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RESEARCH PAPERS | CORPORATE FINANCE


Small Business Lending

THE RISE OF FINANCE COMPANIES AND FINTECH LENDERS IN SMALL BUSINESS LENDING
Manasa Gopal, and Philipp Schnabl
2022
We document that finance companies and FinTech lenders increased lending to small businesses after the 2008 financial crisis. We show that most of the increase substituted for a reduction in lending by banks. In counties where banks had a larger market share before the crisis, finance companies and FinTech lenders increased their lending more. By 2016, the increase in finance company and FinTech lending almost perfectly offset the decrease in bank lending. We control for firms' credit demand by examining lending by different lenders to the same firm, by comparing firms within the same narrow industry, and by comparing firms pledging the same type of collateral. Consistent with the substitution of bank lending with finance company and FinTech lending, we find that reduced bank lending had no effect on employment, wages, new business creation, or business expansion. Our results show that finance companies and FinTech lenders are major suppliers of credit to small businesses and played an important role in the recovery from the 2008 financial crisis. >more


Responsible Investment

MUTUAL FUNDS' STRATEGIC VOTING ON ENVIRONMENTAL AND SOCIAL ISSUES
Roni Michaely, Guillem Ordonez-Calafi, and Silvina Rubio
2022
Environmental and social (ES) funds in non-ES families must balance incorporating the stakeholder's interests they advertise and maximizing shareholder value favored by their families. We find that these funds support ES proposals that are far from the majority threshold, while opposing them when their vote is more likely to be pivotal, consistent with greenwashing. This strategic voting is not exhibited in governance proposals, by ES funds in ES families or by non-ES funds in non-ES families, reinforcing the notion of strategic voting to accommodate family preferences while appearing to meet the fiduciaries responsibilities of the funds. >more


Russia-Ukraine War

STOCK PRICES AND THE RUSSIA-UKRAINE WAR: SANCTIONS, ENERGY AND ESG
Ming Deng, Markus Leippold, Alexander F. Wagner, and Qian Wang
2022
In the build-up to and especially in the weeks after the Russian invasion of Ukraine, stocks more exposed to the regulatory risks of the transition to a low-carbon economy performed better, suggesting that investors expect a slow-down of that transition. Moreover, analysts increased their earnings estimates for these stocks. The stock price effects for transition risk were particularly strong in the US. In Europe, the effects for transition risk were less pronounced or even opposite. Stocks with opportunities in the low-carbon transition benefited, arguably because market participants expect stronger policy responses supporting renewable energy sources in the face of the pronounced dependence of Europe on Russian oil and gas. In sum, investors thus expect the speed of transition to a low-carbon economy to diverge between the US and Europe. The analysis controls for a range of different Environmental, Social, and Governance (ESG) measures (for which we obtain mixed results). Companies that more frequently refer to inflation in their conference calls with analysts performed worse. Internationally oriented firms did poorly, and investors were particularly concerned regarding companies' exposure to China. Overall, the results offer a preview of the challenging economic impact of the Russia-Ukraine war. >more

ESG Ratings

AGGREGATE CONFUSION: THE DIVERGENCE OF ESG RATING
Florian Berg, Julian F Kölbel, and Roberto Rigobon
2022
This paper investigates the divergence of environmental, social, and governance (ESG) ratings based on data from six prominent ESG rating agencies: KLD, Sustainalytics, Moody’s ESG (Vigeo-Eiris), S&P Global (RobecoSAM), Refinitiv (Asset4), and MSCI. We document the rating divergence and map the different methodologies onto a common taxonomy of categories. Using this taxonomy, we decompose the divergence into contributions of scope, measurement, and weight. Measurement contributes 56% of the divergence, scope 38%, and weight 6%. Further analyzing the reasons for measurement divergence, we detect a rater effect where a rater’s overall view of a firm influences the measurement of specific categories. The results call for greater attention to how the data underlying ESG ratings are generated. >more


