization, which provides important guidance for interpreting related empirical and policy studies.

Goldstein-Commodity Financialization and Information Transmission-140.pdf
11:05am - 12:00pmTUES01-3: Finance and Politics
Session Chair: Paola Sapienza, NWU-Kellogg
Session Chair: Jacopo Ponticelli, NWU-Kellogg
Room 2200 

The Value and Real Effects of Implicit Guarantees

Shuang Jin1, Wei Wang2, Zilong Zhang3

1HKUST; 2Queen’s University; 3City University of Hong Kong

Exploiting the first default by a large state-owned enterprise (SOE) in China’s onshore bond market for identification, we find that implicit government guarantees account for 1.45 - 1.77% of bond values, or 39 basis points - 48 basis points in yield spread, given an average bond duration of 3.64. This translates into a total value of more than 93 billion CNY (15 billion USD) in China’s domestic bond markets for the corporate sector. Implicit guarantees account for a greater value for firms in sectors operating at overcapacity and with high default risk but a smaller value for firms that receive direct government subsidy and firms that rely primarily on banks for financing. We further document that implicit guarantees have real effects on corporate investment and financing policies. The reduction of implicit guarantees leads to a decline in investment and net debt issuance, an increase in cash holdings, and an improvement in investment efficiency for SOEs compared to non-SOEs.

Jin-The Value and Real Effects of Implicit Guarantees-447.pdf
11:05am - 12:00pmTUES02-3: Real Effects of Corporate Financial Decisions
Session Chair: John Graham, Duke University
Session Chair: Roberta Romano, Yale University
Room 2210 

The Limits of Limited Liability: Evidence from Industrial Pollution

Ian Appel1, Pat Akey2

1Boston College; 2University of Toronto

We study how parent liability for subsidiary environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a landmark Supreme Court case that strengthened limited liability protection for parents with subsidiaries located in the jurisdiction of lower courts that previously adopted weaker standards. Using a difference-in-differences framework, we find that increased liability protection for parents leads to a 10% increase in toxic emissions by subsidiaries. We do not, however, find evidence that the increase in pollution results from increased production. Rather, subsidiaries are 12--25% less likely to engage in pollution abatement activities related to production. The effects are driven by less-solvent subsidiaries as well as parents that are closer to distress, a finding consistent with risk-shifting behavior. Overall, our results highlight moral hazard problems associated with limited liability.

Appel-The Limits of Limited Liability-529.pdf
11:05am - 12:00pmTUES03-3: Venture Capital and the Financing of Innovation
Session Chair: Ramana Nanda, Harvard Business School
Session Chair: Julian Atanassov, University of Nebraska
Room 2230 

Venture Capital Investments and Merger and Acquisition Activity around the World

Gordon Phillips1, Alexei Zhdanov2

1Dartmouth College, Tuck School of Business and National Bureau of Economic Research; 2Penn State University

We examine the relation between venture capital (VC) investments and mergers and acquisitions (M&A) activity around the world. We find evidence of a strong positive association between VC investments and lagged M&A activity, consistent with the hypothesis that an active M&A market provides viable exit opportunities for VC companies and therefore incentivizes them to engage in more deals. We also explore the effects of country-level pro-takeover legislation passed internationally (positive shocks), and US state-level antitakeover business combination laws (negative shocks), on VC activity. We find significant post-law changes in VC activity. VC activity intensifies after enactment of country-level takeover friendly legislation and decreases following passage of state antitakeover laws in the U.S.

Phillips-Venture Capital Investments and Merger and Acquisition Activity around the World-222.pdf
11:05am - 12:00pmTUES04-3: Corporate Governance
Session Chair: Alon Brav, Duke University
Session Chair: Emiliano Catan, New York University
Room 2400 

Shadow Pills and Long-Term Firm Value

Martijn Cremers1, Lubomir Litov2, Simone Sepe1,3, Scott Guernsey2

1University of Notre Dame; 2University of Oklahoma; 3University of Arizona

This paper analyzes the value impact of the right to adopt a poison pill – or “shadow pill” – on long-term firm value, exploiting the natural experiment provided by staggered poison pill law adoptions that validated the use of the pill in 35 U.S. states over the period 1986 to 2009. We document that the availability of a shadow pill results in an economically and statistically significant increase in firm value, especially for firms more engaged in innovation or with stronger stakeholder relationships. Our findings are robust to different specifications, including matching and portfolio analysis, and provide support to the bonding hypothesis of takeover defenses

Cremers-Shadow Pills and Long-Term Firm Value-893.pdf
11:05am - 12:00pmTUES05-3: Trading, Prices, and Household Finance
Session Chair: Eduardo Davila, New York University
Session Chair: Matteo Crosignani, Federal Reserve Board
Room 2410 

FinTech Credit and Service Quality

Yi Huang1, Chen Lin2, Zixia Sheng3, Lai Wei4

1Graduate Institute of International and Development Studies; 2University of Hong Kong; 3Ant Financial Services Group; 4Lingnan University

This paper provides the first empirical assessment about the effect of FinTech credit on service quality. Using millions of credit records on the online merchants of Alibaba, the paper identifies a causal effect of credit access on the service quality of small businesses. As credit lines are automatically granted to the merchants following a fuzzy discontinuity rule in credit scores, we are able to estimate the treatment effect in a regression discontinuity design. We find that, firms that receive a credit score just above the decision threshold have a significantly higher probability of receiving a credit line than those just below; and the predicted grant of credit lines has a significant positive effect on four measures of service quality based on customer-contributed seller ratings. The results suggest that, access to credit incentivizes the firms to provide better customer services. Additional heterogeneous results also show that, the positive effect is much larger for firms operating in (1) regions with a higher development of internet finance, and (2) more competitive industries.

Huang-FinTech Credit and Service Quality-892.pdf
11:05am - 12:00pmTUES06-3: Credit
Session Chair: Olivier Darmouni, Columbia Business School
Session Chair: Sean Hundtofte, Federal Reserve Bank of New York
Room 4200 

Information Disclosure and Payday Lending in Texas

Kathleen Burke1, Jesse B. Leary2, Jialan Wang3

1Princeton University; 2Consumer Financial Protection Bureau; 3University of Illinois at Urbana-Champaign

Inspired by a fi eld experiment conducted by Bertrand and Morse (2011), in 2012 the state of Texas adopted a three-part information disclosure that lenders must present to consumers before providing them with a payday loan. The disclosures present comparisons between the interest rates and dollar costs of payday loans and other credit products, and provide information on the costs and likelihood of renewing payday loans. Using a difference-in-differences strategy to compare borrowing patterns in Texas with states that did not change their payday laws, we estimate that loan volume declined by 13% in the six months following the disclosure implementation. This effect is persistent, and is not driven by store closings, changes in prices, or concurrent city ordinances in Austin and Dallas that imposed direct restrictions on credit supply. The results suggest that some payday borrowers have imperfect expectations about the costs of borrowing, and that disclosures can have a signi ficant impact on demand.

Burke-Information Disclosure and Payday Lending in Texas-788.pdf
11:05am - 12:00pmTUES07-3: Returns-Empirics
Session Chair: Kent Daniel, Columbia University
Session Chair: Toby Moskowitz, Yale University
Room 4210 

Factor Momentum

Mark William Clements1, Vitali Kalesnik1, Juhani Linnainmaa2,3, Rob Arnott1

1Research Affiliates; 2Marshall School of Business, University of Southern California; 3National Bureau of Economic Research

Past industry returns predict the cross section of industry returns, and this predictability is at its strongest at the one-month horizon (Moskowitz and Grinblatt 1999). We show that the cross section of factor returns shares this property, and that industry momentum stems from factor momentum. Factor momentum is transmitted into the cross section of industry returns via variation in industries’ factor loadings. Momentum in industry-neutral factors spans industry momentum; factor momentum is therefore not a by-product of industry momentum. Factor momentum is a pervasive property of all factors; we show that factor momentum can be captured by trading almost any set of factors.

Clements-Factor Momentum-278.pdf
11:05am - 12:00pmTUES08-3: Corporate Bonds, Municipal Bonds, CDS, and Equity Valuation
Session Chair: Stefano Giglio, Yale University
Session Chair: Yoshio Nozawa, Federal Reserve Bank
Room 4220 

Credit and Option Risk Premia

Lars Kuehn1, David Schreindorfer2, Florian Schulz3

1Carnegie Mellon University; 2Arizona State University; 3University of Washington

The goal of this paper is to extract the joint distribution of default probabilities and loss rates from the prices of credit default swaps and equity options. To this end, we estimate a structural model of credit risk with a representative agent with recursive preferences and Markov-switching states for the drift and volatility of consumption and earnings growth. While CDS rates are sensitive to both risk-neutral default probabilities and loss rates to bond holders, equity option prices are only sensitive to default probabilities because equity holders recovery almost nothing in bankruptcy. Using the information in both CDS rates and put option prices, we can recover the level and cyclicality of default probabilities, loss rates, and bankruptcy costs.

Kuehn-Credit and Option Risk Premia-1138.pdf
11:05am - 12:00pmTUES09-3: Investment Theory
Session Chair: Vish Viswanathan, Duke University
Session Chair: Will Diamond, Wharton School, University of Pennsylvania
Room 4230 

Why is capital slow moving? Liquidity hysteresis and the dynamics of limited arbitrage.

James Dow1, Jungsuk Han2, Francesco Sangiorgi3

1London Business School; 2Stockholm School of Economics; 3Frankfurt School of Finance and Management

Will arbitrage capital flow into a market experiencing a liquidity shock, mitigating the adverse effect of the shock on liquidity? Using a stochastic dynamic model of equilibrium pricing with privately informed capital-constrained arbitrageurs, we show that arbitrage capital may actually flow out of the illiquid market. When some arbitrage capital flows out, the remaining capital in the market becomes trapped because it becomes too illiquid for arbitrageurs to want to close out their positions. This mechanism creates endogenous liquidity regimes under which temporary shocks can trigger flight-to-liquidity resulting in "liquidity hysteresis'" which is a persistent shift in market liquidity.

Dow-Why is capital slow moving Liquidity hysteresis and the dynamics-891.pdf
12:00pm - 1:20pmKeynote Speaker Luncheon

Speaker: Heitor Almeida, University of Illinois at Urbana-Champaign, 2017 Chair of SFS Cavalade North America

New Haven Lawn Club 
1:30pm - 2:25pmTUES01-4: Finance and Politics
Session Chair: Paola Sapienza, NWU-Kellogg
Session Chair: Florian Schulz, University of Washington
Room 2200 

Executives in Politics

Ilona Babenko1, Viktar Fedaseyeu2, Song Zhang3

1Arizona State University; 2Bocconi University; 3Boston College

Between 1980 and 2014, the share of politicians in federal office who held a corporate executive position prior to being elected increased from 13.5% to 21.2%, while the likelihood that an executive runs for federal elective office doubled over the same period. Firms whose executives win federal elections experience significant positive stock returns around the dates of such elections and around the dates when Congress passes legislation introduced by their former executives. Relative to non-businessman politicians, we show that businessman politicians are not more effective at introducing or passing legislation but are significantly more likely to vote for legislation supported by pro-business interest groups and less likely to vote for legislation supported by labor unions or consumer advocacy groups. Businessman politicians have a 44.4% higher likelihood of winning elections, and executives with a good track record at their firms are more likely to run for political office. Our results indicate that business representatives have increased their direct involvement in the legislative process in the United States and that this involvement may have generated substantial benefits for their firms. American voters appear to value business experience in political candidates, even though, once elected, such candidates are not more effective legislators than other politicians.

Babenko-Executives in Politics-664.pdf
1:30pm - 2:25pmTUES02-4: Real Effects of Corporate Financial Decisions
Session Chair: John Graham, Duke University
Session Chair: Arthur Korteweg, University of Southern California
Room 2210 

Asymmetric Cash Flow Distributions and Corporate Policies

John Easterwood, Bradley Paye, Yutong Xie

Virginia Tech

A large literature hypothesizes that corporate financial policies depend on the stochastic properties of future cash flows. In this paper, we empirically investigate whether and how cash flow stochastic properties beyond the mean and variance impact three key corporate policies: 1) Leverage choice; 2) cash holdings; and 3) corporate payout. We decompose traditional measures of total cash flow uncertainty into downside and upside components and calculate asymmetry measures (e.g., skewness). We reject the hypothesis that total variation adequately captures future cash flow risk as it relates to these policies. We find that leverage depends negatively on the downside component of cash flow volatility but positively on the upside component. The reverse relations hold for cash holdings. Additionally, we find that leverage (cash) is positively (negatively) related to skewness. In terms of payout decisions, downside uncertainty negatively affects the propensity to pay a dividend or repurchase shares, upside uncertainty has no impact on either form of payout, and propensity to pay is positively related to skewness. While downside uncertainty is important for most payout decisions we investigate, upside uncertainty relates only to dividend increases and decreases. Our results indicate that cash flow characteristics beyond variance are important for a variety of corporate policy decisions.

Easterwood-Asymmetric Cash Flow Distributions and Corporate Policies-1186.pdf
1:30pm - 2:25pmTUES03-4: Venture Capital and the Financing of Innovation
Session Chair: Ramana Nanda, Harvard Business School
Session Chair: Tania Babina, Columbia University
Room 2230 

Angels, Entrepreneurship, and Employment Dynamics: Evidence from Investor Accreditation Rules

Laura A. Lindsey, Luke Stein

Arizona State University

This paper examines the effects of a shock to angel finance on entrepreneurial activity and employment. Using public micro data from the U.S. Census, we construct a state-level estimate of the fraction of accredited investors likely affected by Dodd- Frank’s elimination of housing wealth in the determination of accreditation status. We demonstrate that a larger reduction in the pool of potential angels negatively affects firm entry and reduces employment levels at small entrants. Employment increases at small and young incumbents as workers are absorbed, and relative wages for the startup sector decline. Angel finance appears to be a complement to organized venture capital and of greater importance in less concentrated and lower startup-capital-intensive industries. Our paper quantifies the impact of angel finance at the margin and offers insight on the geographies and sectors where it matters most.

Lindsey-Angels, Entrepreneurship, and Employment Dynamics-723.pdf
1:30pm - 2:25pmTUES04-4: Corporate Governance
Session Chair: Alon Brav, Duke University
Session Chair: Margarita Tsoutsoura, Cornell University
Room 2400 

SEC Enforcement and Corporate Relocations

Paul Calluzzo, Wei Wang, Serena Shuo Wu

Queen's University

We examine whether firms exploit regulatory enforcement heterogeneity in response to risks arising from the scrutiny of local US Securities and Exchange Commission enforcement offices. We find that the probability of a firm relocating to outside the jurisdiction of a SEC regional office is positively associated with its enforcement risk. We exploit shocks to enforcement intensity at the regional office for identification. Our results are stronger for small firms and firms with low analyst coverage. We also find that relocating firms avoiding scrutiny usually migrate to regions with weaker SEC enforcement and seldom provide explicit reasons for their relocation.

Calluzzo-SEC Enforcement and Corporate Relocations-673.pdf
1:30pm - 2:25pmTUES05-4: Trading, Prices, and Household Finance
Session Chair: Eduardo Davila, New York University
Session Chair: Paul Goldsmith-Pinkham, Federal Reserve Bank of New York
Room 2410 

Who Wears the Pants? Gender Identity Norms and Intra-Household Financial Decision Making

Da Ke

University of South Carolina

Using microdata from U.S. household surveys, I document that families with a financially sophisticated husband are more likely to participate in the stock market than those with a wife of equal financial sophistication. This pattern is best explained by gender identity norms, which constrain women's influence over intra-household financial decision making. A randomized controlled experiment reveals that female identity hinders idea contribution by the wife, whereas male identity causes men to be obstinate. These findings suggest that gender identity norms can have real consequences for household financial well-being.

