RESEARCH PAPERS | CORPORATE FINANCE

PORTFOLIO PUMPING IN MUTUAL FUND FAMILIES
Pingle Wang
2024
This paper investigates portfolio pumping at the fund family level, where non-star fund managers strategically purchase stocks held by star funds in the family to inflate their quarter-end performance. Star funds that engage in such activities show inflated performance after 2002 when the Securities and Exchange Commission increased regulation on portfolio pumping. Stocks pumped by the strategy show strong reversals at the quarter end. Moreover, despite a minor underperformance stemming from portfolio misallocation, non-star fund managers pumping for star funds receive abnormally high subsequent flows, suggesting a pattern of family subsidization. >more

CHATGPT AND CORPORATE POLICIES
Manish Jha, Jialin Qian, Michael Weber, and Baozhong Yang
2024
We create a firm-level ChatGPT investment score, based on conference calls, that measures managers' anticipated changes in capital expenditures. We validate the score with interpretable textual content and its strong correlation with CFO survey responses. The investment score predicts future capital expenditure for up to nine quarters, controlling for Tobin's q and other determinants, implying the investment score provides incremental information about firms' future investment opportunities. The investment score also separately forecasts future total, intangible, and R&D investments. High-investment-score firms experience significant negative future abnormal returns. We demonstrate ChatGPT's applicability to measure other policies, such as dividends and employment. >more

ZOMBIE CREDIT AND (DIS-)INFLATION: EVIDENCE FROM EUROPE
Viral V. Acharya, Matteo Crosignani, Tim Eisert, and Christian Eufinger
2023
We show that ``zombie credit''---subsidized credit to non-viable firms---has a disinflationary effect. By keeping these firms afloat, zombie credit creates excess aggregate supply, thereby putting downward pressure on prices. Granular European data on inflation, firms, and banks confirm this mechanism. Markets affected by a rise in zombie credit experience lower firm entry and exit, capacity utilization, markups, and inflation, as well as a misallocation of capital and labor, which results in lower productivity, investment, and value added. If weakly-capitalized banks were recapitalized in 2009, inflation in Europe would have been up to 0.21pp higher post-2012. >more

SIZE DISCOUNT AND SIZE PENALTY: TRADING COSTS IN BOND MARKETS
Gabor Pinter, Chaojun Wang, and Junyuan Zou
2023
We show that larger trades incur lower trading costs in government bond markets (“size discount”), but costs increase in trade size after controlling for clients’ identities (“size penalty”). The size discount is driven by the cross-client variation of larger traders obtaining better prices, consistent with theories of trading with imperfect competition. The size penalty, driven by the within-client variation, is larger for corporate bonds, during major macroeconomic surprises and during COVID-19. These differences are larger among more sophisticated clients, consistent with information-based theories. >more

SUSTAINABILITY OR PERFORMANCE? RATINGS AND FUND MANAGERS’ INCENTIVES
Nickolay Gantchev, Mariassunta Giannetti, and Rachel Li
2024
We explore how mutual fund managers and investors react when the tradeoff between a fund’s sustainability and performance becomes salient. Following the introduction of Morningstar’s sustainability ratings (the “globe” ratings), mutual funds increased their holdings of sustainable stocks to attract flows. Such sustainability-driven trades, however, underperformed, impairing the funds’ overall performance. Consequently, a tradeoff between sustainability and performance emerged. In the new equilibrium, the globe ratings do not affect investor flows and funds no longer trade to improve their globe ratings. >more

TRADE CREDIT AND THE STABILITY OF SUPPLY CHAINS
Nuri Ersahin, Mariassunta Giannetti, and Ruidi Huang
2024
We show that trade credit flows increase when a firm in a production network becomes a less reliable supplier due to an operating shock. Affected firms extend more trade credit when their customers have lower switching costs or expect more disruption. Suppliers that are more dependent on the affected firms facilitate the trade credit extension. However, when financial constraints at the affected firms and their suppliers prevent the increase in trade credit, customers sever their relationships with the affected firms, and the sales of the affected firms and their suppliers drop, suggesting that trade credit enhances production network stability. >more

HOW DOES EQUITY ALLOCATION IN UNIVERSITY SPINOUTS AFFECT FUNDRAISING SUCCESS? EVIDENCE FROM THE UK
Thomas F. Hellmann, Junida Mulla, and Matthias Qian
2023
There is considerable controversy about the allocation of equity in university spinouts. Founder teams and outside investors frequently criticize universities for taking excessive ownership stakes, weakening entrepreneurial incentives, and making spinouts ‘uninvestable.’ Universities in turn defend their ownership rights in terms of the resources needed to generate the research in the first place. This paper uses detailed data from UK spinouts to assess the impact of university ownership on subsequent fundraising success. Perhaps surprisingly, the data suggests a positive correlation between university stakes and fundraising success, even after controlling for observable characteristics. However, this correlation appears to be partly driven by universities retaining larger stakes in their most promising spinouts. Using an instrumental variable based on the precedence set by prior spinouts within a university, we find some evidence that higher university stakes reduce the likelihood of fundraising success. A 10% larger university stake decreases the probability of raising venture capital on average by 3%. The negative effect is concentrated in less science-intensive spinouts (e.g., IT), and is statistically insignificant in the more science-intensive spinouts (e.g., engineering, or biomedical). Reductions in university stakes are also associated with increases in the spinout rate. >more

SEXISM, CULTURE, AND FIRM VALUE: EVIDENCE FROM THE HARVEY WEINSTEIN SCANDAL AND THE #METOO MOVEMENT
Karl V. Lins, Lukas Roth, Henri Servaes, and Ane Tamayo
2023
During the revelation of the Harvey Weinstein scandal and the re-emergence of the #MeToo movement, firms with a non-sexist corporate culture, proxied by having women among the five highest paid executives, earn excess returns of 1.6% relative to firms without female top executives. Returns for firms with female top executives are substantially higher in industries with few women in executive positions and in states with greater sexism or a larger gender pay gap. These returns are driven by changes in investor preferences towards firms with a non-sexist culture. Institutional ownership increases in firms with a non-sexist culture after the Weinstein/#MeToo events, particularly for institutions with larger holdings and investors with a lower ESG focus ex-ante. Firms without female top executives improve gender diversity after these events, even in sexist states and in industries with few women executives. Our evidence attests to the value of having a non-sexist corporate culture. >more

USE OF PROCEEDS IN PRIVATE EQUITY-BACKED INITIAL PUBLIC OFFERINGS
Benjamin Hammer, Nikolaus Marcotty-Dehm, and Jens Martin
2024
This paper provides the first empirical investigation of the disclosure of use of proceeds in private equity (PE)-backed initial public offerings (IPOs). We find that PE-backed issuers primarily use the IPO as a means of repaying claimholders. The subset of PE-backed issuers that disclose “repay debt” as the use of proceeds have high ex-ante debt-to-total assets ratios and use the IPO proceeds to reduce them by approximately 31 percentage points post IPO. Further results suggest that the need to repay claimholders in PE-backed IPOs conflicts with the implementation of other stated use-of-proceeds categories related to M&A and R&D. Finally, we provide evidence that PE backing reduces the adverse impact of an uninformative use-of-proceeds disclosure on underpricing. >more

DISSECTING THE LONG-TERM PERFORMANCE OF THE CHINESE STOCK MARKET
Franklin Allen, Jun "QJ" Qian, Chenyu Shan, and Julie Zhu
2024
Domestically listed Chinese (A-share) firms have lower stock returns than externally listed Chinese, developed, and emerging country firms during 2000 to 2018. They also have lower net cash flows than matched unlisted Chinese firms. The underperformance of both stock and accounting returns is more pronounced for large A-share firms, while small firms show no underperformance along either dimension. Investor sentiment explains low stock returns in the cross-country and within-A-share samples. Institutional deficiencies in IPO and delisting processes and weak corporate governance in terms of shareholder value creation are consistent with the underperformance in stock returns and net cash flows. >more