Treasury Yields

WHAT MOVES TREASURY YIELDS?
Emanuel Moench, and Soofi Siavash Soroosh
2022
We identify a yield news shock as an innovation that does not move Treasury yields contemporaneously but explains a maximum share of their future variation. Yields do not immediately respond to the news shock as the initial reaction of term premiums and expected short rates offset each other. While the impact on term premiums fades quickly, expected short rates and thus yields decline persistently. As a result, the shock explains a staggering 50 percent of Treasury yield variation several years out. A positive yield news shock is associated with a coincident sharp increase in stock and bond market volatility, a contemporaneous response of leading economic indicators, and is followed by a persistent decline of real activity and inflation which is accommodated by the Federal Reserve. Identified shocks to realized stock market volatility and business cycle news imply similar impulse responses and together capture the bulk of variation of the yield news shock. >more


CSR

SOCIALLY RESPONSIBLE DIVESTMENT
Alex Edmans, Doron Levit, and Jan Schneemeier
2022
Blanket exclusion of "brown" stocks is seen as the best way to reduce their negative externalities, by starving them of capital and hindering their expansion. We show that a more effective strategy may be tilting -- holding a brown stock if it is best-in-class, i.e. has taken a corrective action. While such holdings allow the firm to expand, they also encourage the corrective action. We derive conditions under which tilting dominates exclusion for externality reduction. If the corrective action is unobservable to the market, the investor is unable to tilt even if she has perfect information -- doing so would lead her to hold a company that has taken the action but the market thinks it has not, leading to accusations of greenwashing. Even if managers can costlessly disclose a signal of their actions, they will only do so under certain circumstances, and even a manager intending to take the action will only disclose a noisy signal. >more


Green Bonds

BANK GREEN BONDS
Mascia Bedendo, Giacomo Nocera, and Linus Siming
2022
We analyze the characteristics of banks that issue green bonds to understand: (i) why some banks are more likely than others to resort to these funding instruments, and (ii) if the issuance of green bonds translates into an improvement in a bank’s environmental footprint. We find that large banks and banks that had already publicly expressed their support for a green transition are more likely to issue green bonds. Conditional on being a green bond issuer, smaller banks tend to resort to green bonds in a more persistent manner and for larger amounts, while larger banks issue green bonds on a more occasional basis and for smaller amounts. This heterogeneity is also reflected in our findings that only banks that issue green bonds more intensively increase their environmental and emissions scores, and reduce lending to polluting sectors. >more


Equity Markets

INTERNATIONAL DIVERSIFICATION WITH FRONTIER MARKETS
Dave Berger, Kuntara Pukthuanthong, and J. Jimmy Yang
2022
We provide an analysis of frontier market equities with respect to world market integration and
diversification. Principal component results reveal that frontier markets exhibit low levels of integration. In contrast with developed and emerging markets, frontier markets offer no indication of increasing integration through time. Furthermore, individual frontier market countries do not exhibit consistent rates of changing integration. Structural break tests identify breakpoints in integration, as well as integration dynamics across countries. We show that frontier markets have low integration with the world market and thereby offer significant diversification benefits. >more


Startup Financing

ANGELS AND VENTURE CAPITALISTS: COMPLEMENTARITY VERSUS SUBSTITUTION, FINANCING SEQUENCE, AND RELATIVE VALUE ADDITION TO ENTREPRENEURIAL FIRMS
Thomas J. Chemmanur, Harshit Rajaiya, and Jiajie Xu
2022
Using a large sample of angel and venture capital (VC) financing data from the Crunchbase and VentureXpert databases and private firm data from the NETS database, we address three important research questions. First, we analyze the relative extent of value addition by angels versus VCs to startup firms. We show that startups financed by angels rather than VCs are associated with a lower likelihood of successful exit (IPO or acquisition), lower sales and employment growth, lower quantity and quality of innovation, and lower net inflow of high-quality inventors. We disentangle selection and monitoring effects using instrumental variable (IV) and switching regression analyses and show that our baseline results are causal. Second, we investigate the complementarity versus substitution relationship between angel and VC financing. We find that a firm that received a larger fraction of VC or angel financing in the first financing round is likely to receive a larger fraction of the same type of financing in a subsequent round; however, when we include other non-VC financing sources such as accelerators and government grants into the analysis, a firm that received angel (rather than other non-VC) financing in the first round is also more likely to receive VC financing in a subsequent round. Third, we analyze how the financing sequence (order of investments by angels and VCs across rounds) of startup firms is related to their successful exit probability. We find that firms that received primarily VC financing in the first round and continued to receive VC financing in subsequent rounds (VC-VC) or those that received primarily angel financing in the first round and received VC financing in subsequent rounds (Angel-VC) have a higher chance of successful exit compared to those with other financing sequences (VC-Angel or Angel-Angel). >more