Ke-Who Wears the Pants Gender Identity Norms and Intra-Household Financial Decision Making-697.pdf
1:30pm - 2:25pmTUES06-4: Credit
Session Chair: Olivier Darmouni, Columbia Business School
Session Chair: Matthieu Chavaz, Bank of England
Room 4200 

Pushing Boundaries: Political Redistricting and Consumer Credit

Christine Dobridge1, Pat Akey2, Rawley Heimer3, Stefan Lewellen4

1Federal Reserve Board of Governors; 2University of Toronto; 3Boston College; 4Carnegie Mellon University

Consumers residing in irregularly shaped congressional districts (i.e., potentially more gerrymandered) have lost access to credit over the past two decades. We identify this effect using a long panel data set of consumers’ credit histories and shocks to district boundaries after decennial censuses. The reduction in credit access is concentrated in states that allow elected politicians to draw political boundaries, providing evidence that the effects are the result of political processes. We find similar effects when we examine redistricting involving State Senators rather than U.S. Representatives. The effects are also strongest when congressional districts become less politically competitive, and similarly, in independent tests, credit access falls in states that make it more difficult for constituents to vote. These findings suggest that when constituencies lose their political voice, politicians have less incentive to cater to the median voter by advocating for goods and services.

Dobridge-Pushing Boundaries-1112.pdf
1:30pm - 2:25pmTUES07-4: Returns-Empirics
Session Chair: Kent Daniel, Columbia University
Session Chair: Jun Li, University of Texas at Dallas
Room 4210 

Vacancy Posting, Employee Value, and Asset Pricing

Yukun Liu

Yale University

Firms invest resources to search for employees and demand rent to compensate for the search costs. I show that the employee valuation ratio, defined as the ratio between rent and employee value, captures firm information about discount rate and economic conditions. A decomposition of the ratio reveals that firm risk premium drives most of the time-series movement in the employee valuation ratio. Regressing aggregate stock and bond returns on lagged values of the employee valuation ratio generates statistically significant coefficients and large adjusted R-squareds. Conditional on the employee valuation ratio, the consumption CAPM prices size, book-to-market, investment, momentum, and bond portfolios in the cross-section with an adjusted R-squared of 73 percent and a statistically insignificant alpha. The conditional consumption CAPM outperforms benchmark models that are designed to price these assets.

Liu-Vacancy Posting, Employee Value, and Asset Pricing-497.pdf
1:30pm - 2:25pmTUES08-4: Corporate Bonds, Municipal Bonds, CDS, and Equity Valuation
Session Chair: Stefano Giglio, Yale University
Session Chair: Carolin Pflueger, University of British Columbia, Sauder School of Business
Room 4220 

Low Inflation: High Default Risk AND High Equity Valuations

Alexandre Jeanneret1, Harjoat Bhamra2, Christian Dorion1, Michael Weber3

1HEC Montréal; 2Imperial College Business School; 3Booth School of Business, University of Chicago

We develop an asset pricing model with endogenous corporate policies that explains how inflation jointly impacts real asset prices and corporate default risk. Our model accounts for two important sources of nominal rigidity present in the data. First, nominal coupons paid to long-term corporate debt are fixed in the short run, that is, leverage is sticky. Second, in the short run, earning growth is less sensitive to variations in expected inflation than the nominal risk-free rate, that is, firm profitability is sticky. These features combined result in higher real equity prices and credit spreads when inflation falls. An increase in inflation has the opposite effects, but with smaller magnitudes. The relation between equity prices and inflation is thus asymmetric. In the cross-section, the model predicts the negative impact of inflation on real equity values and credit risk is stronger for low leverage firms. We find empirical support for our theoretical predictions.

Jeanneret-Low Inflation-925.pdf
1:30pm - 2:25pmTUES09-4: Investment Theory
Session Chair: Vish Viswanathan, Duke University
Session Chair: Emily Williams, Harvard Business School
Room 4230 

Securities Lending: Wholesale Funding and the Supply of Safe Assets

Nathan Foley-Fisher, Borghan Narajabad, Stephane Verani

Federal Reserve Board

We provide compelling evidence that the securities lending market is one channel through which the existence of a convenience yield on short-term safe assets distorts financial markets. We introduce a model in which the supply of securities lending increases the amount of safe assets in the financial system and is a source of wholesale funding for lenders to invest in less liquid securities. We offer strong empirical support using new data matching the universe of securities lending transactions to U.S. life insurers’ bond lending and cash collateral reinvestment decisions, covering nearly one million bond holdings from 2011 to 2015. We find that, controlling for bond demand, the cross-sectional variation in liquidity transformation by U.S. life insurers accounts for about 45 percent of the variation in their bond lending decisions. We also find that insurers that aggressively reinvest their cash collateral tend to switch to repo financing when the demand for borrowing their bonds is low. Our findings indicate that the supply channel is associated with distortions in the securities lending market, which have important consequences for the overall fragility of financial markets.

Foley-Fisher-Securities Lending-1028.pdf
2:40pm - 3:35pmTUES01-5: Finance and Politics
Session Chair: Paola Sapienza, NWU-Kellogg
Session Chair: Xiaoxue Zhao, Yale University
Room 2200 

Lending without creditor rights, collateral, or reputation—The “trusted-assistant” loan in 19th century China

Meng Miao1, Guanjie Niu1, Thomas Noe2

1Renmin University of China; 2The University of Oxford

This paper considers a lending to finance projects in a setting where repayment enforcement appears impossible. The loan was illegal and thus legally unenforceable. Creditors were incapable of applying private coercion to force repayment. Borrowers lacked both collateral and reputation capital. Project cash flows were unobservable. The project were acquisitions of Imperial administrative posts by scholars in nineteenth century Qing China. The lending mechanism was the “trusted-assistant loan.” Our model of trusted-assistant lending shows that it is a renegotiation-proof implementation of efficient state dependent financing. Empirical analysis of officials’ diaries and bank records shows that the employment of trusted-assistant lending and the performance of trusted-assistant loans conforms roughly with the model’s predictions.

Miao-Lending without creditor rights, collateral, or reputation—The “trusted-assistant” loan-116.pdf
2:40pm - 3:35pmTUES02-5: Real Effects of Corporate Financial Decisions
Session Chair: John Graham, Duke University
Session Chair: James Weston, Rice University
Room 2210 

Exchange Rate Exposure and Firm Dynamics

Juliana Salomao1, Liliana Varela2

1University of Minnesota; 2University of Warwick

This paper develops a firm-dynamics model with endogenous currency debt composition to jointly study firms’ financing and investment decisions in developing economies. In our model, foreign currency borrowing arises from a dynamic trade-off between firms’ optimal exposure to the currency risk and growth. Crucially, there is cross-sectional heterogeneity in foreign currency borrowing decisions in two dimensions. First, there is selection into foreign currency borrowing, as only productive firms find it optimal to be exposed to the currency risk. Second, there is heterogeneity in the share of foreign currency loans across firms, driven by firms’ idiosyncratic risk of default. We provide evidence for the pattern of foreign currency borrowing across firms using firm-level census data on Hungary, and quantify its impact on the aggregate.

Salomao-Exchange Rate Exposure and Firm Dynamics-882.pdf
2:40pm - 3:35pmTUES03-5: Venture Capital and the Financing of Innovation
Session Chair: Ramana Nanda, Harvard Business School
Session Chair: Sudheer Chava, Georgia Tech
Room 2230 

More Cash, Less Innovation: The Effect of the American Jobs Creation Act on Patent Value

Heitor Almeida1, Po-Hsuan Hsu2, Dongmei Li3, Kevin Tseng4

1Gies College of Business, University of Illinois at Urbana-Champaign and National Bureau of Economic Research; 2Faculty of Business and Economics, University of Hong Kong; 3Darla Moore School of Business, University of South Carolina, Columbia; 4School of Business, University of Kansas

We find that firms can become less innovative following a sudden “inflow” of cash. Specifically, multinational firms that were likely to repatriate cash to the U.S. under the 2004 American Jobs Creation Act (AJCA) generate less valuable patents than similar firms that could not benefit from this Act. This effect only exists among poorly governed firms and financially unconstrained firms, and is mainly driven by the reduction in exploratory innovation and in the value of U.S.-originated patents. Furthermore, there is no significant effect on the value of acquired innovation. These results appear to be consistent with the “quiet life” agency story.

Almeida-More Cash, Less Innovation-533.pdf
2:40pm - 3:35pmTUES04-5: Corporate Governance
Session Chair: Alon Brav, Duke University
Session Chair: Nadya Malenko, Boston College
Room 2400 

Does Diversity Pay in the Boardroom?

Laura Field1, Matthew Souther2, Adam Yore2

1University of Delaware; 2University of Missouri

This paper examines board leadership positions held by diverse (female and minority) directors. While the percentage of diverse directors on boards of S&P 1500 firms has doubled over the past twenty years and diverse directors possess at least the same professional qualifications as their peers, many board leadership positions allude them. Controlling for qualifications and experience, we find that diverse directors are significantly less likely to hold positions of chairman of the board, lead director, audit, or compensation committee chair than their non-diverse counterparts. Because diverse directors do not frequently serve in leadership roles on the board, they earn lower director pay. Evidence suggests that diverse directors perform their duties as well as other directors: diverse directors receive higher shareholder support during director elections, and we find no evidence of lower board monitoring quality for firms with diverse directors in leadership roles.

Field-Does Diversity Pay in the Boardroom-1168.pdf
2:40pm - 3:35pmTUES05-5: Trading, Prices, and Household Finance
Session Chair: Eduardo Davila, New York University
Session Chair: Zhaogang Song, Johns Hopkins University
Room 2410 

Discriminatory Pricing of Over-the-Counter FX Derivatives

Peter Hoffmann1, Yannick Timmer2, Sam Langfield3, Harald Hau4

1European Central Bank; 2Trinity College Dublin; 3European Systemic Risk Board; 4University of Geneva

New regulatory data with counterparty identities allows us to characterize discriminatory pricing in the OTC market for FX derivatives traded between dealers and non-financial firms. After controlling for contract characteristics, dealer identities, and market conditions, a client at the 75th percentile of the cross-sectional distribution pays an average spread that is 12 times as large as the one paid by clients at the 25th percentile. This large difference in spreads strongly correlates with various proxies of client sophistication. Trading on electronic request-for-quote platforms induces competition among dealers, which eliminates price discrimination and prevents dealers from exploiting recent price changes to their advantage.

Hoffmann-Discriminatory Pricing of Over-the-Counter FX Derivatives-968.pdf
2:40pm - 3:35pmTUES06-5: Credit
Session Chair: Olivier Darmouni, Columbia Business School
Session Chair: Andres Liberman, New York University
Room 4200 

Predictably Unequal? The Effects of Machine Learning on Credit Markets

Andreas Fuster1, Paul Goldsmith-Pinkham1, Tarun Ramadorai2, Ansgar Walther3

1Federal Reserve Bank of New York; 2Imperial College London; 3University of Warwick

Recent innovations in statistical technology, including in evaluating creditworthiness, have sparked concerns about impacts on the fairness of outcomes across categories such as race and gender. We build a simple equilibrium model of credit provision in which to evaluate such impacts. We find that as statistical technology changes, the effects on disparity depend on a combination of the changes in the functional form used to evaluate creditworthiness using underlying borrower characteristics and the cross-category distribution of these characteristics. Employing detailed data on US mortgages and applications, we predict default using a number of popular machine learning techniques, and embed these techniques in our equilibrium model to analyze both extensive margin (exclusion) and intensive margin (rates) impacts on disparity. We propose a basic measure of cross-category disparity, and find that the machine learning models perform worse on this measure than logit models, especially on the intensive margin. We discuss the implications of our findings for mortgage policy.

Fuster-Predictably Unequal The Effects of Machine Learning-909.pdf
2:40pm - 3:35pmTUES07-5: Returns-Empirics
Session Chair: Kent Daniel, Columbia University
Session Chair: Stijn Van Nieuwerburgh, New York University
Room 4210 

The Economics of the Fed Put

Anna Cieslak1, Annette Vissing-Jorgensen2

1Duke University; 2University of California Berkeley

We study the impact of the stock market on the Federal Reserve’s monetary policy. We analyze the economics behind the “Fed put,” i.e., the tendency for low stock returns to predict accommodating monetary policy. We show that stock returns are a statistically more powerful predictor of Federal funds target changes than standard macroeconomic news releases. Using textual analysis of FOMC minutes and transcripts, we then argue that stock returns cause Fed policy. FOMC participants are more likely to be concerned about the stock market after market declines and the frequency of negative stock market mentions in FOMC documents predicts target rate cuts. The focus on the stock market reflects Fed’s concern about the consumption-wealth effect and about the impact of the stock market on investment, with less role for the stock market simply predicting (as opposed to driving) the economy. We assess whether the Fed may be reacting too much to the stock market by (a) comparing the sensitivity to the stock market of the Fed’s growth, unemployment and inflation forecasts with the stock-market sensitivity of private sector forecasts, and (b) estimating whether the stock market impacts target changes even after controlling for Fed expectations of economic activity and inflation.

Cieslak-The Economics of the Fed Put-509.pdf
2:40pm - 3:35pmTUES08-5: Corporate Bonds, Municipal Bonds, CDS, and Equity Valuation
Session Chair: Stefano Giglio, Yale University
Session Chair: Umit Gurun, University of Texas at Dallas
Room 4220 

Financing Dies in Darkness? The Impact of Newspaper Closures on Public Finance

Pengjie Gao1, Chang Lee2, Dermot Murphy2

1University of Notre Dame; 2University of Illinois at Chicago

Local newspapers hold their governments accountable. We examine the effect of local newspaper closures on public finance for local governments. Following a newspaper closure, we find municipal borrowing costs increase by six to ten basis points in the long run. Identification tests illustrate that these results are not being driven by deteriorating local economic conditions. Newspaper closures also lead to lower credit ratings, smaller issue sizes, and higher underwriter gross spreads. The loss of monitoring that results from a newspaper closure is associated with increased government inefficiencies, as measured by government wages, employees, and tax revenues.

Gao-Financing Dies in Darkness The Impact of Newspaper Closures-929.pdf
2:40pm - 3:35pmTUES09-5: Investment Theory
Session Chair: Vish Viswanathan, Duke University
Session Chair: Colin Ward, University of Minnesota
Room 4230 

Schumpeterian Competition and Financial Markets

Daniel Andrei, Bruce Carlin

University of California, Los Angeles

Creative destruction not only involves bringing new technology to market, it imposes higher risk on the future of existing assets. We characterize the asset pricing implications of creative destruction when Schumpeterian competition takes place. Compared to first best, the quest for oligopoly rents leads to over-investment in uncertain projects, spikes in the price-dividend ratio, and an aftermath in which prices fall steeply as uncertainty resolves. If competition for rents is sufficiently intense, the elevated price-dividend ratio predicts negative future expected excess returns. This may provide a rational explanation for why periods in which investors race to market during technological change may promote investment bubbles. Our analysis yields novel empirical predictions and we discuss how creative destruction affects the term structure of risk.

Andrei-Schumpeterian Competition and Financial Markets-1003.pdf
3:45pm - 4:15pmRCFS: Special SFS Journal Paper Presentation: The Review of Corporate Finance Studies Keynote Paper

"Within-Bank Spillovers and Real Estate Shocks" by Kathy Yuan, Dragana Cvijanovic, and Vicente Cunat

Presenter: Vicente Cunat, London School of Economics

Zhang Auditorium at SOM 
6:00pm - 8:00pmReception
Murray College 
Date: Wednesday, 23/May/2018
7:30am - 8:30amRegistration & Breakfast
1st Floor 
8:45am - 9:40amWED01-1: Labor and Finance
Session Chair: Margarita Tsoutsoura, Cornell University
Session Chair: Ilona Babenko, Arizona State University
Room 2200 

Is Cash Still King: Why Firms Offer Non-Wage Compensation and the Implications for Shareholder Value

Tim Liu1, Paige Ouimet1, Christos Makridis2, Elena Simintzi3

1University of North Carolina at Chapel Hill; 2Stanford University; 3University of British Columbia

Over the past 40 years, the share of non-wage benefits in employee compensation grew from 5% to 30%. Using disaggregated data from Glassdoor, we first document a series of stylized facts about the availability of non-wage benefits and how these benefits are correlated with firm characteristics. We subsequently test three non-mutually exclusive hypotheses explaining the heterogeneity of non-wage benefits: (i) tax advantages, (ii) attracting and retaining specific employee groups, and (iii) mitigating the disutility of work. We find empirical evidence in support of all three hypotheses. Moreover, firms with higher rated benefits exhibit larger ex-post equity returns, suggesting that differences in non-cash types of compensation are not fully priced by the market.