FRESH AIR EASES WORK – THE EFFECT OF AIR QUALITY ON INDIVIDUAL INVESTOR ACTIVITY
Steffen Meyer, and Michaela Pagel
2023
This paper shows that air quality has a significantly negative effect on the likelihood of individual investors to sit down, log in, and trade in their brokerage accounts controlling for investor-, weather-, traffic-, and market-specific factors. In perspective, a one standard deviation increase in fine particulate matter leads to the same reduction in the probability of logging in and trading as a one standard deviation increase in sunshine. We document this effect for low levels of pollution that are commonly found throughout the developed world. As individual investor trading can be a proxy for everyday cognitively-demanding tasks such as office work, our findings suggest that the negative effects of pollution on white-collar work productivity are much more severe than previously thought. To our knowledge, this is the first study to demonstrate a negative impact of pollution on a measure of white-collar productivity at the individual level in a western country. >more
 

YIELD CURVE MOMENTUM
Markus Sihvonen
2023
I analyze time series momentum along the Treasury term structure. Yield curve momentum is primarily due to changes in the level factor of yields. Because yield changes are partly induced by changes in the federal funds rate, yield curve momentum is related to post-FOMC announcement drift. The momentum factor is unspanned by the information in the term structure today and is hence inconsistent with standard term structure, macrofinance and behavioral models. I argue that the results are consistent with a model with unpriced longer term dependencies, which can be explained by a specific form of bounded rationality. >more

INVESTMENT WHEN NEW CAPITAL IS HARD TO FIND
Olivier Darmouni, and Andrew Sutherland
2023
We examine how a fixed capital supply shortage affects firm investment. Using equipment transaction-level data, we find pandemic-driven production disruptions significantly altered capital reallocation patterns across firms. A surge in used capital trading activity softened the investment decline, as firms acquired used capital from distant and dissimilar counterparts. Younger firms were disproportionately affected even though they rarely purchase new capital: while in normal times older firms sell their capital to younger firms, following a supply shortage, older firms compete for used capital, pricing out younger firms. Our evidence highlights the crucial role of secondary markets and distributive externalities for corporate investment. >more

COMMON VENTURE CAPITAL INVESTORS AND STARTUP GROWTH
Ofer Eldar, and Jillian Grennan
2023
We exploit the staggered introduction of liability waivers when investors hold stakes in conflicting business opportunities as a shock to venture capital (VC) investment and director networks. After the law changes, we find increases in within-industry VC investment and common directors serving on startup boards. Despite the potential for rent extraction, same-industry startups inside VC portfolios benefit by raising more capital, failing less, and exiting more successfully. VC directors serving on other startup boards are the primary mechanism associated with positive outcomes, consistent with common VC investment facilitating informational exchanges in VC portfolios. >more

USING SOCIAL MEDIA TO IDENTIFY THE EFFECTS OF CONGRESSIONAL VIEWPOINTS ON ASSET PRICES
Francesco Bianchi, Roberto Gomez Cram, and Howard Kung
2023
We use a high-frequency identification approach to document that individual politicians affect asset prices. We exploit the regular flow of viewpoints contained in Congress members' tweets. Supportive (critical) tweets increase (decrease) the stock prices of the targeted firm and the corresponding industry in minutes around the tweet. The bulk of the stock price effects is concentrated in the tweets revealing news about future legislative action. The effects are amplified around committee meeting days, especially when the tweet originates from committee members and influential politicians. Overall, we show that Congress members' social media accounts are an important source of political news. >more

LIQUIDATION VALUE AND LOAN PRICING
Francesca Barbiero, Glenn Schepens, and Jean-David Sigaux
2023
This paper shows that the liquidation value of collateral depends on the interdependency between borrower and collateral risk. Using transaction-level data on short-term repurchase agreements (repo), we show that borrowers pay a 1.1 to 2.6 basis points premium when their default risk is positively correlated with the risk of the collateral that they pledge. Moreover, we show that borrowers internalize this premium when making their collateral choices. Loan-level credit registry data suggest that the results extend to the corporate loan market as well. >more

FOUR FACTS ABOUT ESG BELIEFS AND INVESTOR PORTFOLIOS
Stefano Giglio, Matteo Maggiori, Johannes Stroebel, Zhenhao Tan, Stephen P. Utkus, and Xiao Xu
2023
We analyze survey data on ESG beliefs and preferences in a large panel of retail investors linked to administrative data on their investment portfolios. The survey elicits investors’ expectations of long-term ESG equity returns and asks about their motivations, if any, to invest in ESG assets. We document four facts. First, investors generally expected ESG investments to underperform the market. Between mid-2021 and late-2022, the average expected 10-year annualized return of ESG investments relative to the overall stock market was −1.4%. Second, there is substantial heterogeneity across investors in their ESG return expectations and their motives for ESG investing: 45% of survey respondents do not see any reason to invest in ESG, 25% are primarily motivated by ethical considerations, 22% are driven by climate hedging motives, and 7% are motivated by return expectations. Third, there is a link between individuals’ reported ESG investment motives and their actual investment behaviors, with the highest ESG portfolio holdings among individuals who report ethics-driven investment motives. Fourth, financial considerations matter independently of other investment motives: we find meaningful ESG holdings only for investors who expect these investments to outperform the market, even among those investors who reported that their most important ESG investment motives were ethical or hedging reasons. >more

DECARBONIZING INSTITUTIONAL INVESTOR PORTFOLIOS: HELPING TO GREEN THE PLANET OR JUST GREENING YOUR PORTFOLIO?
Vaska Atta-Darkua, Simon Glossner, Philipp Krueger, and Pedro Matos
2023
We study how institutional investors that join climate-related investor initiatives decarbonize their equity portfolios. Decarbonization can be achieved either by re-weighting portfolios towards lower carbon emitting firms or alternatively via targeted engagements with portfolio companies to reduce their emissions. Our findings indicate that portfolio re-weighting is the predominant greening strategy by climate-conscious investors, in particular by those based in countries with carbon emissions pricing schemes. We do not uncover much evidence of engagement even after the 2015 Paris Agreement. Furthermore, we find no evidence that climate-conscious investors allocate capital towards firms developing climate patents, but they do re-weight towards firms starting to generate green revenues. Overall, our analysis raises doubts about the effectiveness of investor-led initiatives in reducing corporate emissions and helping an all-economy transition to “green the planet”. >more

FEARING THE FED: HOW WALL STREET READS MAIN STREET
Vadim Elenev, Tzuo Hann Law, Dongho Song, and Amir Yaron
2022
We provide strong evidence of a countercyclical sensitivity of the stock market to major macroeconomic announcements. The most notable cyclical variation takes place within expansions: sensitivity is largest early in an expansion and essentially zero late in an expansion. By exploiting the comovement pattern between stock returns and bond yields around announcements, we show that the stock market sensitivity is large when the cash flow component of news is least offset by news about future risk-free rates. We propose a simple New Keynesian model which links this asset pricing evidence to monetary policy responsiveness. >more

ARE ALL ESG FUNDS CREATED EQUAL? ONLY SOME FUNDS ARE COMMITTED
Michelle Lowry, Pingle Wang, and Kelsey D. Wei
2022
ESG funds are not all equal: there is significant heterogeneity in incentives of fund managers to engage with portfolio firms. We argue that differences in incentives affect ESG-related information acquisition, investment strategies, engagement activities, and impact of ESG funds. Our findings support these predictions. Conditional on similarly large ESG investments, those funds with higher incentives to engage with portfolio firms, which we refer to as committed ESG funds, differ significantly from other ESG funds along each of these dimensions. Moreover, committed ESG funds have outperformed other ESG funds on their ESG holdings, particularly those with longer duration. Our findings highlight that committed ESG funds view ESG as a value driver. >more

COLLATERAL ELIGIBILITY OF CORPORATE DEBT IN THE EUROSYSTEM
Loriana Pelizzon, Max Riedel, Zorka Simon, and Marti G. Subrahmanyam
2023
We study the many implications of the Eurosystem collateral framework for corporate bonds. Using data on the evolving collateral eligibility list, we identify the first inclusion dates of bonds and issuers and use these events to find that the increased supply and demand for pledgeable collateral following eligibility (a) increases activity in the corporate securities lending market, (b) lowers eligible bond yields, and (c) affects bond liquidity. Thus, corporate bond lending relaxes the constraint of limited collateral supply and thereby improves market functioning. >more