Treasury Yields

THE TREASURY MARKET IN SPRING 2020 AND THE RESPONSE OF THE FEDERAL RESERVE
Annette Vissing-Jorgensen
2022
Treasury yields spiked during the initial phase of COVID. The 10-year yield increased by 64 bps from March 9 to 18, 2020, leading the Federal Reserve to purchase $1T of Treasuries in 2020Q1. Fed purchases were causal for reducing Treasury yields based on the timing of purchases (which increased on March 19), the timing of yield reversal and Fed purchases in the MBS market, and evidence against confounding factors. Treasury-QE worked more via purchases than announcements. The yield spike was driven by liquidity needs of mutual funds, foreign official agencies, and hedge funds that were unaffected by the March 15 Treasury-QE announcement. >more


Syndicated Loan Spreads

THE EU TAXONOMY AND THE SYNDICATED LOAN MARKET
Zacharias Sautner, Jing Yu, Rui Zhong, and Xiaoyan Zhou
2022
We provide first empirical evidence on the financial market effects of the EU Taxonomy for Sustainable Activities. Using international data from the syndicated loan market, we demonstrate that – in the past – firms with larger Taxonomy-aligned revenue shares paid lower interest rates. Business revenue is Taxonomy-aligned if it originates from “transitional activities” that substantially contribute to climate change mitigation. A one-standard-deviation increase in firm revenue from transitional activities is associated with six basis points lower loan spreads. Effects are more pronounced for firms in countries with greater climate risk exposure and more stringent environmental policies, and when lending institutions have green preferences. Our results indicate that financial markets already price in some of the intended effects of the EU Taxonomy. >more


IPO Underpricing

ARE WOMEN UNDERVALUED? BOARD GENDER DIVERSITY AND IPO UNDERPRICING
P. Raghavendra Rau, Jason Sandvik, and Theo Vermaelen
2022
We find that IPOs experience significantly greater underpricing when the firm’s board has at least one female director, relative to when no women sit on the board. The underpricing effect is not attributable to differences in profitability, growth opportunities, CSR profiles, or other firm characteristics. Instead, the presence of women on the board appears to create value because of a reduction in the cost of capital for these firms, driven by increased institutional investor demand for board gender diversity. We find evidence that underwriters with greater network centrality are better able to value board gender diversity, reducing the underpricing effect. >more


Treasury Yields

THE REST OF THE WORLD'S DOLLAR-WEIGHTED RETURN ON U.S. TREASURYS
Zhengyang Jiang, Arvind Krishnamurthy, and Hanno N. Lustig
2022
Since 1980, foreign investors have timed their purchases and sales of U.S. Treasuries to yield particularly low returns. The dollar-weighted returns (or IRRs) based on their actual cash flows into U.S. Treasuries are around 3% lower than a buy-and-hold return over the same horizon. In comparison, the IRRs achieved by domestic investors are about 1% higher than foreign investors, while the IRRs achieved by the Fed's Treasury purchases and sales are similarly low. Our results are consistent with theories where foreign investors are price-inelastic buyers of safe dollar assets, which provide them with convenience services. >more


Bond Markets

EXORBITANT PRIVILEGE? QUANTITATIVE EASING AND THE BOND MARKET SUBSIDY OF PROSPECTIVE FALLEN ANGELS
Viral V. Acharya, Ryan Banerjee, Matteo Crosignani, Tim Eisert, and Renee Spigt
2022
We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels—risky firms just above the IG rating cutoff—enjoyed subsidized bond financing since 2009, especially when the scale of QE purchases peaked and from IGfocused investors that held more securities purchased in QE programs. The benefitting firms used this privilege to fund risky acquisitions and increase market share, exploiting the sluggish adjustment of credit ratings in downgrading after M&A and adversely affecting competitors' employment and investment. Eventually, these firms suffered more severe downgrades at the onset of the pandemic. >more