Liu-Is Cash Still King-795.pdf
8:45am - 9:40amWED02-1: Ownership, Information, and Decision-Making
Session Chair: Cecilia Parlatore, New York University
Session Chair: Will Gornall, University of British Columbia
Room 2210 

Adverse Selection, Capital Supply, and Venture Capital Allocation

Adam Winegar

BI Norwegian Business School

This paper develops a model to explore how the interaction of adverse selection and search frictions affects the allocation of venture capital. Entrepreneurs have projects with different levels of risk and private information about their projects' quality and compete in a search market to attract investors. The combination of low capital supply and information frictions can cause entrepreneurs with high quality risky projects to avoid entering the venture capital market. An increase in capital supply reduces the distorting effects of search and information frictions causing entrepreneurs with high quality risky projects to enter the market and venture capitalists to increase their allocations to riskier projects. These effects can persist even if riskier projects are more valuable, meaning the average output per dollar of venture capital investment can increase with venture capital supply. Several other model predictions are also consistent with empirical findings.

Winegar-Adverse Selection, Capital Supply, and Venture Capital Allocation-796.pdf
8:45am - 9:40amWED03-1: Designing Bank Regulation
Session Chair: Gary Gorton, Yale University
Session Chair: Jean-Edouard Colliard, HEC Paris
Room 2230 

Design of Macro-prudential Stress Tests

Pavel Zryumov1, Dmitry Orlov1, Andrzej Skrzypacz2

1University of Rochester; 2Stanford University

We study the design of macro-prudential stress tests and capital requirements. The tests provide information about correlation in banks portfolios. The regulator chooses contingent capital requirements that create a liquidity buffer in case of a fire sale. The optimal stress test discloses information partially: when systemic risk is low, capital requirements reflect full information; when systemic risk is high, the regulator pools information and requires all banks to hold precautionary liquidity. With heterogeneous banks, weak banks determine the level of transparency and strong banks are often required to hold excess capital when systemic risk is high. Moreover, dynamic disclosure and capital adjustments can improve welfare.

Zryumov-Design of Macro-prudential Stress Tests-941.pdf
8:45am - 9:40amWED04-1: Capital Structure, Mergers, and Labor Compensation
Session Chair: Heather Tookes, Yale School of Management
Session Chair: Jessie Jiaxu Wang, Arizona State University
Room 2400 

A Model of Capital Structure Under Labor Market Search

Ping Liu

University at Buffalo, SUNY

This paper develops a unified framework examining the joint relationships between firms’ capital structure choices and labor-market outcomes in an economy featuring two-sided search frictions in the labor market. I nest a canonical capital structure model ̀ Leland (1994) into a competitive searching-and-bargaining environment in the spirit of Diamond-Mortensen-Pissarides. I obtain highly tractable solutions for firms’ optimal capital-structure choices and labor-market outcomes in the presence of wage bargaining and search frictions in the labor market. The model delivers rich implications for firms’ capital structure choices and their impact on aggregate labor market outcomes. Comparative static analyses show that firms adjust leverage upward when workers have more bargaining power, when workers’ unemployment risk is lower, or when the economy becomes more volatile. Moreover, firms’ optimal capital structure choices provide a novel channel through which workers’ bargaining power, job search efficiency, and economic volatility influence labor market outcomes. For example, job search efficiency affects the wages of new hires in an offsetting way, and the labor force participation rate climbs up during turbulent economic times.

Liu-A Model of Capital Structure Under Labor Market Search-209.pdf
8:45am - 9:40amWED05-1: Contracts
Session Chair: Giorgia Piacentino, Columbia University
Session Chair: Andrey Malenko, Massachusetts Institute of Technology
Room 2410 

Robust Security Design

Seokwoo Lee1, Uday Rajan2

1George Mason University; 2The University of Michigan

We consider the optimal contract between an entrepreneur and investors in a single-period model when both parties have limited liability, are risk-neutral toward cash flow risk, and are ambiguity-averse. Ambiguity aversion is modeled by multiplier preferences for robustness toward model uncertainty, as in Hansen and Sargent (2001). efficient ambiguity-sharing implies that the first-best contract consists of either convertible debt or levered equity. As is customary, in the second-best contract, moral hazard is alleviated by giving more cash to investors in low cash flow states. Under many settings in our model, the optimal security has an equity-like component in high cash flow states, providing a contrast to the results in Innes (1990). Finally, we derive the optimal contract in which the parties may voluntarily renegotiate the initial contract. We find that convertible debt emerges optimally: the entrepreneur offers risky debt as an initial contract which is later renegotiated to levered equity.

Lee-Robust Security Design-354.pdf
8:45am - 9:40amWED06-1: Behavioral
Session Chair: James Choi, Yale University
Session Chair: Jillian Grennan, Duke University
Room 4200 

Wisdom of the Employee Crowd: Employer Reviews and Stock Returns

Clifton Green4, Ruoyan Huang2, Quan Wen3, Dexin Zhou1

1Baruch College, City University of New York; 2Moody’s Analytics; 3McDonough School of Business, Georgetown University; 4Goizueta Business School, Emory University

We find that firms experiencing improvements in crowd-sourced employer ratings significantly outperform firms with declines. The return effect is concentrated among reviews from current employees, and it is stronger among early firm reviews and when the employee works in the headquarters state. Decomposing employer ratings, we find the return effect is related to changing employee assessments of career opportunities and views of senior management and unrelated to work-life balance. Changing employer reviews predict contemporaneous growth in sales and profitability and help forecast one-quarter ahead earnings announcement surprises. The evidence is consistent with employee reviews revealing fundamental information about the firm.

Green-Wisdom of the Employee Crowd-162.pdf
8:45am - 9:40amWED07-1: Asset Pricing & Production
Session Chair: Lukas Schmid, Duke University
Session Chair: Erik Loualiche, University of Minnesota
Room 4210 

Risk Exposure to Investment Shocks: A New Approach Based on Investment Data

Lorenzo Garlappi1, Zhongzhi Song2

1University of British Columbia; 2Cheung Kong Graduate School of Business

We propose a new approach to determine firms' return exposure to investment-specific technology (IST) shocks. Based on the idea that IST shocks affect firms through their cost of investment, we show analytically that firms' return exposure to IST shocks can be estimated from observable investment data. We apply our investment-based approach to the cross-section of book-to-market portfolios and find that value firms have higher exposure to IST shocks than growth firms, in contrast to the pattern estimated from IST proxies. The empirical findings provide an independent perspective on the economic mechanism through which IST shocks affect asset prices.

Garlappi-Risk Exposure to Investment Shocks-402.pdf
8:45am - 9:40amWED08-1: Macro-Finance
Session Chair: Stanley Zin, New York University
Session Chair: Michael Gallmeyer, University of Virigina
Room 4220 

Term structure of risk in expected returns

Irina Zviadadze

Stockholm School of Economics

Return predictability reveals economic variables that drive expected returns. Alternative economic theories relate fluctuations in predictive variables to different sources of risk. I develop an empirical approach that exploits these observations and measures how economically interpretable shocks propagate in the term structure of expected buy-and-hold returns. Shock propagation patterns constitute term structure of risk in expected returns whose shape and level serve as informative moments to test competing equilibrium theories of return predictability. As an application, I examine sources of stock return predictability. I find that equilibrium shocks in the long-run mean of the variance of consumption growth can justify the level and the shape of the term structure of expected stock returns, in contrast to consumption disasters or long-run risk.

Zviadadze-Term structure of risk in expected returns-881.pdf
8:45am - 9:40amWED09-1: Mutual Funds
Session Chair: Alexi Savov, New York University Stern School of Business
Session Chair: Kent Daniel, Columbia University
Room 4230 

What do fund flows reveal about asset pricing models and investor sophistication?

Narasimhan Jegadeesh, Chandra Sekhar Mangipudi

Emory University

Recent papers use the relative strength of the relation between fund flows and alphas with respect to various multifactor models to draw inferences about the best asset pricing model and about investor sophistication. This paper analytically shows that such inferences are tenable only under a number of additional assumptions. The results of our simulations and empirical tests indicate that such comparisons are not reliable tests of asset pricing models. We also find that parsimonious factor models better predict future alphas than models with additional factors, and discuss its implications for evaluating investor sophistication.

Jegadeesh-What do fund flows reveal about asset pricing models and investor sophistication-1030.pdf
9:55am - 10:50amWED01-2: Labor and Finance
Session Chair: Margarita Tsoutsoura, Cornell University
Session Chair: Rui Silva, London Business School
Room 2200 

Finance, Talent Allocation, and Growth

Laurent Fresard1, Francesco D'Acunto2

1University of Lugano and Swiss Finance Institute; 2University of Maryland

Using data covering 24 countries over 35 years, we show that the growth of the relative wage in the financial sector is related to a modest reallocation of skilled workers from non-finance sectors into finance. Reallocation is higher when the finance relative wage grows faster than the contribution of the financial sector to the overall economy. The reallocation of skilled workers to finance is higher from sectors that are more innovative, and from sectors in which the costs workers face to move to finance are lower. Yet, we detect no significant relationship between the growth of the finance relative wage and the subsequent growth of non-finance sectors or country-level growth. We also find no association between the growth of the finance relative wage and patent applications or the productivity of scientific research at the country level. Overall, the reallocation of skilled labor away from non-finance sectors rising wages in finance induce appears to be too modest to materially affect economic growth.

Fresard-Finance, Talent Allocation, and Growth-621.pdf
9:55am - 10:50amWED02-2: Ownership, Information, and Decision-Making
Session Chair: Cecilia Parlatore, New York University
Session Chair: Andrey Malenko, Massachusetts Institute of Technology
Room 2210 

Leaks, disclosures and internal communication

Snehal Banerjee1, Taejin Kim2

1University of California, San Diego; 2The Chinese University of Hong Kong

We study how leaks affect a firm’s communication decisions and real efficiency. A privately informed manager strategically chooses both public disclosure and internal communication to employees. Public disclosure is noisy, but in the absence of leaks, internal communication is perfectly informative because it maximizes employee coordination and efficiency. The possibility of public leaks distorts these choices: we show that more leakage worsens internal communication and can reduce real efficiency, despite increasing public disclosure. We discuss the implications of our results for recent regulations that protect and encourage whistleblowers in financial markets.

Banerjee-Leaks, disclosures and internal communication-183.pdf
9:55am - 10:50amWED03-2: Designing Bank Regulation
Session Chair: Gary Gorton, Yale University
Session Chair: Yiming Ma, Stanford University
Room 2230 

Lender of Last Resort versus Buyer of Last Resort — Evidence from the European Sovereign Debt Crisis

Viral Acharya1, Diane Pierret2,3, Sascha Steffen4

1Reserve Bank of India; 2University of Lausanne; 3Swiss Finance Institute; 4Frankfurt School of Finance and Management

We document channels of monetary policy transmission to banks following two interventions of the European Central Bank (ECB). As a lender of last resort via the long-term refinancing operations (LTROs), the ECB improved the collateral value of sovereign bonds of peripheral countries. This resulted in an elevated concentration of these bonds in the portfolios of domestic banks, increasing fire-sale risk and making both banks and sovereign bonds riskier. In contrast, the ECB’s announcement of being a potential buyer of last resort via the Outright Monetary Transaction (OMT) program attracted new investors and reduced fire-sale risk in the sovereign bond market.

Acharya-Lender of Last Resort versus Buyer of Last Resort — Evidence-520.pdf
9:55am - 10:50amWED04-2: Capital Structure, Mergers, and Labor Compensation
Session Chair: Heather Tookes, Yale School of Management
Session Chair: Daniel Carvalho, Indiana University
Room 2400 

Capital Structure and Hedging Demand with Incomplete Markets

Alberto Bisin1, Gian Luca Clementi1, Piero Gottardi2

1New York University; 2European University Institute

Capital structure choices are the result of supply considerations, such as taxes, costly default, agency, and asymmetric information, as well as demand factors, among which investors' hedging demand. The latter, which has received very little attention in the academic literature, is at the core of this paper. In a general equilibrium model with production and incomplete markets where households differ in their risk--sharing needs, ex--ante identical value--maximizing firms issue different securities, in order to cater to different groups of investors. We find that as the demand for hedging increases, corporates grow in size -- to allow for greater precautionary saving -- and issue more debt. How much more, depends on the availability of competing risk-sharing instruments, such as (government--issued) risk--free debt and derivatives. When capital structure is jointly shaped by demand and supply considerations -- the latter, in the form of an asset--substitution problem -- we find that (i) agency is relevant only when hedging demand is high and that (ii) larger investors' risk--sharing needs lead to equilibria featuring greater aggregate risk.

Bisin-Capital Structure and Hedging Demand with Incomplete Markets-678.pdf
9:55am - 10:50amWED05-2: Contracts
Session Chair: Giorgia Piacentino, Columbia University
Session Chair: Itay Goldstein, Wharton School, University of Pennsylvania
Room 2410 

Monitor Reputation and Transparency

Ivan Marinovic1, Martin Szydlowski2

1Stanford Graduate School of Business; 2University of Minnesota

We study the optimal disclosure policy of a regulator who oversees a monitor. Disclosures

by the regulator that reduce the monitor's reputation may destroy the monitor's incentive to

monitor firms and lead {as an unintended consequence{ to an escalation of manipulation by the

client firm's manager. By contrast, disclosures that increase monitor reputation boost monitor

incentives and decrease the intensity of manipulation. When the regulator's disclosure policy

aims to minimize the prevalence of manipulation, the optimal policy is opaque: it never reveals

monitor quality in a deterministic fashion, for any given reputation level. In fact, non-disclosure

and disclosures with random delay dominate deterministic disclosure, at any given reputation


Marinovic-Monitor Reputation and Transparency-371.pdf
9:55am - 10:50amWED06-2: Behavioral
Session Chair: James Choi, Yale University
Session Chair: Bo Becker, Stockholm School of Economics
Room 4200 

Monetary Policy and Reaching for Income

Kent Daniel1, Lorenzo Garlappi2, Kairong Xiao1

1Columbia Business School; 2University of British Columbia

This paper studies the impact of monetary policy on investors' portfolio choice and on asset prices. Using data on mutual fund flows and individual trading records, we find that low-interest-rate monetary policy increases investors' demand for high-dividend stocks and drives up the prices of these assets. To explain these empirical findings, we develop a portfolio choice model in which investors have quasi-hyperbolic time preferences and use dividend income as a commitment device to curb their tendency to overconsume in the shortrun. When accommodative monetary policy lowers interest rates, it reduces the income stream investors receive from holding bonds. If portfolio income becomes too low to sustain a desired level of consumption, investors tilt their portfolio towards high-dividend stocks to ``reach for income.'' Our finding suggests that low-interest-rate monetary policy may lead to underdiversification of investors' portfolios and may cause redistributive effects across firms that differ in their dividend policy.

Daniel-Monetary Policy and Reaching for Income-575.pdf
9:55am - 10:50amWED07-2: Asset Pricing & Production
Session Chair: Lukas Schmid, Duke University
Session Chair: Alexandre Corhay, University of Toronto
Room 4210 

Production Networks and Stock Returns: The Role of Creative Destruction

Michael Gofman1, Gill Segal2, Youchang Wu3

1University of Rochester; 2University of North Carolina at Chapel Hill; 3University of Oregon

We establish a novel return spread based on the distance between firms and final consumers in a production network. Firms with the longest distance to consumers earn an excess monthly return of 105 basis points relative to final goods producers. We explain this spread quantitatively using a general equilibrium model with multiple layers of production. The driving force behind the spread is vertical creative destruction, which reduces firms' exposure to productivity shocks. The spread is smaller for firms that belong to supply chains with lower competition. Overall, our results demonstrate a novel effect of creative destruction on firms' cost of capital.