CREDIT RISK, DEBT OVERHANG, AND THE LIFE CYCLE OF CALLABLE BONDS
Bo Becker, Murillo Campello, Viktor Thell, and Dong Yan
2022
We show that callable bonds have both higher yields and lower market prices than matched non-callable bonds of the same issuer-time, reflecting the value of call features to issuers and investors. This "value of callability" as well as the inclusion and the exercise of call rights are jointly determined by issuer credit quality. Critically, our agency-based theoretical and empirical analyses show that callability reduces debt overhang in corporate mergers. Our results help explain the value and increasing prevalence of callable bonds in credit markets. >more

PLACE YOUR BETS? THE MARKET CONSEQUENCES OF INVESTMENT RESEARCH ON REDDIT'S WALLSTREETBETS
Daniel Bradley, Jan Hanousek Jr., Russell Jame, and Zicheng Xiao
2023
We examine the consequences of due diligence recommendations on Reddit’s Wallstreetbets (WSB) platform. Before the Gamestop (GME) short squeeze, recommendations are significant predictors of returns and cash-flow news. This predictability is completely eliminated post-GME. Post-GME, the fraction of reports emphasizing price-pressure or attention-grabbing stocks dramatically increases, and the decline in informativeness is concentrated in these reports. Similarly, retail trade informativeness increases following DD reports in the pre-GME period, but not post-GME. Our findings are consistent with the view that the Gamestop event altered the culture of WSB, leading to a deterioration in investment quality that adversely impacted smaller investors. >more

THE DECLINE OF SECURED DEBT
Efraim Benmelech, Nitish Kumar, and Raghuram G. Rajan
2022
The share of secured debt issued (as a fraction of total corporate debt) declined steadily in the United States over the twentieth century. This stems partly from financial development giving creditors greater confidence that high quality borrowers will respect their claims even if creditors do not obtain security up front. Consequently, such borrowers prefer retaining financial flexibility by not giving security up front. Instead, security is given contingently – when a firm approaches distress. This also explains why superimposed on the secular decline, the share of secured debt issued is countercyclical. >more

CORPORATE BOND FACTORS: REPLICATION FAILURES AND A NEW FRAMEWORK
Jens Dick-Nielsen, Peter Feldhütter, Lasse Heje Pedersen, and Christian Stolborg
2023
We demonstrate that the literature on corporate bond factors suffers from replication failures, inconsistent methodological choices, and the lack of a common error-free dataset. Going beyond identifying this replication crisis, we create a clean database of corporate bond returns where outliers are analyzed individually and propose a robust factor construction. Using this framework, we show that most, but not all, factors fail to replicate. Further, while traditional factors are constructed from individual bonds, we create representative firm-level bonds, showing which bond signals work at the firm-level. Lastly, we show that a number of equity signals work for corporate bonds. In summary, most factors fail, but so does the CAPM for corporate bonds. >more

LENDER AUTOMATION AND RACIAL DISPARITIES IN CREDIT ACCESS
Sabrina T Howell, Theresa Kuchler, David Snitkof, Johannes Stroebel, and Jun Wong
2023
Process automation reduces racial disparities in credit access through enabling smaller loans, broadening banks’ geographic reach, and removing human biases from decision-making. We document these findings in the context of the Paycheck Protection Program (PPP), a setting where private lenders faced no credit risk but decided which firms to serve. Black-owned firms primarily obtained PPP loans from automated fintech lenders, especially in areas with high racial animus. After traditional banks automated their loan processing procedures, their PPP lending to Black-owned firms increased. Our findings cannot be fully explained by racial differences in loan application behaviors, pre-existing banking relationships, firm performance, or fraud rates. >more

CONTRACTING COSTS, COVENANT-LITE LENDING AND REPUTATIONAL CAPITAL
Dominique C. Badoer, Mustafa Emin, and Christopher M. James
2023
Using a large sample of leveraged loans, we provide evidence that, despite having fewer creditor control rights, covenant-lite loans have similar recovery rates and significantly lower spreads than loans with maintenance covenants. We find that the propensity to borrow covenant-lite is related to various proxies for the reputational capital of a borrowing firm’s private equity sponsor. We construct a simple model to illustrate the relationship between reputational capital, covenants, and loan spreads in the leveraged loan market. Our model illustrates how reputational capital can substitute for covenants in mitigating agency costs of debt, leading to lower loan spreads for covenant-lite loans. >more

PEER VERSUS PURE BENCHMARKS IN THE COMPENSATION OF MUTUAL FUND MANAGERS
Richard B. Evans, Juan-Pedro Gomez, Linlin Ma, and Yuehua Tang
2023
We examine the role of peer (e.g., Lipper manager indices) vs. pure (e.g., S&P 500) benchmarks in fund manager compensation. We model their impact on manager incentives and then test those predictions using novel data. We find that 71% of managers are compensated based on peer benchmarks. Consistent with the model, peer-benchmarked fund managers exhibit higher effort generating higher gross performance and collect higher fee income. Analyzing advisors’ choice between benchmark types, we show that peer-benchmarking advisors cater to more sophisticated and performance-sensitive investors, and are more likely to sell through direct channels, consistent with investor heterogeneity and market segmentation. >more

DO INVESTORS OVERVALUE STARTUPS? EVIDENCE FROM THE JUNIOR STAKES OF MUTUAL FUNDS
Vikas Agarwal, Brad M. Barber, Si Cheng, Allaudeen Hameed, Harshini Shanker, and Ayako Yasuda
2023
We show that mutual funds report their junior stakes in startups at 43% higher valuation than model fair values that consider multi-tier capital structures of startups. The latest-issued and most senior security is worth 48% per share than junior securities held by mutual funds, implying that mutual funds mark junior securities close to par with the senior securities. Our findings are robust to model assumptions. Identical valuations reported for dual holdings of senior and junior securities imply 37% discrepancy in implied values of the firm. Overvaluation is lower for fund families with longer experience in private startup investments, and higher for junior securities purchased in secondary transactions. Overvaluation declines after down rounds (new financing rounds with purchase prices lower than previous rounds) and near IPOs. The results are consistent with mutual funds neglecting the probability of negative outcomes in which junior securities are paid less than senior securities and overweighting successful exits where all securities convert to common equity and are valued equally. >more

CALL ME MAYBE? BONDHOLDER RELATIONSHIPS AND CORPORATE CALL POLICY
Paul Beaumont, David Schumacher, and Gregory Weitzner
2023
When a firm refinances a bond by calling it, existing bondholders are forced to sell their bonds back to the firm at a below-market price. Do these bondholders replace the bond that was just called by buying the newly issued one? This paper shows that calls have a large impact on firms' bondholder relationships. After a call, existing bondholders are far less likely to participate in the firm’s subsequent bond issuances. Funds that are most valuable to firms (i.e., top bondholders or large funds) are more likely to exit, consistent with them exerting market power. In turn, firms are more likely to delay calling their bonds when they have more attractive investors in their bondholder base. Finally, we show that firms' borrowing costs are affected by their reputation for call delays. Our results show how call policies affect firm/bondholder relationships and highlight the role of both firm and investor reputation in financial markets. >more

INDEPENDENT IPO ADVISERS
Tim Jenkinson, Howard Jones, and Emmanuel Pezier
2023
Firms increasingly appoint independent advisers in IPOs alongside underwriters. We explore why, and we formulate a selection model. Controlling for issuer-adviser matching, we find advisers in aggregate have no effect on first-day returns, withdrawals, or fees paid to underwriters. However, underpricing with generalist advisers (who offer diverse services alongside IPOs) is significantly greater than with specialists. We link these findings to the different incentives of generalists and specialists. Our results are consistent with naivety on the part of certain issuers, but more likely reflect the willingness of large issuers to pay through underpricing for the wider services of generalists. >more

CROWDED OUT FROM THE BEGINNING: IMPACT OF GOVERNMENT DEBT ON CORPORATE FINANCING
Cagri Akkoyun, Nuri Ersahin, and Christopher M. James
2021
Using hand-collected data on corporate bond and stock offerings, we identify the impact of government debt on corporate financing during World War I. The early twentieth century provides a unique opportunity to identify the impact of government debt on private financing because during this period (1) firms announced the amount they wanted to raise before each security offering and (2) the Treasury issued debt in discrete intervals. We identify the impact of Treasury issues by comparing differences in the amount firms offered to the amount they actually raised when the Treasury was borrowing to when the Treasury was not in the market. We find that long term government bond offerings negatively affect both amount of long-term corporate bonds and dividend paying stocks issued. In contrast, we find no effect of government bond offerings on short term debt issue. Our findings suggest that investors view dividend paying stocks as a close substitute for relatively safe long-term bonds. >more