Performance

EMPLOYEE HEALTH AND FIRM PERFORMANCE
Daniel A. Rettl, Alexander Schandlbauer, and Mircea Trandafir
2022
When workers are in bad health, their productivity declines. We investigate whether the health of employees affects firm performance, taking advantage of the severity of the seasonal influenza seasons as a source of exogenous variation. We find that firms whose employees are particularly affected by influenza experience reductions in their return on assets and in net income. These results are not driven by firm-specific characteristics, as we find the same relationship between influenza severity and firm performance within firms, at the establishment level. We also document substantial heterogeneity in the effects, with small firms and labor-intensive firms driving our findings. This suggests that labor is an important driver of firm performance and that capital-intensive and larger firms are better able to shift resources in response to temporary shocks to their workforce. Back-of-the-envelope calculations suggest that smaller firms may be better off subsidizing vaccination programs for their employees. >more


Corporate Bond Returns

THE CROSS-SECTION OF GLOBAL CORPORATE BOND RETURNS
Marlena I. Lee, Savina Rizova, and Samuel Yusun Wang
2022
Forward rates contain reliable information about cross-sectional differences in expected global corporate bond returns. Many alternative bond-level and issuer-level variables, by contrast, are not reliably linked to expected bond returns or provide information about expected bond returns only through their correlation with forward rates. An exception is the issuer's prior short-term equity return. Short-term equity returns are negatively related to subsequent yield changes for the issuer's bonds in cross-sectional regressions, consistent with our finding that short-term equity returns are positively related to subsequent differences in bond returns even after controlling for forward rates. While the information in forward rates about differences in corporate bond returns tends to last for over a year, the information in short-term equity returns decays fast. >more


Corporate Loans

THE REAL EFFECTS OF BANK LOBBYING: EVIDENCE FROM THE CORPORATE LOAN MARKET
Manthos D. Delis, Iftekhar Hasan, Thomas Y. To, and Eliza Wu
2022
Using corporate loan facilities and hand-matched information on bank lobbying, we show that borrower performance improves after receiving credit from lobbying banks. This especially holds for opaque borrowers, about which the lending bank possesses valuable information, as well as for borrowers with strong standards of corporate governance. We also find that credit from lobbying banks funds corporate capital expenditures that increase the scope of firm operations, thereby leading to sales growth. Our findings are consistent with the information-transmission theory that political lobbying provides regulators with valuable borrower information, which results in improved bank-lending supervisory decisions and corporate borrower performance. >more


Earnings Announcements

SOCIAL NETWORKS AND MARKET REACTIONS TO EARNINGS NEWS
David A. Hirshleifer, Lin Peng, and Qiguang Wang
2021
Using social network data from Facebook, we show that earnings announcements made by firms located in counties with higher investor social network centrality attract more attention from both retail and institutional investors. For such firms, the immediate price and volume reactions to earnings announcements are stronger, and post-announcement drift is weaker. Such firms have lower post-announcement persistence of return volatility but higher persistence in investor attention and trading volume. These effects are stronger for small firms, firms with poor analyst and media coverage, and for stocks with salient returns. Our evidence suggests a dual role of social networks---they facilitate the incorporation of public information into prices, but also trigger persistent excessive trading. >more


ESG and Cost of Capital

THE IMPACT OF IMPACT INVESTING
Jonathan Berk, and Jules H. van Binsbergen
2021
We evaluate the quantitative impact of ESG divestitures. For divestitures to have impact they must change the cost of capital of affected firms. We derive a simple expression for the change in the cost of capital as a function of three inputs: (1) the fraction of socially conscious capital, (2) the fraction of targeted firms in the economy and (3) the correlation between the targeted firms and the rest of the stock market. Given the current state of ESG investment we find that the impact on the cost of capital is too small to meaningfully affect real investment decisions. We empirically corroborate these small estimates by studying firm changes in ESG status. When firms are either included or excluded from the leading socially conscious US index (FTSE USA 4Good) we find no detectable effect on the cost of capital. We conclude that current ESG divesture strategies have had little impact and will likely have little impact in the future. Our results suggest that to have impact, instead of divesting, socially conscious investors should invest and exercise their rights of control to change corporate policy. >more