Gofman-Production Networks and Stock Returns-766.pdf
9:55am - 10:50amWED08-2: Macro-Finance
Session Chair: Stanley Zin, New York University
Session Chair: Nicholas Kozeniauskas, New York University
Room 4220 

News-Driven Uncertainty Fluctuations

Dongho Song1, Jenny Tang2

1Boston College; 2Federal Reserve Bank of Boston

Economic agents consider not only current fundamentals but also news when forming expectations about the future. We consider an agent, in a two-state Markov-switching economy, who receives news each period that reveals the next period's state with some error. When news contradicts existing beliefs, the agent's beliefs are revised toward a uniform distribution, raising subjective uncertainty. When the agent rationally learns model parameters, including the accuracy of news, the response of uncertainty to news depends on not just current, but also past, states. We estimate the model using recession probability forecasts from the Survey of Professional Forecasters. Our filtered probability of bad news correlates strongly with survey- and media-based measures. Posterior beliefs vary significantly over time with bad news frequently raising uncertainty during expansions. Simulating asset prices using our estimates in a model in which agents prefer an early resolution of uncertainty shows that news gives rise to sizable fluctuations in both risk-free rates and equity risk premia.

Song-News-Driven Uncertainty Fluctuations-257.pdf
9:55am - 10:50amWED09-2: Mutual Funds
Session Chair: Alexi Savov, New York University Stern School of Business
Session Chair: Bing Liang, University of Massachusetts Amherst
Room 4230 

The Economic Consequences of Mutual Fund Advisory Misconduct

Kai Wu

Cornell University

I evaluate the economic consequences of advisory misconduct by estimating the effect of publicly disclosed regulatory actions of mutual fund advisors on fund flows. Based on misconduct events from 2000-2013, I find a 5% reduction in fund flows to malfeasant advisors in one year following the misconduct. Further analysis using the 2001 SEC electronic filing mandate as a positive shock to misconduct transparency corroborates these results. In order to mitigate the negative impact on flows, mutual fund companies tend to reduce contractual incentives, raise marketing expenditures and relax investment restrictions in subsequent years. Moreover, advisory misconduct adversely affects advising relationships and advisor survival. My findings highlight the significant impact of misconduct on fund flows and advisory contracting in the mutual fund industry.

Wu-The Economic Consequences of Mutual Fund Advisory Misconduct-124.pdf
11:05am - 12:00pmWED01-3: Labor and Finance
Session Chair: Margarita Tsoutsoura, Cornell University
Session Chair: Hyunseob Kim, Cornell University
Room 2200 

Who Benefits from the Demise of American Manufacturing? Evidence from 142,663 Foreign and Domestic Entries in China

Minwen Li1, Tanakorn Makaew2, Vojislav Maksimovic3

1Tsinghua University; 2SEC; 3University of Maryland

We examine export propensity of manufacturing entries in China. Almost half of new exporters in the Chinese Census are foreign owned. Using the establishment of U.S.-China Permanent Normal Trade Relation as a plausibly exogenous shock, we find that foreign entrants are more responsive to trade liberalization. This differential response is concentrated in financially underdeveloped areas. In these areas, foreign entrants are better capitalized, more liquid, and pay lower taxes. They tend to survive and grow faster than domestic entrants. Our results suggest that in underdeveloped markets, trade globalization may benefit foreign plants rather than domestic plants, which are financially constrained.

Li-Who Benefits from the Demise of American Manufacturing Evidence from 142,663 Foreign and Domestic.pdf
11:05am - 12:00pmWED02-3: Ownership, Information, and Decision-Making
Session Chair: Cecilia Parlatore, New York University
Session Chair: Moqi Xu, London School of Economics
Room 2210 

The Rise of Common Ownership

Erik Gilje1, Todd Gormley2, Doron Levit1

1University of Pennsylvania; 2Washington University in St. Louis

Common ownership—where two firms are at least partially owned by the same investor—is on the rise among publicly-held U.S. firms. In this paper, we discuss the challenges in quantifying the impact of common ownership on firms’ strategic choices and analyze the potential determinants of its rise. To do so, we derive measures that capture the extent to which common ownership will shift managers’ actions and estimate them for every pair of stocks between 1980 and 2012. Our findings suggest that naïve measures of overlapping ownership have increased far more than managers’ motive to internalize how their choices affect other firms’ valuations. We also find that the growth of indexing is unlikely to shift managerial motives. While indexing is associated with more overlapping ownership, it is also associated with a firm’s common owners spreading their assets over more stocks, which reduces common owners’ likelihood of being informed and managers’ incentives to internalize this common ownership.

Gilje-The Rise of Common Ownership-453.pdf
11:05am - 12:00pmWED03-3: Designing Bank Regulation
Session Chair: Gary Gorton, Yale University
Session Chair: Pablo D'Erasmo, Federal Reserve Bank of Philadelphia
Room 2230 

Dynamic Bank Capital Requirements

Tetiana Davydiuk

Tepper School of Business, Carnegie Mellon University

The Basel III Accord requires countercyclical capital buffers to protect the banking system against potential losses associated with excessive credit growth and buildups of systemic risk. In this paper, I provide a rationale for time-varying capital requirements in a dynamic general equilibrium setting. An optimal policy trades off reduced inefficient lending with reduced liquidity provision. Quantitatively, I find that the optimal Ramsey policy requires a capital ratio that mostly varies between 4% and 6% and depends on economic growth, bank supply of credit, and asset prices. Specifically, a one standard deviation increase in the bank credit-to-GDP ratio (GDP) translates into a 0.1% (0.7%) increase in capital requirements, while each standard deviation increase in the liquidity premium leads to a 0.1% decrease. The welfare gain from implementing this dynamic policy is large when compared to the gain from having an optimal fixed capital requirement.

Davydiuk-Dynamic Bank Capital Requirements-1184.pdf
11:05am - 12:00pmWED04-3: Capital Structure, Mergers, and Labor Compensation
Session Chair: Heather Tookes, Yale School of Management
Session Chair: Thomas Geelen, EPFL and Swiss Finance Institute
Room 2400 

The Private and Social Value of Capital Structure Commitment

Tim Johnson1, Ping Liu2, Chelsea Yu1

1University of Illinois, Urbana-Champaign; 2University at Buffalo

We analyze dynamic stationary models of capital structure, in partial and general equilibrium,

when managers cannot commit to firm value maximization. Our setting includes time-varying economic and

firm characteristics, as well as valuation under generalized preferences.

We quantify both the private cost to firms of the commitment problem, and also the aggregate cost of

its externality. The model provides an explanation for the procyclical use of unprotected debt: the

private costs of non-commitment increase in bad times. Likewise, expropriation incentives rise when firm valuations are low.

Hence, without commitment, leverage can be countercyclical. This dynamic amplifies the

effect of excess debt on aggregate risk. A range of calibrations suggests that the social cost of unprotected debt

can be very large. We present evidence supportive of the prediction that firms with unprotected debt

increase their borrowing in bad times.

Johnson-The Private and Social Value of Capital Structure Commitment-238.pdf
11:05am - 12:00pmWED05-3: Contracts
Session Chair: Giorgia Piacentino, Columbia University
Session Chair: John Zhu, Wharton School, University of Pennsylvania
Room 2410 

Agency Conflicts over the Short- and the Long-Run

Sebastian Gryglewicz2, Simon Mayer2, Erwan Morellec1

1EPFL; 2Erasmus University

We study a continuous-time agency model in which the agent controls both the current cash-flow rate as well as the growth rate of the firm. Because agency conflicts arise over both the short- and the long-run, alignment of incentives requires a compensation scheme comprising short- and long-term components. When the agent's stake in the contractual relationship is large, agency conflicts over the long-run optimally involve pay-for-luck. Under the optimal contract, agency conflicts can induce both over- and underinvestment in short- and long-term efforts compared to first best, leading to short- or long-termism in corporate policies. Correlated short- and long-term shocks to cash flows and firm value lead to externalities in effort choices and in incentive provision with higher correlation leading to decreased long-term effort and incentives.

Gryglewicz-Agency Conflicts over the Short- and the Long-Run-844.pdf
11:05am - 12:00pmWED06-3: Behavioral
Session Chair: James Choi, Yale University
Session Chair: Lisa Kramer, University of Toronto
Room 4200 

Decision Fatigue and Heuristic Analyst Forecasts

Yaron Levi1, David Hirshleifer2, Siew Hong Teoh2, Ben Lourie2

1University of Southern California; 2University of California - Irvine

Psychological evidence indicates that decision quality declines after an extensive session of decision-making, a phenomenon known as decision fatigue. We study whether decision fatigue affects analysts’ judgments. Analysts cover multiple firms and often issue several forecasts in a single day. We find that forecast accuracy declines over the course of a day as the number of forecasts the analyst has already issued increases. Also consistent with decision fatigue, we find that the more forecasts an analyst issues, the higher the likelihood the analyst resorts to more heuristic decisions by herding more closely with the consensus forecast and also by self-herding (i.e., reissuing their own previous outstanding forecasts). Finally, we find that the stock market understands these effects and discounts for analyst decision fatigue.

Levi-Decision Fatigue and Heuristic Analyst Forecasts-764.pdf
11:05am - 12:00pmWED07-3: Asset Pricing & Production
Session Chair: Lukas Schmid, Duke University
Session Chair: Berardino Palazzo, Boston University
Room 4210 

Aggregate Expected Investment Growth and Stock Market Returns

Jun Li1, Huijun Wang2, Jianfeng Yu3

1University of Texas at Dallas; 2University of Delaware; 3PBCSF, Tsinghua University

Consistent with neoclassical models with investment lags, we find that a bottom-up measure of aggregate investment plans, namely, aggregate expected investment growth (AEIG), negatively predicts future stock market returns, with an adjusted in-sample R2 of 18.5% and an out-of-sample R2 of 16.3% at the one-year horizon. The return predictive power is robust after controlling for popular macroeconomic return predictors,

in subsample periods, as well as in other G7 countries. Further analyses suggest that the predictive ability of AEIG is more likely to be driven by the time-varying risk premium than by behavioral biases such as extrapolative expectations.

Li-Aggregate Expected Investment Growth and Stock Market Returns-434.pdf
11:05am - 12:00pmWED08-3: Macro-Finance
Session Chair: Stanley Zin, New York University
Session Chair: Itamar Drechsler, New York University
Room 4220 

Macroeconomic Tail Risks and Asset Prices

David Schreindorfer

Arizona State University

The correlation between aggregate dividend and consumption growth is substantially higher in bad economic times than in good times. This paper proposes a simple consumption-based asset pricing model with a generalized disappointment averse (GDA) investor that highlights downside risk in cash flows as the main determinant of risk premia. I show that GDA risk preferences generate a high price price of risk for tail outcomes of i.i.d. growth rate shocks, which are essentially irrelevant under expected utility. In contrast to existing asset pricing models, the theory is consistent with numerous well-known features of aggregate risk premia that can be inferred from equity index options.

Schreindorfer-Macroeconomic Tail Risks and Asset Prices-1205.pdf
11:05am - 12:00pmWED09-3: Mutual Funds
Session Chair: Alexi Savov, New York University Stern School of Business
Session Chair: Mark Egan, Harvard Business School
Room 4230 

Marketing Mutual Funds

Nikolai Roussanov1, Hongxun Ruan1, Yanhao Wei2

1Wharton School, University of Pennsylvania; 2Marshall School of Business, University of Southern California

Marketing and distribution expenses constitute a large fraction of

the cost of active management in the mutual fund industry. We investigate

their impact on the allocation of capital to funds and on returns

earned by mutual fund investors. We develop and estimate a structural

model of costly investor search and fund competition with learning

about fund skill and endogenous marketing expenditures. We find that

marketing is nearly as important as performance and fees for determining

fund size. Restricting the amount that funds can spend on marketing

substantially improves investor welfare, as more capital is invested

with passive index funds and price competition decreases fees on actively

managed funds. Average alpha increases as active fund size is reduced,

and the relationship between fund size and fund manager skill net

of fees is closer to that implied by a frictionless model. Decreasing

investor search costs would also imply a reduction in marketing expenses and management fees

as well as a shift towards passive investing.

Roussanov-Marketing Mutual Funds-1181.pdf
12:00pm - 1:20pmSFS Annual Membership Luncheon
New Haven Lawn Club 
1:30pm - 2:25pmWED01-4: Labor and Finance
Session Chair: Margarita Tsoutsoura, Cornell University
Session Chair: Jordan Nickerson, Boston College
Room 2200 

Labor Scarcity, Finance, and Innovation: Evidence from Antebellum America

Yifei Mao2, Jessie Jiaxu Wang1

1Arizona State University; 2Cornell University

This paper establishes labor scarcity as an important economic channel through which access to finance shapes technological innovation. We exploit antebellum America, a unique setting with (1) staggered passage of free banking laws across states and (2) sharp differences in labor scarcity between slave and free states. We find that greater access to finance spurred technological innovation as measured by patenting activities, especially in free states and the previously unbanked Midwest. Furthermore, in slave states where slave labor was prevalent, access to finance encouraged technological innovation that substituted for slave labor, but discouraged technological innovation that substituted for free labor.

Mao-Labor Scarcity, Finance, and Innovation-592.pdf
1:30pm - 2:25pmWED02-4: Ownership, Information, and Decision-Making
Session Chair: Cecilia Parlatore, New York University
Session Chair: Richard Lowery, University of Texas at Austin
Room 2210 

Collusion with Public and Private Ownership and Innovation

Arnoud Boot, Vladimir Vladimirov

University of Amsterdam

We argue that public ownership helps firms to collude and engage in rent seeking on existing technologies. While possibly enhancing firm value, it can reduce the commitment to develop new technologies. We show that the option to collude is valuable when innovation is either not very attractive or very attractive, resulting in a U-shaped relation between the attractiveness of innovation and the preference for public ownership. Private ownership dominates in the middle. Control via equity stakes could also facilitate collusion, but is an imperfect substitute. The main predictions of our model are consistent with empirical patterns and shed light on several puzzling stylized facts.

Boot-Collusion with Public and Private Ownership and Innovation-973.pdf
1:30pm - 2:25pmWED03-4: Designing Bank Regulation
Session Chair: Gary Gorton, Yale University
Session Chair: Daniel Greenwald, Massachusetts Institute of Technology
Room 2230 

Bank Risk-Taking and the Real Economy: Evidence from the Housing Boom and its Aftermath

Antonio Falato1, Giovanni Favara2, David Scharfstein3

1Fed Board; 2Fed Board; 3Harvard University

This paper studies bank lending behavior during the U.S. housing boom and its effect on mortgage defaults, unemployment and consumption during the ensuing housing bust. During the boom, publicly-traded banks increased mortgage lending activity and relaxed mortgage lending standards relative to privately-held banks. In the ensuing bust, mortgages originated by publicly-traded banks were more likely to default or be foreclosed. In the aggregate, counties with greater exposure to publicly-traded banks before the boom experienced greater declines in house prices and higher mortgage default and foreclosure rates in the bust. These counties also experienced a larger increase in unemployment and a larger drop in durable consumption. These findings are robust to matching public and private lenders on size and to controlling for local time-varying shocks and numerous observable county characteristics. While there are a number of interpretations of these findings, we present evidence that stock market pressure to maximize short-term earnings may be part of the reason why publicly-traded banks were more aggressive mortgage lenders during the boom. Banks engage in more aggressive mortgage lending if, among other measures of short-term focus, they are run by CEOs that emphasize short-term earnings when discussing performance and if they have more institutional shareholders that trade shares actively. Our findings provide a microfoundation for the supply-side view of the U.S. mortgage credit expansion based on the short-term earnings focus of some depository institutions.

Falato-Bank Risk-Taking and the Real Economy-531.pdf
1:30pm - 2:25pmWED04-4: Capital Structure, Mergers, and Labor Compensation
Session Chair: Heather Tookes, Yale School of Management
Session Chair: David Dicks, Baylor University
Room 2400 

Bankers and their bonuses: A theory of periodic labor markets and optimal compensation

Edward Van Wesep, Brian Waters

University of Colorado, Boulder

Some industries are associated with periodic surges in turnover. High finance, for example, experiences a surge in voluntary departures and hires every January. We present a general equilibrium model of labor market flows in which periodic or aperiodic labor markets are equilibria. If a firm finds itself in a periodic equilibrium, then it is optimal to time compensation in the form of low wages during the year and large guaranteed bonuses at year-end, which ensures that employees depart when the available talent pool is deepest. Relative to the case where hiring is aperiodic, industry-wide compensation is higher when job markets are periodic. Therefore, we expect that hiring cycles will be associated with low base salaries, high guaranteed bonuses, and high overall compensation. These patterns are consistent with stylized facts about pay and turnover in high finance.