STOCK REPURCHASING BIAS OF MUTUAL FUNDS
Mengqiao Du, Alexandra Niessen-Ruenzi, and Terrance Odean
2023
The paper shows that mutual funds’ trading experiences bias their future repurchasing decisions. Mutual funds are less likely to repurchase a stock if they previously sold the stock for a loss rather than for a gain. After switching to managing a different fund, fund managers still avoid repurchasing stocks they sold for a loss at a past fund. We do not find that mutual fund managers are biased against repurchasing past loser stocks because of superior information. Though less likely to be repurchased, repurchased losers do not underperform repurchased winners – and the fund itself – in the subsequent quarter. >more

ESG SHAREHOLDER ENGAGEMENT AND DOWNSIDE RISK
Andreas G. F. Hoepner, Ioannis Oikonomou, Zacharias Sautner, Laura T. Starks, and Xiaoyan Zhou
2023
We show that engagement on environmental, social, and governance issues can benefit shareholders by reducing firms’ downside risks. We find that the risk reductions (measured using value at risk and lower partial moments) vary across engagement types and success rates. Engagement is most effective in lowering downside risk when addressing environmental topics (primarily climate change). Further, targets with large downside risk reductions exhibit a decrease in environmental incidents after the engagement. We estimate that the value at risk of engagement targets decreases by 9% of the standard deviation after successful engagements, relative to control firms. >more

DOES THE CARBON PREMIUM REFLECT RISK OR MISPRICING?
Yigit Atilgan, K. Ozgur Demirtas, Alex Edmans, and A. Doruk Gunaydin
2023
Prior research has documented a carbon premium in realized returns, which has been assumed to proxy for expected returns and thus the cost of capital. We find that the carbon premium partially represents unexpected returns and thus mispricing. Companies with higher scope 1, scope 2, or scope 3 emissions enjoy superior earnings surprises and earnings announcement returns; quarterly earnings announcements account for 30-50% of the premium. We find similar results for changes in emissions but not scaled emissions, consistent with earlier findings on realized returns. Our results suggest that the carbon premium, where it exists, partially results from an unpriced externality, highlighting the need for government action. >more

FLIGHT TO SAFETY: HOW ECONOMIC DOWNTURNS AFFECT TALENT FLOWS TO STARTUPS
Shai Bernstein, Richard Townsend, and Ting Xu
2023
Using proprietary data from AngelList Talent, we study how startup job seekers' search and application behavior changed during the COVID downturn. We find that workers shifted their searches and applications away from less-established startups and toward more-established ones, even within the same individual over time. At the firm level, this shift was not offset by an influx of new job seekers. Less-established startups experienced a relative decline in the quantity and quality of applications, ultimately affecting their hiring. Our findings uncover a flight-to-safety channel in the labor market, which may amplify the pro-cyclical nature of entrepreneurial activities. >more

CHOOSING INVESTMENT MANAGERS
Amit Goyal, Sunil Wahal, and M. Deniz Yavuz
2023
We study how plan sponsors choose investment management firms from their opportunity set when delegating $1.6 trillion in assets between 2002 and 2017. Choice is related to (i) pre-hiring returns, and (ii) pre-existing connections between personnel at the plan (or investment consultant), and the investment management firm. Ex post, connections do not result in higher post-hiring returns. Relationships are thus conducive to asset gathering by investment managers but do not generate commensurate pecuniary benefits for plan sponsors. >more

DIVERSITY WASHING
Andrew Baker, David F. Larcker, Charles McClure, Durgesh Saraph, and Edward M. Watts
2023
We provide large-sample evidence on whether U.S. publicly traded corporations use voluntary disclosures about their commitments to employee diversity opportunistically. We document significant discrepancies between companies' external stances on diversity, equity, and inclusion (DEI) and their hiring practices. Firms that discuss DEI more than their actual employee gender and racial diversity (“diversity washers”) obtain superior scores from environmental, social, and governance (ESG) rating organizations and attract more investment from institutional investors with an ESG focus. These outcomes occur even though diversity-washing firms are more likely to incur discrimination violations and have negative human-capital-related news events. Our study provides evidence consistent with growing allegations of misleading statements from firms about their DEI initiatives and highlights the potential consequences of selective ESG disclosures. >more

THE DEBT-INFLATION CHANNEL OF THE GERMAN HYPERINFLATION
Markus K. Brunnermeier, Sergio Correia, Stephan Luck, Emil Verner, and Tom Zimmermann
2023
This paper studies how a large increase in the price level is transmitted to the real economy through firm balance sheets. Using newly digitized macro- and micro-level data from the German inflation of 1919-1923, we show that inflation led to a large reduction in real debt burdens and bankruptcies. Firms with higher nominal liabilities at the onset of inflation experienced a larger decline in interest expenses, a relative increase in their equity values, and higher employment during the inflation. The results are consistent with real effects of a debt-inflation channel that operates even when prices and wages are flexible. >more

EMPIRICAL EVIDENCE ON THE STOCK-BOND CORRELATION
Roderick Molenaar, Edouard Senechal, Laurens Swinkels, and Zhenping Wang
2023
The correlation between stock and bond returns is a cornerstone of asset allocation decisions. The correlation can move considerably over time, which can have a large impact on portfolio construction. Our empirical evidence points to inflation and real returns on short-term bonds, and the uncertainty surrounding inflation as important factors for understanding the sign and magnitude of the stock-bond correlation. Our historical analyses across countries suggest that our findings are robust. We apply these insights to analyze the implications of a shift in stock-bond correlation regime for the risk of multi-asset class portfolios and for bonds risk premia. >more

POPULATION AGING AND BANK RISK-TAKING
Sebastian Doerr, Gazi Kabas, and Steven Ongena
2023
What are the implications of an aging population for financial stability? To examine this question, we exploit geographic variation in aging across U.S. counties. We establish that banks with higher exposure to aging counties increase loan-to-income ratios. Laxer lending standards lead to higher nonperforming loans during downturns, suggesting higher credit risk. Inspecting the mechanism shows that aging drives risk-taking through two contemporaneous channels: deposit inflows due to seniors’ propensity to save in deposits; and depressed local investment opportunities due to seniors’ lower credit demand. Banks thus look for riskier clients, especially in counties where they operate no branches. >more

THE RISE OF STAR FIRMS: INTANGIBLE CAPITAL AND COMPETITION
Meghana Ayyagari, Asli Demirgüç-Kunt, and Vojislav Maksimovic
2023
The large divergence in the returns of top-performing (star) firms and the rest of the economy is substantially reduced when we account for mismeasurement of intangible capital. Star firms produce and invest more per dollar of invested capital, are not protected from trade shocks, and have more valuable innovations as measured by the market value of patents compared to non-stars. While star firms have higher markups, these are predicted early in their life-cycle at a time when they are small. Overall, correcting for the mismeasurement, the evidence supports the role of efficiency in determining the rise of star firms. >more

MEASURING THE CLIMATE TRANSITION RISK SPILLOVER
Runfeng Yang, Massimiliano Caporin, and Juan-Angel Jiménez-Martin
2023
Climate transition risk, the generated from the transition to a low-carbon economy due to changing policies, can have cross-border impacts. In this paper, we study the transition risk spillover among six major financial markets globally from 2013 to 2021. We evidence the transition risk spillover. We find that Canada and the US are main transition risk transmitters, and Europe and Japan are the main receivers of the transition risk. Such role of transmission could change over time and change according to different types of transition risk shocks. It takes around three weeks for transition risk to be fairly transmitted. On average, around 40% – 50% of local climate transition risk shocks comes from outside. The transition risk spillover is also affected by other factors. When the financial markets are more connected, the risk spillover is higher. A more tense geopolitical relationship could mean higher risk spillover. A more stringent local climate policy means lower risk received and higher risk given. We also find that a higher climate sentiment is associated with higher level of risk transmission. >more