Small Business Lending

WHY DID SMALL BUSINESS FINTECH LENDING DRY UP DURING MARCH 2020?
Itzhak Ben-David, Mark J. Johnson, and René M. Stulz
2021
With the onset of the COVID-19 crisis in March 2020, small business lending through fintech lenders collapsed. We explore the reasons for the market shutdown using detailed data about loan applications, offers, and take-up from a major small business fintech credit platform. We document that while the number of loan applications increased sharply early in March 2020, the supply of credit collapsed as online lenders dropped from the platform and the likelihood of applicants receiving loan offers fell precipitously. Our analysis shows that the drying up of the loan supply is most consistent with fintech lenders becoming financially constrained and losing their ability to fund new loans. >more


Market Efficiency

MARKET EFFICIENCY IN THE AGE OF MACHINE LEARNING
Leonidas G. Barbopoulos, Rui Dai, Tālis J. Putniņš, and Anthony Saunders
2021
As machines replace humans in financial markets, how is informational efficiency impacted? We shed light on this issue by exploiting a unique data-set that allows us to identify when machines access important company information (8-K filings) versus when humans access the same information. We find that increased information access by cloud computing services significantly improves informational efficiency and reduces the price drift following information events. We address identification through exogenous power and cloud outages, a quasi-natural experiment, and instrumental variables. We show that machines are better able to handle linguistically complex filings, less susceptible to bias from negative sentiment and less constrained in attention/processing capacity than humans. >more


Market Manipulation

COVID, WORK-FROM-HOME, AND SECURITIES MISCONDUCT
Douglas J. Cumming, Chris Firth, John Gathergood, and Neil Stewart
2021
We consider whether traders are more likely to commit securities violations when trading at home, a new form of working induced by the COVID pandemic. We examine data pre- and post-COVID, during which some traders were unexpectedly forced to work at home. The data indicate the presence of both a treatment and a selection effect, where work at home exhibits fewer misconduct cases. Work at home is associated with fewer cases of trading misconduct, although no difference in communications misconduct. The economic significance of working from home on trading misconduct is large for both the treatment and selection effects. >more


Secured vs. Unsecured Debt

SECURED CREDIT SPREADS AND THE ISSUANCE OF SECURED DEBT
Efraim Benmelech, Nitish Kumar, and Raghuram G. Rajan
2021
We show that after accounting for selection, credit spreads for secured debt issuances are lower than for unsecured debt issuances, especially when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. Yet firms tend to be reluctant to issue secured debt when other forms of financing are available, as we demonstrate with an analysis of security issuance over time and in particular around the COVID-19 pandemic shock in the United States in early 2020. We find that for firms that are rated non-investment grade and that have few alternative sources of financing in difficult times, the likelihood of secured debt issuance is positively correlated with the spread between traded unsecured and secured bonds. It is not correlated for firms that are investment grade. This pattern of issue behavior is consistent with theories that see collateral as a form of insurance, to be used only in extremis. >more


SPACs

SHOULD SPAC FORECASTS BE SACKED?
Michael Dambra, Omri Even-Tov, and Kimberlyn George
2021
In 1995 Congress passed the Private Securities Litigation Reform Act (PSLRA), which grants public companies a safe harbor from liability for forward-looking statements (FLS). Because investors cannot reasonably assess the legitimacy of forward-looking information for initial public offerings (IPOs), these companies are excluded from the act’s provision. However, companies that go public through a special acquisition company (SPAC) are defined as merger targets of an already-public firm, and as such, their FLS are protected under the PSLRA safe harbor. In this paper, we offer the first large-scale study on revenue forecasts disclosed in investor presentations given by SPAC targets. We document a positive association between the compound annual growth rate (CAGR) in projected revenue and both market returns and abnormal retail trading during the five-day event window around the investor presentation. We also show that higher revenue growth projections are more likely to be optimistically biased and that firms with higher projections tend to underperform comparable firms during the two-year span following the SPAC merger. Overall, our results attest to the recent concerns expressed by both the SEC and the financial press, that SPAC firms’ aggressive revenue projections compel retail investors, who end up faring worse on their investment. >more


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