Van Wesep-Bankers and their bonuses-922.pdf
1:30pm - 2:25pmWED05-4: Contracts
Session Chair: Giorgia Piacentino, Columbia University
Session Chair: Paolo Fulghieri, University of North Carolina at Chapel Hill
Room 2410 

Ambiguity in Dynamic Contracts

Martin Szydlowski

University of Minnesota

I study a continuous-time principal-agent model in which the principal is

ambiguity averse about the effort cost. The robust contract generates a seemingly

excessive pay-performance sensitivity. The worst-case effort cost is high

after good performance, but low after bad performance. This leads to overcompensation

and undercompensation respectively and provides a new rationale for

using performance-sensitive debt.

I solve the agent’s problem when he is offered the robust contract, but the

reference probability represents the true law of his effort cost. I find that firing

may lead the agent to shirk rather than incentivize effort. The strength of

incentives is hump-shaped and agents close to firing prefer riskier projects, while

those close to getting paid prefer safer ones. This feature resembles careers in

organizations, most notably risk-shifting and the quiet life.

Szydlowski-Ambiguity in Dynamic Contracts-373.pdf
1:30pm - 2:25pmWED06-4: Behavioral
Session Chair: James Choi, Yale University
Session Chair: Yan Liu, Texas A&M University
Room 4200 

Anomalies Abroad: Beyond Data Mining

Xiaomeng Lu1, Robert F. Stambaugh2, Yu Yuan1

1SAIF, Shanghai Jiao Tong University; 2Wharton School, University of Pennsylvania and National Bureau of Economic Research

A pre-specified set of nine prominent U.S. equity return anomalies produce significant alphas in Canada, France, Germany, Japan, and the U.K. All of the anomalies are consistently significant across these five countries, whose developed stock markets afford the most extensive data. The anomalies remain significant even in a test that assumes their true alphas equal zero in the U.S. Consistent with the view that anomalies reflect mispricing, idiosyncratic volatility exhibits a strong negative relation to return among stocks that the anomalies collectively identify as overpriced, similar to results in the U.S.

Lu-Anomalies Abroad-126.pdf
1:30pm - 2:25pmWED07-4: Asset Pricing & Production
Session Chair: Lukas Schmid, Duke University
Session Chair: Thien Nguyen, The Ohio State University
Room 4210 

What Drives Q and Investment Fluctuations?

Ilan Cooper1, Paulo Maio2, Andreea Mitrache3

1BI Norwegian Business School; 2Hanken School of Economics; 3Toulouse Business School

A dynamic present value relation implies that variations in the ratio of the marginal profitability of capital to marginal Q are driven by shocks to the expected growth of the marginal profitability of capital or discount rate shocks, or both. We find that this ratio predicts future marginal profitability of capital growth at horizons of up to 20 years, but not investment returns. Thus, in contrast to stock prices, the primary source of fluctuations in marginal Q as well as of aggregate investment is expected profitability growth shocks, whereas the role of discount rate shocks is negligible. The results indicate that managers' real investment decisions are strongly related to economic fundamentals.

Cooper-What Drives Q and Investment Fluctuations-365.pdf
1:30pm - 2:25pmWED08-4: Macro-Finance
Session Chair: Stanley Zin, New York University
Session Chair: Dana Kiku, University of of Illinois Urbana-Champaign
Room 4220 

Asset Pricing with Return Extrapolation

Lawrence Jin, Pengfei Sui


We develop a Lucas-type general equilibrium model with return extrapolation featuring Epstein-Zin preferences. Our model is the first return extrapolation model that can be taken to the data in a serious way. We compare the model predictions with the data, and find that the model matches important facts about aggregate asset prices, matches extrapolative expectations in surveys, and allows for a direct comparison with rational expectations models. Consistent with recent empirical findings, a Campbell-Shiller decomposition using model-implied investor expectations suggests that stock market movements primarily come from changes in the subjective expectations about future dividend growth.

Jin-Asset Pricing with Return Extrapolation-1249.pdf
1:30pm - 2:25pmWED09-4: Mutual Funds
Session Chair: Alexi Savov, New York University Stern School of Business
Session Chair: Arpit Gupta, New York University Stern School of Business
Room 4230 

Does Stock Mispricing Drive Firm Policies? Mutual Fund Fire Sales and Selection Bias

Elizabeth Berger

Cornell University

This paper examines whether stock mispricing, driven by mutual fund outflows,

influences firm financial policies (i.e., investment, equity issuance, and payout). I find

that negative mispricing events cause firms to alter financial policies, but that selection

bias drives these results. Treatment firms alter financial policies compared to control

firms even when no mispricing event occurs. After accounting for selection bias, the

feedback effect between mispricing and financial policies disappears. I conclude that,

although a feedback effect may exist between efficient market prices and firm policies,

mutual fund flow-induced mispricing does not alter firm financial policies.

Berger-Does Stock Mispricing Drive Firm Policies Mutual Fund Fire Sales and Selection Bias-259.pdf
2:40pm - 3:35pmWED01-5: Labor and Finance
Session Chair: Margarita Tsoutsoura, Cornell University
Session Chair: William Gerken, University of Kentucky
Room 2200 

Competing for Talent: Firms, Managers, and Social Networks

Kristoph Kleiner, Isaac Hacamo

Indiana University

We use a randomized experiment to demonstrate the value of social networks for firms

competing for talented young managers. In our experimental setting, firms are connected

to prospective managers through their former employees. The connections are exogenous

due to the random assignment of individuals into classrooms and small study groups as

they complete an MBA. Using measures of managerial talent, we document that social

connections double the probability a firm hires a high-ability manager, while decreasing

the probability of hiring a low-ability manager. We relate these effects to the role of former

employees in providing referrals and supplying information.

Kleiner-Competing for Talent-971.pdf
2:40pm - 3:35pmWED02-5: Ownership, Information, and Decision-Making
Session Chair: Cecilia Parlatore, New York University
Session Chair: Lorenzo Garlappi, University of British Columbia
Room 2210 

Deadlock on the Board

Jason Roderick Donaldson1, Nadya Malenko2, Giorgia Piacentino3

1Washington University in St. Louis; 2Boston College; 3Columbia University

We develop a dynamic model of board decision making. We show that directors may knowingly retain the policy they all think is the worst just because they fear they may disagree about what policy is best in the future—the fear of deadlock begets deadlock. Board diversity can exacerbate deadlock. Hence, shareholders may optimally appoint a biased director to avoid deadlock. On the other hand, the CEO may appoint unbiased directors, or even directors biased against him, to create deadlock and thereby entrench himself. Still, shareholders may optimally give the CEO some power to appoint directors. Our theory thus gives a new explanation for CEO entrenchment. It also gives a new perspective on director tenure, staggered boards, and short-termism.

Donaldson-Deadlock on the Board-418.pdf
2:40pm - 3:35pmWED03-5: Designing Bank Regulation
Session Chair: Gary Gorton, Yale University
Session Chair: Gregory Phelan, Williams College
Room 2230 

Dynamic Bank Capital Regulation in Equilibrium

Douglas Gale2, Andrea Gamba1, Marcella Lucchetta3

1Warwick Business School, University of Warwick; 2New York University; 3Ca’ Foscari University of Venice

We study optimal bank regulation in an economy with aggregate uncertainty. Bank liabilities are used as “money” and hence earn lower returns than equity. In laissez faire equilibrium, banks maximize market value, trading off the funding advantage of debt against the risk of costly default. The capital structure is not socially optimal because external costs of distress are not internalized by the banks. The constrained efficient allocation is characterized as the solution to a planner’s problem. Efficient regulation is procyclical, but countercyclical relative to laissez faire. We show that simple leverage constraints can get the decentralized economy close to the constrained efficient outcome.

Gale-Dynamic Bank Capital Regulation in Equilibrium-615.pdf
2:40pm - 3:35pmWED04-5: Capital Structure, Mergers, and Labor Compensation
Session Chair: Heather Tookes, Yale School of Management
Session Chair: Dirk Hackbarth, Boston University
Room 2400 

Human Capital Integration in Mergers and Acquisitions

Paolo Fulghieri1, Merih Sevilir2

1University of North Carolina at Chapel Hill; 2Indiana University

Human capital integration often ranks as one of the most critical success factors in mergers and acquisitions. Our paper presents a theory of post-merger human capital integration where

successful integration depends on the willingness of employees of the merging firms to collaborate and share knowledge. In our model, employees in the post-merger firm choose between

collaboration to create synergies, and competition to extract greater resources from the corporate headquarters. We show that incentives to collaborate are stronger in mergers combining

firms possessing distinctive and complementary human capital. In such mergers each employee is essential both to the creation and the realization of the synergies, increasing the likelihood that

he will be retained in the post-merger firm and receive higher wages. Anticipating the importance of their human capital in achieving synergies, employees become more willing ex ante to choose

collaboration over competition, resulting in a greater likelihood of successful human capital integration. Consistent with recent empirical evidence, our model suggests that mergers combining

firms with complementary human capital leads to better merger performance. In addition, our model generates novel predictions such as post-merger wages increasing, and layoffs decreasing

in the level of human capital complementarity between merging firms.

Fulghieri-Human Capital Integration in Mergers and Acquisitions-665.pdf
2:40pm - 3:35pmWED05-5: Contracts
Session Chair: Giorgia Piacentino, Columbia University
Session Chair: Yiming Ma, Stanford University
Room 2410 

Bail-ins and Bail-outs: Incentives, Connectivity, and Systemic Stability

Benjamin Bernard1, Agostino Capponi2, Joseph Stiglitz2

1University of California, Los Angeles; 2Columbia University

This paper develops a framework to analyze the consequences of alternative designs for interbank networks, in which a failure of one bank may lead to others. Earlier work had suggested that, provided shocks were not too large (or too correlated), denser networks were preferred to more sparsely connected networks because they were better able to absorb shocks. With large shocks, especially when systems are non-conservative, the likelihood of costly bankruptcy cascades increases with dense networks. Governments, worried about the cost of bailouts, have proposed bail-ins, where banks contribute. We analyze the conditions under which governments can credibly implement a bail-in strategy, showing that this depends on the network structure as well. With bail-ins, government intervention becomes desirable even for relatively small shocks, but the critical shock size above which sparser networks perform better is decreased; with sparser networks, a bail-in strategy is more credible.

Bernard-Bail-ins and Bail-outs-738.pdf
2:40pm - 3:35pmWED06-5: Behavioral
Session Chair: James Choi, Yale University
Session Chair: Heather Tookes, Yale School of Management
Room 4200 

Doing Less With More

Rawley Heimer1, Alex Imas2

1Boston College; 2Booth School of Business, University of Chicago

The ability to borrow (use leverage to trade assets) increases an individual’s opportunity set. According to standard theories of decision-making under uncertainty, this makes individuals better off, because they can borrow to enter new positions without having to liquidate advantageous holdings. In contrast, we argue that leverage interacts with existing behavioral biases to impair financial decision-making. To identify leverage's effect, we exploit regulation that restricts the amount of leverage available to U.S. retail traders of foreign exchange. These traders make fewer trading mistakes – they have better market timing and less of a disposition effect – following the leverage constraint. We corroborate these findings in a controlled, incentivized laboratory experiment. Leverage leads to significantly lower earnings, and these lower earnings are caused by a greater tendency to hold losses. A dynamic model of cumulative prospect theory and realization utility explains these results. Together, our findings suggest that paternalistic regulations that constrain financial choices can improve welfare.

Heimer-Doing Less With More-983.pdf
2:40pm - 3:35pmWED07-5: Asset Pricing & Production
Session Chair: Lukas Schmid, Duke University
Session Chair: Miao Zhang, University of Southern California
Room 4210 

A Unified Economic Explanation for Profitability Premium and Value Premium

Leonid Kogan1, Jun Li2, Harold Zhang2

1Massachusetts Institute of Technology; 2University of Texas at Dallas

We jointly explain the gross profitability premium and the value premium in a dynamic structural model. Co-existence and negative correlation between profitability and value factors in the data challenge existing asset pricing models because high (low) gross profitability firms resemble growth (value) firms. We demonstrate that the profitability premium is driven by more productive firms having higher exposures to aggregate demand shocks due to their higher operating leverage from input costs, whereas the value premium is created by high book-to-market firms having more assets in place relative to growth options in their asset composition. Our model replicates co-existence of negatively correlated profitability premium and value premium. We also uncover a novel profitability decomposition and the stronger return predictive power of transitory profitability as evidenced in the data.

Kogan-A Unified Economic Explanation for Profitability Premium and Value Premium-1056.pdf
2:40pm - 3:35pmWED08-5: Macro-Finance
Session Chair: Stanley Zin, New York University
Session Chair: Philipp Illeditsch, Carnegie Mellon University
Room 4220 

Macro Risks and the Term Structure of Interest Rates

Geert Bekaert1, Eric Engstrom2, Andrey Ermolov3

1Columbia Business School; 2Federal Reserve Board of Governors; 3Fordham University

We use non-Gaussian features in U.S. macroeconomic data to identify aggregate supply and demand shocks while imposing minimal economic assumptions. Recessions in the 1970s and 1980s were driven primarily by supply shocks; later recessions by demand shocks. We estimate macro risk factors that drive "bad" (negatively skewed) and "good" (positively skewed) variation for supply and demand shocks. We document that macro risks significantly contribute to the variation of yields, risk premiums and return variances for nominal bonds. While overall bond risk premiums are counter-cyclical, an increase in aggregate demand variance significantly lowers risk premiums.

Bekaert-Macro Risks and the Term Structure of Interest Rates-885.pdf
2:40pm - 3:35pmWED09-5: Mutual Funds
Session Chair: Alexi Savov, New York University Stern School of Business
Session Chair: Alan Moreira, University of Rochester
Room 4230 

Mutual Fund Flows and Fluctuations in Credit and Business Cycles

Azi Ben-Rephael1, Jaewon Choi2, Itay Goldstein3

1Indiana University; 2University of Illinois at Urbana-Champaign; 3Wharton School, University of Pennsylvania

We offer an early indicator for credit and business cycles, using intra-family flow shifts towards high-yield bond funds. Our indicator positively predicts increases in net bond issuance, growth in financial intermediary balance sheets, shares of high-yield bond issuers, reaching for yield in the credit market, stock market returns, and measures of monetary policies as well as decreases in credit spreads. Importantly, our measure positively predicts GDP growth and negatively predicts unemployment up to one year earlier than other leading indicators in the literature. The forecasting power of our measure stems in part from its forecasting power for future aggregate investor demand.

Ben-Rephael-Mutual Fund Flows and Fluctuations in Credit and Business Cycles-328.pdf
3:45pm - 4:15pmRAPS: Special SFS Journal Paper Presentation: The Review of Asset Pricing Studies Keynote Paper

Presenter: Kenneth French, Dartmouth University

Zhang Auditorium at SOM 
6:00pm - 9:00pmAwards Reception

450 Lighthouse Road, New Haven

Clambake on the beach

Anthony’s Ocean View 
Date: Thursday, 24/May/2018
7:30am - 8:30amRegistration & Breakfast
1st Floor 
8:45am - 9:40amTHUR01-1: Bank Risk Taking
Session Chair: Justin Murfin, Yale University
Session Chair: Justin Murfin, Yale University
Room 2200 

For Richer, For Poorer: Banker's Skin-in-the-game and Risk Taking in New England, 1867-1880

Peter Koudijs1, Laura Salisbury2

1Stanford University; 2York University

We study whether banks are riskier if managers have less skin-in-the-game. We focus on New England between 1867 and 1880 and consider the introduction of marital property laws that reduced skin-in-the-game for newly wedded bankers. We find that banks with managers who married after a legal change were riskier: they had less liquidity and higher leverage, and they were more likely to lose deposits in the 1873-1878 Depression. This effect was most pronounced for bankers in the middle of the wealth distribution. We fi nd no evidence that reducing skin-in-

the-game increased capital investment at the county level.