CLIMATE CHANGE VULNERABILITY AND IPO UNDERPRICING
Thomas J. Boulton, Douglas J. Cumming, and Chad J. Zutter
2023
Studying 12,874 IPOs issued in 35 countries between 1998 and 2018, we find that first-day returns tend to be larger in countries that are more vulnerable to climate change. A one standard deviation increase in a country’s climate vulnerability index is associated with an additional $18.92 million “left on the table” for the typical offering. The positive association between climate vulnerability and underpricing is evident for all components and most sectors of the vulnerability index, stronger for smaller IPOs, and robust to alternative estimation techniques, instrumental variable analysis, and the exclusion of individual countries with large numbers of IPOs. Short-term orientation, low trust in science, and more transparent accounting disclosures attenuate the positive relation between climate vulnerability and underpricing. >more

TEMPERATURE SHOCKS AND INDUSTRY EARNINGS NEWS
Jawad M. Addoum, David T. Ng, and Ariel Ortiz-Bobea
2023
Climate scientists project a rise in both average temperatures and the frequency of temperature extremes. We study how extreme temperatures affect companies' earnings across different industries and whether sell-side analysts understand these relationships. We combine granular daily data on temperatures across the continental U.S. with locations of public companies' establishments and build a panel of quarterly firm-level temperature exposures. Extreme temperatures significantly impact earnings in over 40% of industries, with bi-directional effects that harm some industries while others benefit. Analysts and investors do not immediately react to observable intra-quarter temperature shocks, but earnings forecasts account for temperature effects by quarter-end in many, though not all, industries. >more

MACHINE-LEARNING THE SKILL OF MUTUAL FUND MANAGERS
Ron Kaniel, Zihan Lin, Markus Pelger, and Stijn Van Nieuwerburgh
2023
We show, using machine learning, that fund characteristics can consistently differentiate high from low-performing mutual funds, before and after fees. The outperformance persists for more than three years. Fund momentum and fund flow are the most important predictors of future risk-adjusted fund performance, while characteristics of the stocks that funds hold are not predictive. Returns of predictive long-short portfolios are higher following a period of high sentiment. Our estimation with neural networks enables us to uncover novel and substantial interaction effects between sentiment and both fund flow and fund momentum. >more

CONTRACTING COSTS, COVENANT-LITE LENDING AND REPUTATIONAL CAPITAL
Dominique C. Badoer, Mustafa Emin, and Christopher M. James
2023
Using a large sample of leveraged loans, we provide evidence that, despite having fewer creditor control rights, covenant-lite loans have similar recovery rates and significantly lower spreads than loans with maintenance covenants. We find that the propensity to borrow covenant-lite is related to various proxies for the reputational capital of a borrowing firm’s private equity sponsor. We construct a simple model to illustrate the relationship between reputational capital, covenants, and loan spreads in the leveraged loan market. Our model illustrates how reputational capital can substitute for covenants in mitigating agency costs of debt, leading to lower loan spreads for covenant-lite loans. >more

CLIMATE RISK AND STRATEGIC ASSET REALLOCATION
Tobias Berg, Lin Ma, and Daniel Streitz
2023
Large emitters reduced their carbon emissions by around 12% after the 2015 Paris Agreement (“the Agreement”) relative to public firms that are less in the limelight. We show that this effect is driven by divestments. Large emitters are 9 p.p. more likely to divest pollutive assets in the post Agreement period, an increase of over 75%. This divestment effect comes from asset sales and not from closures of pollutive facilities. There is no evidence for increased engagements in other emission reduction activities. Decomposing emission growth rates shows that divestments explain up to half of the overall emission reduction by large emitters. Overall, our results indicate significant asset reallocation effects after the Agreement, with potentially limited effects on aggregate emission levels. >more

MONETARY POLICY TRANSMISSION THROUGH ONLINE BANKS
Isil Erel, Jack Liebersohn, Constantine Yannelis, and Samuel Earnest
2023
Financial technology has been reshaping commercial banking. It has the potential to radically alter the transmission of monetary policy, by lowering search costs and expanding bank markets. This paper studies the reaction of online banks to changes in federal fund rates. We find that these banks increase rates that they offer on deposits significantly more than traditional banks do. A 100 basis points increase in federal fund rate leads to a 30 basis points larger increase in rates of online banks. Consistent with the rate movements, online bank deposits experience inflows, while traditional banks experience outflows during monetary tightening of 2022. The findings are consistent across banking markets of different competitiveness and demographics. Our findings shed new light on the role of online banks in interest rate pass-through and deposit channel of monetary policy. >more

CORPORATE PENSION RISK-TAKING IN A LOW INTEREST RATE ENVIRONMENT
Vasso Ioannidou, Roberto Pinto, and Zexi Wang
2023
We study the effect interest rates have on the funding pressure and risk-taking behavior of defined-benefit US corporate pension plans. In the low-interest-rate environment following the financial crisis, many pension plans became severely underfunded. Using a difference-in-differences analysis and a regulatory shock, we show that exogenous changes in interest rates, which release funding pressure, decrease the incentives of underfunded plans to invest in riskier asset classes and shift risk to employees through pension freezes. However, pension contributions of sponsor firms are also reduced. >more

GENDER, PERFORMANCE, AND PROMOTION IN THE LABOR MARKET FOR COMMERCIAL BANKERS
Marco Ceccarelli, Christoph Herpfer, and Steven Ongena
2023
Using data from the US syndicated loan market, we find women to be underrepresented among senior commercial bankers. This gap persists due to unequal promotion rates for men and women at the same institution in the same year, and cannot be explained by different individual or managerial performance. The gap is influenced more by individuals than by institutions, with senior bankers showing assortative matching when changing jobs, and perpetuating the gender gap from their previous workplace. Our findings suggest that the gender gap may be partially attributable to women taking on more family care responsibilities. Hard credentials or female leadership at the top of banks do not alleviate the gender gap, but targeted gender discrimination lawsuits and female leadership on the local level result in increased promotion of women. >more

INDEX PROVIDERS: WHALES BEHIND THE SCENES OF ETFS
Yu An, Matteo Benetton, and Yang Song
2023
Most ETFs replicate indexes licensed by index providers. We show that index providers wield strong market power and charge large markups to ETFs that are passed on to investors. We document three stylized facts: (i) the index provider market is highly concentrated; (ii) investors care about the identities of index providers, although they explain little variation in ETF returns; and (iii) over one-third of ETF expense ratios are paid as licensing fees to index providers. A structural decomposition attributes 60% of licensing fees to index providers’ markups. Counterfactual analyses show that improving competition among index providers reduces ETF fees by up to 30%. >more

REINTERMEDIATION IN FINTECH: EVIDENCE FROM ONLINE LENDING
Tetyana Balyuk, and Sergei Davydenko
2023
We document the unique structure of the peer-to-peer lending market. Originally designed as decentralized, the market has become highly, but not fully, reintermediated. The platforms' software now performs essentially all tasks related to loan evaluation, whereas most lenders are passive and automatically fund most applications on offer. Yet unlike banks, and in contrast to theories predicting full reintermediation, the platforms provide detailed loan information, and some active loan pickers coexist with passive investors. We argue that while intermediation attracts unsophisticated passive investors, transparency in the presence of active investors resolves the lending platform's moral hazard problem inherent in intermediated markets. >more

MONETARY TIGHTENING AND U.S. BANK FRAGILITY IN 2023: MARK-TO-MARKET LOSSES AND UNINSURED DEPOSITOR RUNS?
Erica Xuewei Jiang, Gregor Matvos, Tomasz Piskorski, and Amit Seru
2023
We analyze U.S. banks’ asset exposure to a recent rise in the interest rates with implications for financial stability. The U.S. banking system’s market value of assets is $2.2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. Most of these asset declines were not hedged by banks with use of interest rate derivatives. We illustrate in a simple model that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run. We show that a bank’s survival depends on the market beliefs about the share of uninsured depositors who will withdraw money following a decline in the market value of bank assets. >more