Koudijs-For Richer, For Poorer-103.pdf
8:45am - 9:40amTHUR02-1: Transmission Mechanisms in the Banking Market
Session Chair: Manuel Adelino, Duke University
Session Chair: Ryan Pratt, Brigham Young University
Room 2210 

Understanding the Credit Multiplier: The Working Capital Channel

Heitor Almeida1, Daniel Carvalho2, Taehyun Kim3

1University of Illinois at Urbana-Champaign; 2Indiana University, Kelley School of Business; 3University of Notre Dame

We provide novel evidence on how frictions in the financing of working capital amplify and propagate the effect of economic shocks over time. We propose a test for this idea in a situation where firms must pay for inputs in advance of production, and face credit constraints and seasonal variation in profitability. Persistent input price shocks lead to stronger immediate and longer-term drops on firms’ sales when firms are hit in the period in which they are most profitable (their “main quarter”). These patterns are unlikely to be present in the absence of constraints on firms’ ability to finance their inputs. Our analysis implements this test with oil price shocks and suggests that the financing of working capital can be an important channel for understanding how the credit multiplier affects economic activity.

Almeida-Understanding the Credit Multiplier-528.pdf
8:45am - 9:40amTHUR03-1: Do Managers Still Matter?
Session Chair: Daniel Ferreira, London School of Economcis
Session Chair: Samuli Knupfer, BI Norwegian Business School
Room 2230 

The Origins and Real Effects of the Gender Gap: Evidence from CEOs’ Formative Years

Ran Duchin1, Denis Sosyura2, Mikhail Simutin3

1University of Washington; 2Arizona State University; 3University of Toronto

CEOs allocate more investment capital to male managers than to female managers in the same divisions. Using data from individual Census records, we find that this gender gap is driven by CEOs who grew up in male-dominated families—those where the father was the only income earner and had more education than the mother. The gender gap also increases for CEOs who attended all-male high schools and grew up in neighborhoods with greater gender inequality. The effect of gender on capital budgeting introduces frictions and erodes investment efficiency. Overall, the gender gap originates in CEO preferences developed during formative years and produces significant real effects.

Duchin-The Origins and Real Effects of the Gender Gap-449.pdf
8:45am - 9:40amTHUR04-1: Financial Advice and Fund Managers
Session Chair: Jules van Binsbergen, Wharton School, University of Pennsylvania
Session Chair: Mark Egan, Harvard Business School
Room 2400 

The Market for Conflicted Advice

Briana Chang2, Martin Szydlowski1

1University of Minnesota; 2University of Wisconsin - Madison

We present a model of the market for advice, where advisers have conflicts of interest

and compete for heterogeneous customers through information provision. The

competitive equilibrium features information dispersion: advisers with expertise in more

information-sensitive assets attract less informed customers, provide worse information,

and earn higher rents. Even though distorted information leads to lower returns, investors

choose to trade through advisers, which rationalizes empirical findings. Banning

conflicted payments only improves the information quality but not customers’ welfare.

It is the underlying distribution of financial literacy that determines welfare, and the

fee structure is irrelevant.

Chang-The Market for Conflicted Advice-372.pdf
8:45am - 9:40amTHUR05-1: Household Investment Decisions
Session Chair: Anthony Lynch, New York University
Session Chair: Michaela Pagel, Columbia Business School
Room 2410 

Stock Market Returns and Consumption

Amir Kermani1, Kaveh Majlesi2, Marco Di Maggio3

1University of California Berkeley; 2Lund University; 3Harvard Business School

This paper employs Swedish data containing security level information on households' stock holdings to investigate how consumption responds to changes in stock market returns. We exploit the households’ portfolio weights in previous years as an instrument for the actual capital gains and dividends payments. Normalizing both consumption and stock market returns by average income, we find that unrealized capital gains lead to a marginal propensity to consume (MPC) of 13 percent for the bottom 50% of the wealth distribution, while it is flat at 5 percent for the rest of the distribution. We also find that households’ consumption is significantly more responsive to dividend payouts across all parts of the wealth distribution. Our findings are broadly consistent with standard permanent income hypothesis.

Kermani-Stock Market Returns and Consumption-1032.pdf
8:45am - 9:40amTHUR06-1: Microstructure and Information
Session Chair: Haoxiang Zhu, Massachusetts Institute of Technology
Session Chair: Clara Vega, Federal Reserve Bank
Room 4200 

A Tale of One Exchange and Two Order Books: Effects of Fragmentation in the Absence of Competition

Alejandro Bernales4, Italo Riarte4, Satchit Sagade1,3, Marcela Valenzuela4, Christian Westheide2,3

1Goethe University Frankfurt; 2University of Mannheim; 3Research Center SAFE; 4University of Chile

Exchanges nowadays routinely operate multiple limit order markets for the same security that are almost identically structured. We study the effects of such fragmentation on market performance using a dynamic model of fragmented markets where agents trade strategically across two identically-organized limit order books. We show that fragmented markets, in equilibrium, offer higher welfare to intermediaries at the expense of investors with intrinsic trading motives, and lower liquidity than consolidated markets. Consistent with our theory, we document improvements in liquidity and lower profits for liquidity providers when Euronext, in 2009, consolidated its order flow for stocks traded across multiple, country-specific, and identically-organized limit order books onto a single order book. Our results suggest that competition in market design, not fragmentation, drives previously documented improvements in market quality when new trading venues emerge; in the absence of such competition, market fragmentation is harmful.

Bernales-A Tale of One Exchange and Two Order Books-899.pdf
8:45am - 9:40amTHUR07-1: Options and Stocks Market
Session Chair: Burton Hollifield, Carnegie Mellon University
Session Chair: Sophie Ni, Hong Kong Baptist University
Room 4210 

Does private information from options markets forecast aggregate stock returns?

Christopher Jones1, Haitao Mo2, Tong Wang3

1Marshall School of Business, University of Southern California; 2Lousiana State University; 3Virginia Tech University

In this paper, we show that the difference between the implied volatilities of call and put options on individual equities has strong predictive power for aggregate stock market returns at horizons between one and six months, with in-sample R-squares around 5% at the monthly horizon and 10% at the quarterly horizon and out-of-sample R-squares that are of similar magnitude. Controlling for other common predictive variables increases the significance of the implied volatility spread and broadens the horizons at which it is significant. We attribute this predictability to

private information encapsulated in options prices, as our predictor forecasts future surprises in GDP and aggregate earnings growth. Additionally, the implied volatility spread appears to forecast future discount rate shocks when those shocks are imputed using a standard approach. We further conclude that this predictability is inconsistent with rational risk premia, as the expected market returns implied by our predictor are inversely related to market risk and are unrelated to a number of proxies for aggregate risk premia or risk aversion. It is also inconsistent with a liquidity-based explanation, given that predictability is strongest among more liquid firms and exists at horizons that would be implausibly long if driven by liquidity-related reversals. Our analysis further reveals that the implied volatilities commonly used in options research often suffer from large errors due to nonsynchronous prices in the underlying and options markets

Jones-Does private information from options markets forecast aggregate stock returns-1203.pdf
8:45am - 9:40amTHUR08-1: International Finance
Session Chair: Ric Colacito, University of North Carolina at Chapel Hill
Session Chair: Robert Ready, University of Oregon
Room 4220 

International Currencies and Capital Allocation

Matteo Maggiori1, Brent Neiman2, Jesse Schreger3

1Harvard University; 2University of Chicago; 3Columbia Business School

The external wealth of countries has increased dramatically over the last forty years. Much is still unknown about trillions of dollars of capital allocated across the globe. Using a novel security-level dataset covering more than \$27 trillion of global securities portfolios we find that the structure of global portfolios is driven, at both the macro and micro level, by an often neglected aspect: the currency of denomination of the assets. If a bond is denominated in the currency of one particular country, then investors based in that country tend to own the vast majority of that bond. This implies that the much-studied home bias in bonds primarily reflects home currency bias and that foreigners mostly finance the subset of domestic firms that issue bonds in the foreigners' currency. Further, we find that the dollar and the euro are exceptions to this pattern, with companies in the United States and Eurozone uniquely able to place local currency bonds in foreign portfolios. Finally, we uncover a large and pervasive shift in the use of these international currencies starting around the 2008 financial crisis. Cross-border portfolio holdings have starkly shifted away from euro-denominated bonds and toward dollar-denominated bonds.

Maggiori-International Currencies and Capital Allocation-376.pdf
8:45am - 9:40amTHUR09-1: Returns-Cross-Section
Session Chair: Jeffrey Pontiff, Boston College
Session Chair: Yan Liu, Texas A&M University
Room 4230 

Long-term discount rates do not vary across firms

Matti Keloharju1, Juhani Linnainmaa2, Peter Nyberg1

1Aalto University School of Business; 2University of Southern California

Long-term expected returns appear to vary little, if at all, in the cross section of stocks. We devise a bootstrapping procedure that injects small amounts of variation into expected returns and show that even negligible differences in expected returns, if they existed, would be easy to detect. Markers of such differences, however, are absent from actual stock returns, as they are from portfolios sorted by a combination of 46 return predictors. Even when combining the ex-post most persistent predictors, differences in average returns vanish within five years. Our estimates are consistent with models such as Berk, Green, and Naik (1999) in which firms’ risks change dynamically over time. Our results imply that analysts should use about the same discount rates in their equity valuation models.

Keloharju-Long-term discount rates do not vary across firms-819.pdf
9:55am - 10:50amTHUR01-2: Bank Risk Taking
Session Chair: Justin Murfin, Yale University
Session Chair: Anna Kovner, Federal Reserve Bank of New York
Room 2200 

The Value of Regulators as Monitors: Evidence from Banking

Emilio Bisetti

Tepper School of Business, Carnegie Mellon University

While conventional wisdom suggests that regulation is costly for shareholders, agency theory predicts a positive role of regulation in reducing shareholder monitoring costs. I study this tradeoff by exploiting an unexpected decrease in small-bank reporting requirements to the Federal Reserve using a regression discontinuity design. Using the reporting change as a negative shock to regulatory monitoring by the Fed, I find that reduced Fed monitoring leads to a 1% loss in Tobin's q and a 7% loss in equity market-to-book. I show that these losses come from increased internal monitoring expenditures, managerial rents, and monitoring conflicts between shareholders. My results are among the first to quantify the shareholder value of monitoring.

Bisetti-The Value of Regulators as Monitors-700.pdf
9:55am - 10:50amTHUR02-2: Transmission Mechanisms in the Banking Market
Session Chair: Manuel Adelino, Duke University
Session Chair: Basil Williams, New York University
Room 2210 

Intermediation Variety

Jason Roderick Donaldson1, Giorgia Piacentino2, Anjan Thakor1

1Washington University in St Louis; 2Columbia University

We explain the endogenous emergence of a variety of lending intermediaries in a model based only on differences in their funding costs. Banks have a lower cost of capital than non-banks due to government safety nets. However, with only bank finance, entrepreneurs make inefficient project choices, forgoing innovative projects for traditional projects. Non-banks emerge to mitigate this inefficiency, using their high cost of capital as a commitment device not to fund traditional projects, thus inducing entrepreneurs to innovate efficiently. Despite earning high returns, non-banks never take over the entire market, but coexist with banks in general equilibrium.

Donaldson-Intermediation Variety-525.pdf
9:55am - 10:50amTHUR03-2: Do Managers Still Matter?
Session Chair: Daniel Ferreira, London School of Economcis
Session Chair: Antonio Falato, Fed Board
Room 2230 

Credit and Punishment: The Career Incentives of Wall Street Bankers

Janet Gao, Kristoph Kleiner, Joseph Pacelli

Indiana University

This study examines whether Wall Street bankers are disciplined for loan failures and how turnover risk impacts bankers' career outcomes and future contracting tendencies. We construct a novel dataset containing employment histories and loan portfolios related to nearly 1,500 bankers employed by major banks from 1994 to 2014. Loan failures increase the likelihood that a banker departs a bank, transitions to a lower-ranked bank, and faces demotions in the future. The threat of termination also incentivizes bankers to impose stricter lending terms on future loans. Overall, our findings suggest that Wall Street bankers are disciplined for large-scale credit losses.

Gao-Credit and Punishment-390.pdf
9:55am - 10:50amTHUR04-2: Financial Advice and Fund Managers
Session Chair: Jules van Binsbergen, Wharton School, University of Pennsylvania
Session Chair: Lawrence Jin, Caltech
Room 2400 

Pessimistic Fund Managers

Yongqiang Chu, Hugh Kim

University of South Carolina

This paper examines the predictive power of investment managers’ sentiment revealed in their letters to shareholders for their future performance, using closed-end funds (CEFs) as a laboratory. We find that pessimistic tone in managers’ letters to shareholders predicts superior future risk-adjusted returns and narrows CEFs’ discounts. An increase in the pessimistic tone by one standard deviation leads to an increase of risk-adjusted NAV return by 3.6% ~ 5.0% per annum. The result is robust to controlling for potential mean-reversion patterns of investment performance and not driven by the 2008-2009 Financial Crisis and subsequent recovery periods. We find that CEFs with pessimistic tone are more likely to initiate profitable stock trades prior to stocks’ earnings announcements. Our result is consistent with the reference-dependent effort provision theory arguing that people exert more effort when they feel at a loss relative to their expectation.

Chu-Pessimistic Fund Managers-1117.pdf
9:55am - 10:50amTHUR05-2: Household Investment Decisions
Session Chair: Anthony Lynch, New York University
Session Chair: Casey Dougal, Drexel University
Room 2410 

Local Agglomeration and Stock Market Participation

Jawad M. Addoum1, Stefanos Delikouras2, Da Ke3, George Korniotis2

1Cornell University; 2University of Miami; 3University of South Carolina

We study the impact of local agglomeration economies on stock market participation. Using multiple datasets, we find that when the industry in which individuals work is locally agglomerated, they are more likely to participate in the stock market and, conditional on participation, allocate more to stocks. Further, we show that this relationship is especially strong among skilled workers. We find that the local agglomeration effect is not explained by risk tolerance, worker inertia, or a preference for stocks of firms that are in the same industry as the worker. Instead, our findings are consistent with local agglomeration enhancing human capital and in turn, raising workers' optimal allocations to risky assets. More generally, our analysis underscores the role of geography in shaping human capital and household financial decisions.

Addoum-Local Agglomeration and Stock Market Participation-1165.pdf
9:55am - 10:50amTHUR06-2: Microstructure and Information
Session Chair: Haoxiang Zhu, Massachusetts Institute of Technology
Session Chair: Katya Malinova, University of Toronto
Room 4200 

Information and Competition with Speculation and Hedging

Mina Lee1, Pete Kyle2

1Washington University in St Louis; 2University of Maryland

Can financial markets aggregate information dispersed among traders and allow traders to achieve their target inventories? To examine this question, we study a model of a double auction among finitely many traders who are all rational, strategic, risk averse, and informed about the value of a risky asset. Traders trade both to speculate on their private information and to hedge their endowments. Using concrete measures of competition and informational efficiency, we show that the strategic incentives of traders prevent financial markets from achieving both full informational efficiency and perfect competition, even with infinitely many traders.

Lee-Information and Competition with Speculation and Hedging-463.pdf
9:55am - 10:50amTHUR07-2: Options and Stocks Market
Session Chair: Burton Hollifield, Carnegie Mellon University
Session Chair: Bryan Routledge, Carnegie Mellon University
Room 4210 

Implied Volatility Duration and the Early Resolution Premium

Christian Schlag, Julian Thimme, Ruediger Weber

Goethe University

We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of stocks indicate that investors demand on average about seven percent return per year as a compensation for a late resolution of uncertainty. This premium is higher in times of low market returns and cannot be explained by standard factor models. In a general equilibrium model, we show that the expected excess return differential between `late' and `early' stocks can only be positive, if the investor's relative risk aversion exceeds the inverse of her elasticity of intertemporal substitution, i.e., if she exhibits a preference for early resolution of uncertainty in the spirit of Epstein and Zin (1989). Our empirical analysis thus provides a purely market-based assessment of the relation between two preference parameters, which are notoriously hard to estimate.

Schlag-Implied Volatility Duration and the Early Resolution Premium-879.pdf
9:55am - 10:50amTHUR08-2: International Finance
Session Chair: Ric Colacito, University of North Carolina at Chapel Hill
Session Chair: Robert Richmond, New York University
Room 4220 

Financial Contagion in International Supply-Chain Networks

Christoph Schiller

University of Toronto

Using novel, hand-collected data on U.S. suppliers and their international principal customers, we show that firm-level supply chain links are an important channel for the propagation of financial contagion around the world. Following large country-level shocks, such as extreme market-index jumps or natural disasters like the 2011 earthquake and tsunami in Japan, dynamic conditional correlation (DCC) between U.S. suppliers and foreign customers increases significantly, beyond country-level and industry effects. Consistent with a credit-chain mechanism of shock propagation, we find asymmetric contagion effects for positive and negative shocks, and larger effects for supply-chain pairs with a closer relationship, higher leverage, lower cash holdings and firm profitability. The results are especially strong when customer firms are located in countries with high costs of bankruptcy resolution. Our findings highlight the importance of studying global financial contagion at the firm network level.