PHANTOM OF THE OPERA: ETF SHORTING AND SHAREHOLDER VOTING
Richard B. Evans, Oğuzhan Karakaş, Rabih Moussawi, and Michael Young
2023
The short-selling of exchange-traded funds (ETFs) creates “phantom” ETF shares, trading at market prices, with cash flows rights but no associated voting rights. Unlike regular ETF shares backed by underlying securities that are voted as directed by the ETF sponsor, phantom ETF shares hedged by the underlying basket as part of market-making activities result in a significant number of sidelined votes of the underlying securities. We find increases in phantom shares for the corresponding underlying securities are associated with decreases in the number of proxy votes cast (for and against), and increases in broker non-votes, voting premia, and value-reducing acquisitions. >more

(WHY) DO CENTRAL BANKS CARE ABOUT THEIR PROFITS?
Igor Goncharov, Vasso Ioannidou, and Martin C. Schmalz
2023
We document that central banks are discontinuously more likely to report slightly positive profits than slightly negative profits, especially amid greater political pressure, the public’s receptiveness to more extreme political views, and when governors are reappointable. The propensity to report small profits over small losses is correlated with higher inflation and lower interest rates. We conclude that there are agency problems at central banks, which give rise to discontinuous profit incentives and are related to their policy choices and outcomes. These findings inform a debate about the political economy of central banking and central bank design. >more
 

FAMILY FIRMS IN ENTREPRENEURIAL FINANCE: THE CASE OF CORPORATE VENTURE CAPITAL
Mario Daniele Amore, Samuele Murtinu, and Valerio Pelucco
2023
We show that families are an engine of venturing activities: one third of all corporate venture capital (CVC) deals in the US from 2000 to 2017 originated from family firms. Family firms orchestrate CVC activities differently than non-family firms: they syndicate more often and with more reputable investors, join larger syndicates, and make more proximate deals (geography- and industry-wise), especially when they are led by a family CEO. Family firms’ approach to corporate venturing maps into performance results: family CVC-backed ventures exhibit a higher likelihood of successful exit. We explore a number of mechanisms pertaining to asymmetric information and risk management. Collectively, our results shed light on the important, and largely unexplored, role of family firms in CVC. >more

THE EU PROSPECTUS REGULATION AND ITS IMPACT ON SME LISTINGS
Christoph Kaserer, and Victoria Treßel
2023
This paper analyses the economic consequences of the EU growth prospectus, a simplified listing document for SMEs, introduced by the Prospectus Regulation (EU) 2017/1129. For this purpose, we use a hand-collected database of 1,257 initial offerings at 8 different EU exchanges over the period from 2016 to 2022. 906 of these initial offerings were MTF-based and 113 used the EU growth prospectus. We find that to some extent the EU growth prospectus was successful in de-burdening and streamlining SME IPOs without jeopardising investor protection. In fact, we confirm EU growth prospectuses to be less complex in terms of word counts compared to full prospectuses. At the same time, we do not find evidence that they are less informative. We find SMEs to be more likely to use the EU growth prospectus when filing for an IPO unless the IPO becomes relatively large. In terms of listing expenses, we do not substantiate that the fixed listing cost component embedded in the overall listing expenses is smaller for companies using the EU growth prospectus instead of a full prospectus. Also, by using a difference-in-difference analysis we do not find robust evidence that the Prospectus Regulation led to a significant increase in IPO activity. >more

CORPORATE DISCOUNT RATES
Niels Joachim Gormsen, and Kilian Huber
2023
Standard theory implies that the discount rates used by firms in investment decisions (i.e., their required returns to capital) determine investment and transmit financial shocks to the real economy. However, there exists little evidence on how firms’ discount rates change over time and affect investment. We construct a new global database based on manual entry from conference calls. We show that, on average, firms move their discount rates with the cost of capital, but the relation is far below the one- to-one mapping assumed by standard theory, with substantial heterogeneity across firms. This pattern leads to time-varying wedges between discount rates and the cost of capital. The average wedge has increased substantially over the last decades as the cost of capital has dropped. Future investment is negatively related to discount rates and discount rate wedges, but only weakly related to the cost of capital because of the limited transmission into discount rates. Moreover, the large and growing discount rate wedges can account for the puzzle of “missing investment” (relative to high asset prices) in recent decades. We find that beliefs about value creation combined with market power, along with fluctuations in risk, explain changes in discount rate wedges over time. >more

STOCK-OIL COMOVEMENT: FUNDAMENTALS OR FINANCIALIZATION?
Alessandro Melone, Otto Randl, Leopold Sögner, and Josef Zechner
2023
The return correlation between U.S. stocks and oil has shifted from negative to positive since 2008. We use a return decomposition framework to demonstrate that the underlying reason for this structural change is a shift in the correlation between cash flow news for the two assets. Intuitively, as the U.S. turned from an oil importer to a net exporter, the correlation between the cash flow news associated with oil and the U.S. stock market turned positive. Our findings help to understand the set of potential determinants of equity-commodity correlations and the diversification benefits of investing in commodities. >more

EMPLOYEE COSTS OF CORPORATE BANKRUPTCY
John R. Graham, Hyunseob Kim, Si Li, and Jiaping Qiu
2023
Employees' annual earnings fall by 13% the year their firm files for bankruptcy, and the present value of lost earnings from bankruptcy to six years following bankruptcy is 87% of pre-bankruptcy annual earnings. More worker earnings are lost in thin labor markets and among small firms. Ex ante compensating wage differentials for this “bankruptcy risk” are approximately 2% of firm value for a firm whose credit rating falls from AA to BBB, comparable to the magnitude of debt tax benefits. Thus, wage premia for expected costs of bankruptcy are of sufficient magnitude to be an important consideration in corporate capital structure decisions. >more

GREEN TILTS
Lubos Pastor, Robert F. Stambaugh, and Lucian A. Taylor
2023
We estimate financial institutions’ portfolio tilts that relate to stocks’ environmental, social, and governance (ESG) characteristics. We find ESG-related tilts totaling 6% of the investment industry’s assets under management in 2021. ESG tilts are significant at both the extensive margin (which stocks are held) and the intensive margin (weights on stocks held). The latter tilts are larger. Institutions divest from brown stocks more by reducing positions than by eliminating them. The industry tilts increasingly toward green stocks, due to only the largest institutions. Other institutions and households tilt increasingly toward brown stocks. UNPRI signatories tilt greener; banks tilt browner. >more

DO STARTUPS BENEFIT FROM THEIR INVESTORS’ REPUTATION? EVIDENCE FROM A RANDOMIZED FIELD EXPERIMENT
Shai Bernstein, Kunal Mehta, Richard Townsend, and Ting Xu
2022
We analyze a field experiment conducted on AngelList Talent, a large online search platform for startup jobs. In the experiment, AngelList randomly informed job seekers of whether a startup was funded by a top-tier investor and/or was funded recently. We find that the same startup receives significantly more interest when information about top-tier investors is provided. Information about recent funding has no effect. The effect of top-tier investors is not driven by low-quality candidates and is stronger for earlier-stage startups. The results show that venture capitalists can add value passively, simply by attaching their names to startups. >more

IS MARRIAGE A TURNING POINT? EVIDENCE FROM CASH HOLDINGS BEHAVIOR
Md Al Mamun, Boubaker Sabri, Abdul Ghafoor, and Mouhammed Tahir Suleman
2023
Given that marriage transforms people with wide-ranging and long-lasting impacts, we examine the role of CEOs' marital status on firms' cash holdings behavior. Using a large sample of US-listed firms, we find that single CEOs stockpile more cash than married ones. Our finding is robust to alternative measures of cash, controlling for various CEO characteristics, CFO influence, and tackling the endogeneity concerns. Moreover, we show that exogenous CEO turnover resulting in an appointment of single (married) CEOs increases (decreases) cash holdings. Additional results show that single-CEO firms practice a more conservative payout policy and are more likely to accumulate cash from operating and financing cash flows. Consistent with the agency theory, single CEOs extract more compensation from the accumulated cash, leading to a lower value of cash holdings. External corporate governance mechanisms mitigate the relationship between single CEOs and cash holdings. Overall, our results show that single-CEO firms are more prone to agency problems. >more