Schiller-Financial Contagion in International Supply-Chain Networks-1081.pdf
9:55am - 10:50amTHUR09-2: Returns-Cross-Section
Session Chair: Jeffrey Pontiff, Boston College
Session Chair: David Solomon, Boston College
Room 4230 

The Earnings Announcement Return Cycle

Juhani Linnainmaa, Conson Zhang

University of Southern California

Stocks earn negative abnormal returns in the months before earning announcements and positive returns in the months after the announcements. A long-short strategy that trades on this earnings announcement return cycle (EARC) earns a four-factor alpha of 8% per year. The EARC is unrelated to the earnings announcement premium, and it is a distinct feature of stocks with wide analyst coverage. A significant part of this return pattern appears to emanate from biases in analysts' expectations. Analysts become less optimistic in their forecasts before earnings announcements, and more optimistic afterwards. This optimism cycle accounts for over 55% of the EARC abnormal return. Consistent with a mispricing interpretation, both the optimism cycle and the EARC are significantly stronger among high uncertainty stocks and stocks that are difficult to arbitrage.

Linnainmaa-The Earnings Announcement Return Cycle-1233.pdf
11:05am - 12:00pmTHUR01-3: Bank Risk Taking
Session Chair: Justin Murfin, Yale University
Session Chair: Stephen Adam Karolyi, Carnegie Mellon University
Room 2200 

Banks as Patient Lenders: Evidence from a Tax Reform

Elena Carletti1, Filipo De Marco1, Vasso Ioannidou2, Enrico Sette3

1Bocconi University; 2Lancaster University; 3Banca di Italia

We test whether the composition of bank funding, and the share of deposit funding in particular, affects bank risk-taking and loan maturity. For identification, we exploit a tax reform in Italy that created incentives for households to hold deposits rather than bank bonds. Using geographically disaggregated data on deposits and securities from securities holdings statistics, we first show that the reform led to larger increases (decreases) in term deposits (bank bonds) in areas where households held more bank bonds prior to the reform. Next, relying on the comprehensive Italian Credit Register, we find that the change in funding led banks to increase the maturity of loans to non-financial firms. Moreover, consistent with theories about the role of the government safety net, we find that the effects on maturity and risk-taking are more pronounced for banks that increased the share of insured deposits.

Carletti-Banks as Patient Lenders-779.pdf
11:05am - 12:00pmTHUR02-3: Transmission Mechanisms in the Banking Market
Session Chair: Manuel Adelino, Duke University
Session Chair: Guillaume Vuillemey, HEC Paris
Room 2210 

Banking on Deposits: Maturity Transformation without Interest Rate Risk

Itamar Drechsler, Alexi Savov, Philipp Schnabl

New York University Stern School of Business

We show that in stark contrast to conventional wisdom maturity transformation does not expose banks to significant interest rate risk. Aggregate net interest margins have been near-constant from 1955 to 2015, despite substantial maturity mismatch and wide variation in interest rates. We argue that this is due to banks' market power in deposit markets. Market power allows banks to pay deposit rates that are low and relatively insensitive to interest rate changes, but it also requires them to pay large operating costs. This makes deposits resemble fixed-rate liabilities. Banks hedge them by investing in long-term assets whose interest payments are also relatively insensitive to interest rate changes. Consistent with this view, we find that banks match the interest rate sensitivities of their expenses and income one for one. This relationship is robust to instrumenting for expense sensitivity using geographic variation in market power. Also consistent, we find that banks with lower expense sensitivity hold assets with substantially longer duration. Our results provide a novel explanation for the coexistence of deposit-taking and maturity transformation.

Drechsler-Banking on Deposits-353.pdf
11:05am - 12:00pmTHUR03-3: Do Managers Still Matter?
Session Chair: Daniel Ferreira, London School of Economcis
Session Chair: Stefan Lewellen, London Business School
Room 2230 

Timing stock trades for personal gain: Private information and sales of shares by CEOs

Anh Tran1, Eliezer Fich2, Robert Parrino3

1Cass Business School; 2Drexel University; 3University of Texas at Austin

We investigate the determinants of gains to CEOs from large stock sales. Consistent with the literature, we find that some CEOs benefit from inside information by strategically timing sales. We also find that internal accounting information can be used to predict such timing. Furthermore, sales executed under plans that conform to SEC Rule 10b5-1 tend to follow positive abnormal stock returns, but do not, on average, precede abnormal declines. In contrast, sales that do not conform to the requirements of Rule 10b5-1 tend to follow smaller positive abnormal stock returns, but, on average, precede large abnormal declines. Board and CEO characteristics are related to the magnitude of the post-transaction abnormal returns. Overall, the evidence suggests that Rule 10b5-1 plans do not prevent CEOs from timing large sales or the release of discretionary information around them.

Tran-Timing stock trades for personal gain-786.pdf
11:05am - 12:00pmTHUR04-3: Financial Advice and Fund Managers
Session Chair: Jules van Binsbergen, Wharton School, University of Pennsylvania
Session Chair: Hongxun Ruan, The Wharton School, University of Pennsylvania
Room 2400 

Going Mobile, Investor Behavior, and Financial Fragility

Xiao Cen

Columbia Business School

This study investigates how mobile trading technology affects retail investor behavior and mutual fund fragility using proprietary individual-level fund trading data. I exploit a natural experiment, the release of a popular mobile trading application (“app”) by a leading investment adviser in China. My difference-in-difference analysis shows “going mobile” raises investor attention and trading volume through aggravating investors’ over-confidence and self-control problem. The mobile app significantly boosts flow volatility and makes investor flow more sensitive to short-term fund return and market sentiment. As a result, “going mobile” depresses fund performance by heightening indirect liquidity costs. The funds more exposed to the shock see a greater decline in abnormal return, explained by large fund flows through the trading app. Lastly, I combine Instrumental Variable method and a spatial discontinuity setting to strengthen causal inference. Overall, the paper shows “going mobile” intensifies financial fragility and dampens mutual fund performance by amplifying investors’ cognitive biases.

Cen-Going Mobile, Investor Behavior, and Financial Fragility-908.pdf
11:05am - 12:00pmTHUR05-3: Household Investment Decisions
Session Chair: Anthony Lynch, New York University
Session Chair: Arpit Gupta, New York University Stern School of Business
Room 2410 

Fully Closed: Individual Responses to Realized Capital Gains and Losses

Michaela Pagel1, Steffen Meyer2

1Columbia Business School; 2Leibniz University Hannover

We use transaction-level data of portfolio holdings and trades as well as account balances, income, and spending of a large sample of retail investors to explore how individuals respond to realized capital gains and losses. To identify individual responses to capital gains and losses, we exploit plausibly exogenous mutual fund liquidations. More specifically, we estimate the marginal propensity to reinvest out of one dollar received from a forced sale event when the investor either achieved a capital gain or loss relative to his or her initial investment. In theory, if individuals held optimized portfolios, the marginal propensity to reinvest out of forced liquidations should be one independent of realizing a gain or loss. Individuals should just reinvest their liquidity immediately into a fund with similar characteristics. In reality, individuals end up keeping a share of their newly found liquidity in cash, saving it, consuming it, or reinvesting into different funds, stocks, or bonds. Moreover, individuals reinvest much more if the forced sale resulted in a capital gain rather than a loss relative to their initial investment. Such differential treatment of gains and losses is inconsistent with active rebalancing or tax considerations but consistent with mental accounting and the idea that individuals treat realized losses differently from paper losses.

Pagel-Fully Closed-637.pdf
11:05am - 12:00pmTHUR06-3: Microstructure and Information
Session Chair: Haoxiang Zhu, Massachusetts Institute of Technology
Session Chair: Eduardo Davila, New York University
Room 4200 

Speed Acquisition

Shiyang Huang1, Bart Yueshen2

1The University of Hong Kong; 2INSEAD

Speed has become a salient feature of modern financial markets. This paper studies investors’ endogenous speed acquisition, alongside their information acquisition. In equilibrium, speed heterogeneity endogenously arises across investors, temporally fragmenting the price discovery process. A deterioration in the long-run price informativeness ensues. Intra- and inter-temporal competition among investors drive speed and information to be either substitutes or complements. The model cautions the possible dysfunction of price discovery: An advancing information technology might complement speed acquisition, which fragments the price discovery process, thus hurting price informativeness. Novel predictions are discussed regarding investor composition,

fund performance, and trading volume.

Huang-Speed Acquisition-731.pdf
11:05am - 12:00pmTHUR07-3: Options and Stocks Market
Session Chair: Burton Hollifield, Carnegie Mellon University
Session Chair: Michael Gallmeyer, University of Virigina
Room 4210 

Option Prices and Costly Short-Selling

Adem Atmaz1, Suleyman Basak2

1Purdue University; 2London Business School

Much empirical evidence shows that short-selling costs and bans have significant effects on option prices. We reconcile these findings by providing a dynamic analysis of option prices with costly short-selling and option marketmakers. In our model, short-sellers incur a shorting fee to borrow stock shares from lenders, who only partially lend their positions. Our model delivers simple, closed-form, unique option bid and ask prices that represent option marketmakers' expected cost of hedging, and are in terms of and preserve the well-known properties of the Black-Scholes prices. We show that bid-ask spreads of typical options and apparent put-call parity violations are increasing in the shorting fee. Moreover, option bid-ask spreads are decreasing in the partial lending, and the effects of costly short-selling on option bid-ask spreads are more pronounced for relatively illiquid options. We apply our model to the recent 2008 short-selling ban period and obtain implications consistent with the documented behavior of option prices of banned stocks.

Atmaz-Option Prices and Costly Short-Selling-478.pdf
11:05am - 12:00pmTHUR08-3: International Finance
Session Chair: Ric Colacito, University of North Carolina at Chapel Hill
Session Chair: Andrea Vedolin, Boston University
Room 4220 

Sovereign credit risk and exchange rates: Evidence from CDS quanto spreads

Patrick Augustin1, Mikhail Chernov2, Dongho Song3

1McGill University; 2University of California, Los Angeles; 3Boston College

The term structure of sovereign quanto spreads -- the difference between CDS premiums denominated in U.S. dollar and a foreign currency corresponding to different maturities-- tell us how financial markets view the likelihood of a foreign default and associated currency devaluations at different horizons. A no-arbitrage model can disentangle the two events and associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate, and yet their term structures are different. There is a substantial cross-sectional variation in default probabilities leading to variation in term structures in the short-to-medium run. These defaults affect the expected depreciation rate: the risk premium for the Euro devaluation in case of default ranges from a low of 0.06% a week at short and long horizons to a high of 0.45% at the 2-year horizon. Risk-neutral expected depreciation rate conditional on default is only a fraction of relative quanto spreads.

Augustin-Sovereign credit risk and exchange rates-1024.pdf
11:05am - 12:00pmTHUR09-3: Returns-Cross-Section
Session Chair: Jeffrey Pontiff, Boston College
Session Chair: Matthew Ringgenberg, University of Utah
Room 4230 

Flow-Driven Common Factors in Stock Returns

Jiacui Li

Stanford Graduate School of Business

We argue that mutual fund flows drive a substantial portion of Fama-French size and value factor variations. Over the period of 1965-2015, mutual fund flows exhibit strong size and value factor structures, and retail investors frequently made large and uninformed style-level capital reallocations through trading equity mutual fund shares. These style-level fund flows are associated with large contemporaneous price impact which reverses in the subsequent years, explaining approximately 30% of SMB and HML factor return variance. The inferred price elasticities and reversion speeds inferred from data are consistent with previous studies of uninformed demand shocks. Because the slow price reversions are not accompanied by reversing fund flows, this evidence is consistent with slow-moving liquidity provision but inconsistent with standard asset pricing models with heterogeneous agents.

Li-Flow-Driven Common Factors in Stock Returns-938.pdf
12:00pm - 1:20pmLuncheon
New Haven Lawn Club 
1:30pm - 2:25pmTHUR01-4: Bank Risk Taking
Session Chair: Justin Murfin, Yale University
Session Chair: Sergey Chernenko, Purdue University
Room 2200 

Reciprocal Lending Relationships in Shadow Banking

Yi Li

Federal Reserve Board

As important investors in the shadow banking sector, prime money market funds (MMFs) lend about two-thirds of their money to banks through various funding instruments. However, post-crisis regulations apply stricter liquidity rules to both MMFs and banks, likely generating contradictory effects on MMFs (which prefer short-term lending) and banks (which prefer long-term borrowing). Using a novel dataset, I find that MMFs and banks seem to resolve this dilemma by developing a "bundling" strategy across multiple funding markets of different maturities. In particular, MMFs substantially increase their purchases of long-term debt issued by banks who have recently accommodated MMFs' overnight investment needs. Such reciprocal relationships are robust after controlling for bank credit risks and traditional relationship measures, and not weakened during the European sovereign debt crisis. These relationships are also stronger between MMFs and foreign banks, who depend on MMF funding more than domestic banks do. In addition, foreign banks that have been accommodative in the overnight market enjoy significantly lower rates on their long-term debt with MMFs.

Li-Reciprocal Lending Relationships in Shadow Banking-310.pdf
1:30pm - 2:25pmTHUR02-4: Transmission Mechanisms in the Banking Market
Session Chair: Manuel Adelino, Duke University
Session Chair: Stephen Adam Karolyi, Carnegie Mellon University
Room 2210 

Unconventional Monetary Policy and Bank Lending Relationships

William Mullins1, Anne Duquerroy2, Christophe Cahn2

1University of California, San Diego; 2Banque de France

How to support private lending to firms in recessions is a major open question. This paper examines how banks adjust their firm lending portfolios in a downturn by exploiting an unexpected unconventional monetary policy that reduced the cost of funding bank loans to a subset of firms in France in 2012. This cost reduction in the midst of a credit crunch raises eligible firms' bank debt, and reduces both defaults on their suppliers and downgrades of their credit ratings, providing causal evidence that targeted unconventional monetary policy can be an effective lever to increase private credit and reduce contagion of financial distress. The effect is almost entirely driven by firms with only a single bank relationship—a numerous and understudied group—and the positive loan supply shock we examine is transmitted to firms through banking relationships. We find that, for firms with strong hard information only, banking relationships support additional lending during a credit crunch. We also provide suggestive evidence that single-bank firms were substantially more credit constrained than multi-bank firms.

Mullins-Unconventional Monetary Policy and Bank Lending Relationships-1215.pdf
1:30pm - 2:25pmTHUR03-4: Do Managers Still Matter?
Session Chair: Daniel Ferreira, London School of Economcis
Session Chair: Maria Marchica, Alliance Manchester Business School
Room 2230 

Managerial Short-Termism and Investment: Evidence from Accelerated Option Vesting

Tomislav Ladika1, Zacharias Sautner2

1University of Amsterdam; 2Frankfurt School of Finance and Management

We show that executives with more short-term incentives spend less on long-term investment. We examine a unique event in which hundreds of firms eliminated option vesting periods to avoid an accounting expense under FAS 123-R. This allowed executives to exercise options earlier and to profit from boosting short-term performance. Our identification exploits that FAS 123-R’s timing was staggered almost randomly by firms’ fiscal year-ends. CEOs cut investment and reported higher short-term earnings after option acceleration. CEOs then increased equity sales and departed more frequently. Accelerating firms’ stocks initially rose, but then underperformed over the long term.

Ladika-Managerial Short-Termism and Investment-1235.pdf
1:30pm - 2:25pmTHUR04-4: Financial Advice and Fund Managers
Session Chair: Jules van Binsbergen, Wharton School, University of Pennsylvania
Session Chair: Jules van Binsbergen, Wharton School, University of Pennsylvania
Room 2400 

Financial Advisors and Risk-Taking

Alessandro Previtero1, Stephen Foerster2, Brian Melzer3, Juhani Linnainmaa4

1Indiana University; 2Western University Canada; 3Federal Reserve Bank, Chicago; 4University of Southern California

We show that financial advisors increase stock market participation and risk-taking. We first exploit a regulatory change in Canada that restricted the supply of financial advisors in all provinces except Quebec. Our estimates suggest that having a financial advisor increases stock market participation and reduces investments in cash accounts. We also use micro-level data on financial advisory accounts to examine how the length of the advisor-client relationship---a measure of trust---affects clients' willingness to take financial risk. We use exogenous shocks to advisor-client pairings as an instrument for the relationship length. We find that clients who started with a new advisor before the 2007-2009 financial crisis were less likely to remain invested in the stock market throughout the crisis. These effects are consistent with the trust model of Gennaioli, Shleifer and Vishny (2015).

Previtero-Financial Advisors and Risk-Taking-1225.pdf
1:30pm - 2:25pmTHUR05-4: Household Investment Decisions
Session Chair: Anthony Lynch, New York University
Session Chair: Nishad Kapadia, Tulane University
Room 2410 

Probability Weighting and Household Portfolio Choice: Empirical Evidence

Stephen Dimmock1, Roy Kouwenberg2, Olivia Mitchell3, Kim Peijnenburg4

1Nanyang Technological University; 2Mahidol University and Erasmus University; 3Wharton School, University of Pennsylvania; 4HEC Paris

This paper tests the relation between probability weighting and household portfolio choice. In a representative household survey, we measure probability weighting preferences using custom-designed incentivized lotteries. We find that, on average, people display “Inverse-S” shaped probability weighting: overweighting small probabilities and underweighting large probabilities. As theory predicts, our Inverse-S measure is positively associated with both non-participation and individual stock ownership, but negatively associated with mutual fund ownership. Conditional on equity ownership, Inverse-S is positively associated with portfolio under-diversification. We match respondents’ individual stock holdings to CRSP data and show that Inverse-S is positively related to skewness and idiosyncratic risk. We show that these choices reflect preferences, not limited financial knowledge or probability unsophistication.

Dimmock-Probability Weighting and Household Portfolio Choice-176.pdf
1:30pm - 2:25pmTHUR06-4: Microstructure and Information
Session Chair: Haoxiang Zhu, Massachusetts Institute of Technology
Session Chair: Baozhong Yang, Georgia State University
Room 4200 

Informing the Market: The Effect of Modern Information Technologies on Information Production

Meng Gao, Jiekun Huang

University of Illinois - Urbana Champaign

Modern information technologies have fundamentally changed how information is disseminated in financial markets. Using the staggered implementation of the EDGAR system in 1993-1996 as a shock to information dissemination technologies, we find evidence that internet dissemination of corporate information increases information production by corporate outsiders. Specifically, trades by individual investors in a stock become more informative about future stock returns after the stock becomes subject to mandatory filing on EDGAR. This effect is driven primarily by investors who have access to the internet. The amount and accuracy of information produced by sell-side analysts increase following the EDGAR implementation. Market responses to analyst revisions also become stronger after a firm becomes an EDGAR filer. Furthermore, stock pricing efficiency improves after the EDGAR implementation. Overall, these results suggest that greater and broader information dissemination facilitated by modern information technologies improves information production and stock pricing efficiency.

Gao-Informing the Market-828.pdf
1:30pm - 2:25pmTHUR07-4: Options and Stocks Market
Session Chair: Burton Hollifield, Carnegie Mellon University
Session Chair: Adam Reed, University of North Carolina at Chapel Hill
Room 4210 

Stock Options, Stock Loans, and the Law of One Price

Jesse Blocher1, Matt Ringgenberg2

1Vanderbilt University; 2University of Utah

Historically, option market makers were exempt from borrowing shares when short selling. This allowed market makers to hedge their exposures in hard-to-borrow stocks and it allowed short sellers to use put options to short sell in spite of limited supply in the stock loan market. Regulators removed this exemption in 2008, and in 2013 they also prohibited a workaround using so-called ‘reverse conversions’. We find that these regulatory changes eliminated the ‘shadow supply’ of hard-to-borrow shares provided by options, and thus caused a significant increase in average stock loan fees. Consequently, stock market quality has deteriorated among hard-to-borrow stocks: price efficiency is lower and stocks are more overpriced. Our results show that now, without the OMM exception, equity option markets and stock loan markets are tightly linked, and thus equity options are redundant securities among short sellers.

Blocher-Stock Options, Stock Loans, and the Law of One Price-1025.pdf
1:30pm - 2:25pmTHUR08-4: International Finance
Session Chair: Ric Colacito, University of North Carolina at Chapel Hill
Session Chair: Federico Gavazzoni, INSEAD
Room 4220 

Government Policy Approval and Exchange Rates

Yang Liu1, Ivan Shaliastovich2

1University of Hong Kong; 2University of Wisconsin-Madison

Measures of U.S. government policy approval, such as U.S. Presidential or Congressional ratings, are strongly related to persistent fluctuations in the dollar exchange rates. Contemporaneous correlations between approval ratings and the dollar value reach 50% against the advanced economy currencies, in real and nominal terms, in levels and multi-year changes. High approval ratings further forecast a decline in the dollar risk premium, a persistent increase in economic growth, and a reduction in future economic volatility several years in the future. We provide an illustrative economic model to interpret our empirical evidence. In the model, policy valuations are forwardlooking and reflect net contributions of policy to economic growth. Policy valuations (approvals) increase at times of high policy-related growth and low policy-related uncertainty, which are the times of a strong dollar and low dollar risk premium.

Liu-Government Policy Approval and Exchange Rates-620.pdf
1:30pm - 2:25pmTHUR09-4: Returns-Cross-Section
Session Chair: Jeffrey Pontiff, Boston College
Session Chair: Nancy Xu, Columbia Business School
Room 4230 

Break Risk

Simon C Smith1, Allan Timmermann2

1USC Dornsife INET; 2University of California, San Diego

We propose a new approach to forecasting stock returns in the presence of structural breaks that simultaneously affect the parameters of multiple portfolios. Exploiting information in the cross-section increases our ability to identify breaks in return prediction models and enables us to detect breaks more rapidly in real time, thereby allowing the parameters of the predictive return regression to be updated with little delay. Empirically, we find that accounting for breaks in panel return models allows us to generate out-of-sample return forecasts that are significantly more accurate than existing forecasts along both statistical and economical measures of performance. Moreover, we find that firms whose equity risk premium processes are most affected by breaks earn significantly higher average returns than firms with lower break exposure, suggesting that ``breaks'' is a risk factor that is priced in the cross-section. Finally, we find that the majority of breaks in equity premiums can be closely tied to breaks in the dividend growth process.

Smith-Break Risk-980.pdf
2:40pm - 3:35pmTHUR01-5: Bank Risk Taking
Session Chair: Justin Murfin, Yale University
Session Chair: Amiyatosh Purnanandam, University of Michigan
Room 2200 

Who bears interest rate risk?

Peter Hoffmann1, Federico Pierobon1, Sam Langfield1, Guillaume Vuillemey2

1European Central Bank; 2HEC Paris

We study the allocation of interest rate risk using novel data on the balance sheets and derivatives positions of 104 major euro area banks. Banks' aggregate exposures are small, but heterogeneous in the cross-section. In contrast with standard views, net worth is increasing in interest rates for over half of the sample banks. A key determinant of the sign of banks' exposures is whether domestic mortgages are predominantly fixed-rate or floating-rate. Banks use derivatives to reduce their risk exposure by one quarter on average. The residual heterogeneity implies that changes in interest rates have redistributive effects within the banking sector.

Hoffmann-Who bears interest rate risk-174.pdf
2:40pm - 3:35pmTHUR02-5: Transmission Mechanisms in the Banking Market
Session Chair: Manuel Adelino, Duke University
Session Chair: Igor Cunha, University of Kentucky
Room 2210 

The Impact of Bank Financing on Municipalities' Bond Issuance and the Real Economy

Ramona Dagostino

London Business School

I document the role of bank financing in the municipal bond market. I show that banks can play a substantial role in relaxing municipalities’ borrowing constraints. Using a unique institutional feature of the municipal market – the bank qualification – I show that a significant mass of local governments are willing to downsize their bond issuance to be able to place their debt with a bank. To meet the bank qualification threshold, the affected municipalities reduce the size of their municipal bond issuance by up to 28 percentage points. Exploiting a regulatory change in the municipal tax code, I show that relaxing bank credit rationing to municipalities translates into a sizable employment growth. I estimate that every additional million dollars of bank-financed debt generates over 30 jobs per year in the private sector. My results contribute to the literature on the real effects of financial constraints, and add to the current debate on the heterogeneous impact of fiscal policy across different states of the economy. Bank-qualified bonds being a source of deficit-financed rather than windfall spending, I find the implied local output multiplier to be around 1.6.

Dagostino-The Impact of Bank Financing on Municipalities Bond Issuance and the Real Economy-405.pdf
2:40pm - 3:35pmTHUR03-5: Do Managers Still Matter?
Session Chair: Daniel Ferreira, London School of Economcis
Session Chair: Erik Gilje, Wharton School, University of Pennsylvania
Room 2230 

Do CEO Compensation Policies Respond to Debt Contracting?

Brian Akins1, Jonathan Bitting1, David De Angelis1, Maclean Gaulin2

1Rice University; 2University of Utah

This paper shows that CEO compensation policies respond to debt contracting. Using a regression discontinuity design around loan covenant violations, we find that compensation policies become more creditor-friendly following violations. For example, the vega of compensation and the use of stock options decrease, indicating lower risk-taking incentives. Firms also recontract on performance metrics that are more likely to be favored by creditors and reduce pay duration, especially when loan maturity is low. Overall, our results support compensation contracts serving as commitment devices to decrease the agency cost of debt. They also reveal a channel through which creditors influence corporate governance.

Akins-Do CEO Compensation Policies Respond to Debt Contracting-699.pdf
2:40pm - 3:35pmTHUR04-5: Financial Advice and Fund Managers
Session Chair: Jules van Binsbergen, Wharton School, University of Pennsylvania
Session Chair: Juhani Linnainmaa, University of Southern California
Room 2400 

The Promises and Pitfalls of Robo-advising

Francesco D'Acunto, Nagpurnanand Prabhala, Alberto G Rossi

University of Maryland

We study a robo-advising portfolio optimizer that constructs tailored strategies based on investors’ holdings and preferences. Adopters are similar to non-adopters in terms of demographics, but have more assets under management, trade more, and have higher risk-adjusted performance. The robo-advising tool has opposite effects across investors with different levels of diversification before adoption. It increases portfolio diversification and decreases volatility for those that held less than 5 stocks before adoption. These investors’ portfolios perform better after using the tool. At the same time, robo-advising barely affects diversification for investors that held more than 10 stocks before adoption. It increases the fees they pay, but not their performance. For all investors, robo-advising reduces – but does not fully eliminate – pervasive behavioral biases such as the dis- position effect, trend chasing, and the rank effect, and increases attention based on online account logins. Our results inform the optimal design of robo-advising tools, which are becoming ubiquitous all over the world.

DAcunto-The Promises and Pitfalls of Robo-advising-880.pdf
2:40pm - 3:35pmTHUR05-5: Household Investment Decisions
Session Chair: Anthony Lynch, New York University
Session Chair: Steven Baker, University of Virginia
Room 2410 

Rationality and Subjective Bond Risk Premia

Andrea Buraschi1, Ilaria Piatti2, Paul Whelan3

1Imperial College; 2University of Oxford; 3Copenhagen Business School

We construct and study the cross-sectional properties of survey-based bond risk premia

and compare them to their traditional statistical counterparts. We document large

heterogeneity in skill, identify top forecasters, and learn about the importance of subjective

risk premia in long-term bonds dynamics. The consensus is not a sucient statistics

of the cross-section of expectations and we propose an alternative real-time aggregate

measure of risk premia consistent with Friedman's market selection hypothesis. We then

use this measure to evaluate structural models and nd support for economies generating

time-varying bond risk premia via an interaction between a quantity and price of risk


Buraschi-Rationality and Subjective Bond Risk Premia-814.pdf
2:40pm - 3:35pmTHUR06-5: Microstructure and Information
Session Chair: Haoxiang Zhu, Massachusetts Institute of Technology
Session Chair: Barney Hartman-Glaser, University of California, Los Angeles
Room 4200 

To Pool or Not to Pool? Security Design in OTC Markets

Vincent Glode, Christian Opp, Ruslan Sverchkov

University of Pennsylvania

This paper studies the optimality of pooling and tranching for a privately informed security originator facing buyers endowed with market power (perhaps due to liquidity shortages). Contrary to the standard result that pooling and tranching are optimal practices, we find that selling assets separately may be preferred by originators. In this environment, originators sell securities separately to avoid being inefficiently screened by buyers with market power. Our results shed light on observed time-variation in the practice of pooling and tranching in financial markets, in particular, the dramatic decline in the size of the ABS market following the most recent financial crisis.

Glode-To Pool or Not to Pool Security Design in OTC Markets-197.pdf
2:40pm - 3:35pmTHUR07-5: Options and Stocks Market
Session Chair: Burton Hollifield, Carnegie Mellon University
Session Chair: David Schreindorfer, Arizona State University
Room 4210 

Extracting Dynamic Latent Factors from Large Option Panels

Yuguo Liu, Kris Jacobs

University of Houston

Estimating option valuation models is challenging due to the complexity of the models and the richness of the available option data. Many existing studies therefore limit the time-series dimension and especially the cross-sectional dimension of the option data. This complicates the identi cation of model parameters from option data, especially the parameters characterizing the tails of the distribution. We propose new techniques to overcome these constraints, based on particle ltering with weights based on model-implied spot volatilities rather than model prices. We also use his approach to estimate option valuation models based on returns and options jointly. We provide an in-depth investigation of the double-jump models with jumps in returns and volatility. Both return and option data support models with jumps in volatility as well as jumps in returns. Using larger cross-sections of options results in model inference and parameter estimates that di er from the existing literature.

Liu-Extracting Dynamic Latent Factors from Large Option Panels-481.pdf
2:40pm - 3:35pmTHUR08-5: International Finance
Session Chair: Ric Colacito, University of North Carolina at Chapel Hill
Session Chair: Andreas Stathopoulos, University of Washington
Room 4220 

International Medium of Exchange: Privilege and Duty

Ryan Chahrour, Rosen Valchev

Boston College

The United States enjoys an ``exorbitant privilege'' that allows it to borrow at especially low interest rates. Meanwhile, the dollarization of world trade appears to shield the U.S. from international disturbances. We provide a new theory that links dollarization and exorbitant privilege through the need for an international medium of exchange. We consider a two-country world where international trade happens in decentralized matching markets, and must be collateralized by assets --- a.k.a. currencies --- issued by one of the two countries. Traders have an incentive to coordinate their currency choices and a single dominant currency arises in equilibrium. With small heterogeneity in traders' information, the model delivers a unique mapping from economic conditions to the dominant currency. Nevertheless, the model delivers a dynamic multiplicity: in steady-state either currency can serve as the international medium of exchange. The economy with the dominant currency enjoys lower interest rates and the ability to run current account deficits indefinitely. Currency regimes are stable, but sufficiently large shocks or policy changes can lead to transitions, with large welfare implications.

Chahrour-International Medium of Exchange-441.pdf
2:40pm - 3:35pmTHUR09-5: Returns-Cross-Section
Session Chair: Jeffrey Pontiff, Boston College
Session Chair: Pavel Savor, Temple University and DePaul University
Room 4230 

Dissecting Announcement Returns

Mamdouh Medhat, Maik Schmeling

Cass Business School

We develop a model with heterogeneous beliefs about a public and a private signal to understand return predictability around earnings announcements. We find evidence consistent with all of the model's key predictions: (1) Stock prices increase on average on earnings announcement days even though all signals are mean zero; (2) Firms with more fundamental uncertainty have higher announcement day returns on average; (3) Announcements day returns predict fundamental growth rates and stock returns; (4) The part of the announcement return unrelated to the public signal is more informative about future price drifts and fundamental growth rates than the part related to the public signal. Moreover, a factor based on announcement returns unrelated to the public signal should deliver significant returns that cannot be explained by standard risk factors. We find strong evidence for this and show that such a factor subsumes momentum returns.

Medhat-Dissecting Announcement Returns-777.pdf

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