TRACING CONTAGION RISK: FROM CRYPTO OR STOCK?
Stephanie Dong, Vivian W. Fang, and Wenwei Lin
2023
The increasing crypto-stock comovement has spurred concerns over digital assets’ ripple effects and systemic risks. We closely examine this comovement and report two findings. First, the crypto-stock correlation hovered around zero before March 2020 but increased strikingly after. This shift appears to be fueled by the Federal Reserve’s policy response to the COVID-19 pandemic. Second, we find little evidence of crypto shocks being transmitted to stock but observe significant volatility spillovers in reverse. Further evidence links the increased crypto-stock comovement post-COVID to a growing presence of institutional investors in the crypto markets, whose trades are sensitive to monetary policy changes. >more
 

CONNECTED FUNDS
Daniel Fricke, and Hannes Wilke
2023
Mutual funds often invest in other funds. In this paper, we analyze the economics behind such cross-fund investments and investigate their financial stability implications. Using granular data for the German fund sector, our main findings are that cross-fund investments (a) are becoming increasingly important over time, (b) were heavily liquidated during March 2020, and (c) display measurable contagion effects. Overall, cross-fund investments can elevate structural fund sector vulnerabilities. >more

INDIRECT COSTS OF FINANCIAL DISTRESS
Claudia Custodio, Miguel A. Ferreira, and Emilia Garcia-Appendini
2023
We estimate the indirect costs of financial distress due to lost sales by exploiting real estate shocks and cross-supplier variation in real estate assets and leverage. We show that for the same client buying from different suppliers, the client’s purchases from distressed suppliers decline by an additional 13% following a drop in local real estate prices. The effect is more pronounced in more competitive industries, manufacturing, durable goods, less-specific goods, and when the costs of switching suppliers are low. Our results suggest that clients reduce their exposure to suppliers in financial distress. >more

MANAGERS’ USE OF HUMOR ON PUBLIC EARNINGS CONFERENCE CALLS
Andrew C. Call, Rachel W. Flam, Joshua A. Lee, and Nathan Y. Sharp
2023
Despite the prevalence and importance of humor in interpersonal communication, the disclosure literature is silent on the use of humor in the context of corporate communication. Using a sophisticated machine learning algorithm, we identify managers’ successful uses of humor during public earnings conference calls. When managers use humor on an earnings call, stock market returns and analyst forecast revisions following the call are more positive, primarily because of a muted response to negative earnings news. Consistent with managers’ successful use of humor being a favorable signal of future firm performance, we find no evidence of a return reversal over the subsequent quarter, and managers’ use of humor predicts more favorable news at the subsequent quarter’s earnings announcement. Our study provides new evidence on the use of humor in corporate disclosures, and our findings indicate that humor can meaningfully influence the market response to public earnings conference calls. >more

FINTECH LENDING WITH LOWTECH PRICING
Mark J. Johnson, Itzhak Ben-David, Jason Lee, and Vincent Yao
2023
FinTech lending—known for using big data and advanced technologies—promised to break away from the traditional credit scoring and pricing models. Using a comprehensive dataset of FinTech personal loans, our study shows that loan rates continue to rely heavily on conventional credit scores, including 45% higher rates for nonprime borrowers. Other known default predictors are often neglected. Within each segment (prime/nonprime) loan rates are not very responsive to default risk, resulting in realized loan-level returns decreasing with risk. The pricing distortions result in substantial transfers from nonprime to prime borrowers and from low- to high-risk borrowers within segment. >more

TRADE CREDIT, DEMAND SHOCKS, AND LIQUIDITY MANAGEMENT
Vojislav Maksimovic, and Youngsuk Yook
2023
The provision of trade credit has been explained both by theories that focus on its role in contracting for transactions between firms and by theories that focus on the advantages of liquidity provision along the supply chain. We use the 2007-2009 financial crisis and recession as a natural experiment to test trade credit theories. High-demand firms become more constrained relative to their investment needs, do not provide additional liquidity to their suppliers, and increase acquisition activities once the liquidity crunch dissipates. These firms’ accounts payable increase proportional to their raw-material inventories, consistent with the transactions-based theories. Thus, trade credit is unlikely to be effective in financing the corporate sector during crises. >more

ALIGNING INCENTIVES AT SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS: A PROPOSAL BY THE SQUAM LAKE GROUP
Martin N. Baily, John Y. Campbell, John H. Cochrane, Douglas W. Diamond, Darrell Duffie, Kenneth R. French, Anil K. Kashyap, Frederic S. Mishkin, David S. Scharfstein, Robert J. Shiller, Matthew J. Slaughter, Hyun Song Shin, and René M. Stulz
2023
To address the moral hazard problem that can motivate bank executives to take excessive risks and to fail to raise capital when needed, a group of 13 distinguished financial economists recommends that systemically important financial institutions be required to issue contingent convertible debt (CoCos) and to hold back a substantial share - as much as 20% - of the compensation of employees who can have a meaningful impact on the survival of the firm. This holdback should be forfeited if the firm's capital ratio falls below a specified threshold. The deferral period should be long enough - the authors suggest five years - to allow much of the uncertainty about managers' activities to be resolved before the bonds mature. Except for forfeiture, the payoff on the bonds should not depend on the firm's performance, nor should managers be permitted to hedge the risk of forfeiture. The threshold for forfeiture should be crossed well before a firm violates its regulatory capital requirements and well before its contingent convertible securities convert into equity. The Swiss Bank UBS has paid bonuses to its top 6,500 executives that have been structured in exactly this way. Management forfeits its deferred compensation if the bank's regulatory capital ratio falls below 7.5%, and its contingent convertible debt is set up to convert into equity if the bank's capital ratio falls below 5%. >more

HIGH-YIELD DEBT COVENANTS AND THEIR REAL EFFECTS
Falk Bräuning, Victoria Ivashina, and Ali K. Ozdagli
2023
High-yield debt, including leveraged loans, is characterized by incurrence financial covenants, or “cov-lite” provisions. Unlike the maintenance covenants in traditional loans, when triggered, incurrence covenants preserve equity control rights, and instead activate pre-specified restrictions on the borrower’s actions. Similar to the effects of the shift of control rights to creditors, the drop in investments under incurrence covenants is large and sudden. This evidence reveals a new propagation mechanism of economic shocks that works through contractual restrictions which are at play for a highly-levered corporate sector and become binding long before borrower’s default or bankruptcy. >more

CLO PERFORMANCE
Larry Cordell, Michael R. Roberts, and Michael Schwert
2023
We study the performance of collateralized loan obligations (CLOs) to understand the market imperfections giving rise to these vehicles and their corresponding economic costs. CLO equity tranches earn positive abnormal returns from the risk-adjusted price differential between leveraged loans and CLO debt tranches. Debt tranches offer higher returns than similarly rated corporate bonds, making them attractive to banks and insurers that face risk-based capital requirements. Temporal variation in equity performance highlights the resilience of CLOs to market volatility due to their closed-end structure, long-term funding, and embedded options to reinvest principal proceeds. >more

WHO BENEFITS FROM SUSTAINABILITY-LINKED LOANS?
Kai Du, Jarrad Harford, and David (Dongheon) Shin
2023
Sustainability-linked loans (SLLs), in which loan contract terms are contingent on borrower ESG performance, have grown exponentially in recent years. We examine the economic incentives underlying SLL arrangements. We find that loan spreads are not lower for SLLs, and borrower ESG performance does not improve after SLL initiation. On the other hand, SLL lenders are able to attract more deposits post-issuance and consequently increase their loans. We do not, however, find evidence that lenders extend SLL contracts to safe borrowers. Overall, our findings suggest that the incentives for entering SLL contracts are likely to lie on the side of the lenders, who capture most of the benefits from such loans. These findings question the intended objectives of SLLs. >more

DO ESG FACTORS INFLUENCE FIRM VALUATION? EVIDENCE FROM THE FIELD
Franck Bancel, Dejan Glavas, and George Andrew Karolyi
2023
We surveyed more than 300 financial executives on best practices in integrating Environmental, Social, and Governance (ESG) factors into corporate valuation. Hypotheses drawn from previous ESG research were pre-registered prior to the survey, were tested on responses, and were validated further during follow-on interviews with a subset of valuation experts. Findings show external stakeholders, such as buy-side investors and investment advisors, play a crucial role in guiding the use of ESG in valuation. We confirm that the low quality of ESG ratings data remains a significant impediment to its integration into valuation processes. Additionally, the discount rate is the key parameter adjusted in best practices valuations based on discounted cash flow approaches. We conclude by interpreting our survey and interview results for current efforts by regulatory agencies to promulgate policy on climate-related and ESG reporting. >more

IPOS AND SPACS: RECENT DEVELOPMENTS
Rongbing Huang, Jay R. Ritter, and Donghang Zhang
2023
After two decades of low initial public offering (IPO) activity and a number of regulatory changes, the number of IPOs of both operating companies and special purpose acquisition companies (SPACs) boomed in the U.S. in 2021 before collapsing in 2022. In recent years, surging valuations have resulted in many private companies achieving “unicorn” status, a valuation of $1 billion or more, partly fueled by investments from mutual funds. Many of the unicorns that have gone public have done so with dual-class share structures. We compare three alternative mechanisms for going public, including traditional IPOs, mergers with SPACs, and direct listings. The most common exit for successful venture capital-backed companies, however, continues to be by merging with a larger company. >more

THE CLIMATE AND THE ECONOMY
Johannes Breckenfelder, Bartosz Maćkowiak, David Marques-Ibanez, Conny Olovsson, Alexander A. Popov, Davide Porcellacchia, and Glenn Schepens
2023
Climate change and the public policies to arrest it are and will continue reshaping the global economy. This Discussion Paper draws on economic research to identify some key medium- and long-run economic implications of these developments. It explores implications for growth, innovation, inflation, financial markets, fiscal policy, and several socio-economic outcomes. The main message that emerges is that climate change will cause income divergence across individuals, sectors, and regions, adjustment in energy markets, increased inflation variability, financial markets stress, intensified innovation, increased migration, and rising public debt. These challenges appear manageable for EU member states, especially under an early and orderly transition scenario. At the same time, the direction, scope, and speed of economic transformation is subject to large uncertainty due to two separate factors: the wide range of climate scenarios for a given trajectory of greenhouse gas emissions and the exact policy path governments choose, especially in the context of the ongoing Russian aggression in Ukraine. >more

SUPPORTING SMALL FIRMS THROUGH RECESSIONS AND RECOVERIES
Claudia Custodio, Diana Bonfim, and Clara C. Raposo
2022
We use variation in the access to a government credit certification program to estimate the financial and real effects of supporting small firms. This program was first implemented during the global financial crisis, but has remained active ever since, allowing us to analyze its effects both during recessions and recoveries. Eligible firms have access to government loan guarantees and a credit quality certification. We estimate real effects using a multidimensional regression discontinuity design. We find that eligible firms borrow more and at lower rates than non-eligible firms, allowing them to increase investment and employment during crises. Industry-level analysis shows reduced productivity heterogeneity in more exposed industries, which is consistent with improved credit allocation. However, when the economy is recovering the effects of the program are less pronounced and centered on the certification component. The cost-per-job in the recovery period is half of the one estimated for the crisis period (5,784€ and 11,788€, respectively). >more

"I JUST LIKE THE STOCK": THE ROLE OF REDDIT SENTIMENT IN THE GAMESTOP SHARE RALLY
Suwan (Cheng) Long, Brian M. Lucey, Larisa Yarovaya, and Ying Xie
2022
This paper investigates the role played by the social media platform Reddit in the events around the GameStop(GME) share rally in early 2021. In particular, we analyse the impact of discussions on the r/WallStreetBets subreddit on the price dynamics of the American online retailer GameStop. We customise a sentiment analysis dictionary for Reddit platform users based on the VADER sentiment analysis package and perform textual analysis on 10.8 million comments. The analysis of the relationships between Reddit sentiments and 1-minute, 5-minute, 10-minute, and 30-minute GameStop returns contribute to the growing body of literature on 'meme stocks' and the impact of discussions on investment forums on intraday stock price movements. >more

SOVEREIGN WEALTH FUNDS AND COST OF DEBT: EVIDENCE FROM SYNDICATED LOANS
Ruiyuan (Ryan) Chen, Feiyu Liu, and Yijia (Eddie) Zhao
2023
We examine how sovereign wealth fund (SWF) investments affect target firms’ cost of debt. Using a large sample across 39 countries from 2004 to 2019, and applying a difference-in-differences (DiD) approach, we find that the loan spread of target firms decreases after equity investment by SWFs. This result holds when we use alternative specifications, and address endogeneity issues. Moreover, the negative effect is more pronounced for borrowing firms with higher risk. We also show that SWFs help reduce the cost of debt when they have a strong relationship with the lead banks. >more

USING ETFS TO CONCEAL INSIDER TRADING
Elza Eglīte, Dans Štaermans, Vinay Patel, and Tālis J. Putniņš
2023
We show that exchange traded funds (ETFs) are used in a new form of insider trading known as “shadow trading.” Our evidence suggests that some traders in possession of material non-public information about upcoming M&A announcements trade in ETFs that contain the target stock, rather than trading the underlying company shares, thereby concealing their insider trading. Using bootstrap techniques to identify abnormal trading in treatment and control samples, we find significant levels of shadow trading in 3-6% of same-industry ETFs prior to M&A announcements, equating to at least $212 million of such trading per annum. Our findings suggest insider trading is more pervasive than just the “direct” forms that have been the focus of research and enforcement to date. >more

GREEN SPACS
Nebojsa Dimic, John W. Goodell, Vanja Piljak, and Milos Vulanovic
2023
We examine the characteristics of Special Purpose Acquisition Companies (SPACs) focused on green causes. The growing importance of SPACs in financial markets has led to an increased presence of entrepreneurs raising capital to fund environmently friendly companies. We examine the structural characteristics of ‘green SPACs’: explaining their ecosystem, documenting the primary determinants of IPO size, speed of going public, and calculating their returns around merger announcements. Regarding green SPAC size, we find that the amount of capital raised depends on geographical focus, CEO characteristics, choice of exchange, and specialization of respective legal counsels. The speed to IPO is related to respective geographical and legal-counsel characteristics. At the same time, green SPACs exhibit cumulative market-adjusted returns in the range of 6% to 12% around merger announcement. Further, while merger returns are positive at merger date, they quickly become negative (-1 to -9%) declining further with time. >more

DOES ESG INFORMATION IMPACT INDIVIDUAL INVESTORS’ PORTFOLIO CHOICES? – EVIDENCE FROM AN EXPERIMENT
Catharina Janz, Rainer Michael Rilke, and B. Burcin Yurtoglu
2023
We use a web-based asset market experiment to study whether ESG information affects the portfolio choices of retail investors. We find a significantly higher portfolio allocation to stocks with ESG information in the order of 11 percentage points compared to a control group where no ESG information is released. ESG information impacts retail investors regardless of its association with one of its components (Environment, Social or Governance) and degree of detail. We also find that less educated individuals, especially those with little investment experience and, on average, younger, invest more heavily in ESG-friendly stocks. We do not find meaningful differences across gender, financial literacy, and personality traits. >more

THE DEMISE OF THE NYSE AND NASDAQ: MARKET QUALITY IN THE AGE OF MARKET FRAGMENTATION
Peter H. Haslag, and Matthew C. Ringgenberg
2022
U.S. equity exchanges have experienced a dramatic increase in competition from new entrants, resulting in the fragmentation of trading across venues. While market quality has generally improved over this period, we show most of the improvements have accrued to the largest stocks. We then show this bifurcation in market quality is related to the fragmentation of trading. Theoretically, more exchange competition should reduce trading costs, yet it may also increase adverse selection for liquidity providers, leading to higher spreads. We document evidence of both effects -- fragmentation improves market quality for large stocks while small stocks experience relatively worse quality. >more

THE GREAT STARTUP SELLOUT AND THE RISE OF OLIGOPOLY
Florian Ederer, and Bruno Pellegrino
2022
We document a secular shift from IPOs to acquisitions of venture capital-backed startups and show that this trend is accompanied by an increase in the opportunity cost of going public. Dominant companies that are disproportionately active in the corporate control market for startups have become more insulated from the product market competition over the same period. These facts are consistent with the hypothesis that startup acquisitions have contributed to rising oligopoly power. >more