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RESEARCH PAPERS | CORPORATE FINANCE


Beta Anomaly

THE VOLATILITY PUZZLE OF THE BETA ANOMALY
Pedro Barroso, Andrew L. Detzel, and Paulo F. Maio
2024
This paper shows that leading theories of the beta anomaly fail to explain the anomaly’s conditional performance. Abnormal returns and Sharpe ratios of betting-against-beta (BAB) factors rise following months with below-median realized volatility, even controlling for mispricing, limits to arbitrage, lottery preferences, analyst disagreement, and sentiment. Moreover, the leverage constraints theory counterfactually predicts that market and BAB Sharpe ratios increase with volatility. We further show that institutional investors shift their demand from high- to low-beta stocks as volatility increases, and the resulting price impact is sufficient to explain the difference in abnormal BAB returns between high- and low-volatility states. >more


Expected Returns

PRICING POSEIDON: EXTREME WEATHER UNCERTAINTY AND FIRM RETURN DYNAMICS
Mathias S. Kruttli, Brigitte Roth Tran, and Sumudu W. Watugala
2024
We empirically analyze firm-level uncertainty generated from extreme weather events, guided by a theoretical framework. Stock options of firms with establishments in a hurricane's (forecast) landfall region exhibit large implied volatility increases, reflecting significant uncertainty (before) after impact. Volatility risk premium dynamics reveal that investors underestimate such uncertainty. This underreaction diminishes for hurricanes after Sandy, a salient event that struck the U.S. financial center.  Despite constituting idiosyncratic shocks, hurricanes affect hit firms' expected stock returns. Textual analysis of calls between firm management, analysts, and investors reveals that discussions about hurricane impacts remain elevated throughout the long-lasting high-uncertainty period after landfall. >more


Interest Rates

THE FED AND THE SECULAR DECLINE IN INTEREST RATES
Sebastian Hillenbrand
2024
This paper documents a striking fact: a narrow window around Fed meetings captures the entire secular decline in U.S. Treasury yields. Yield movements outside this window are transitory and wash out over time. This is surprising because the forces behind the secular decline are thought to be independent of monetary policy. Long-term bond yields decline when the Fed cuts the short rate and when the Fed lowers its long-run forecast of the federal funds rate (the "dot plot"). These results are consistent with the view that Fed announcements provide guidance about the long-run path of interest rates. >more


Short Squeezes

SHORT SQUEEZES AFTER SHORT-SELLING ATTACKS
Lorien Stice-Lawrence, Yu Ting Forester Wong, and Wuyang Zhao
2024
We estimate the prevalence and drivers of short squeezes after short-selling attacks. Positive returns after attacks have a disproportionate tendency to fully reverse and are accompanied by heightened short covering, consistent with the presence of short squeezes. We assess and find no support for non-squeeze drivers of these positive return reversals and show they are more likely to be accompanied by squeeze-related news articles, increased stock volatility, and disruptions in the stock lending market. Using positive return reversals as a proxy for short squeezes, we estimate that 15% of short attacks experience squeezes, and squeeze risk increases with short sellers’ visibility but decreases with the credibility of their evidence. Additionally, squeezes appear to be precipitated by actions of firms and investors, including insider purchases, share recalls, retail investor trading, and firm disclosures. Our findings quantify a material risk and check on activist short selling and are especially timely given recent proposed short-selling restrictions. >more


IPO Underpricing

LOAN MARKET BENEFITS OF (HIGH) IPO UNDERPRICING
Xunhua Su, Donghang Zhang, and Xiaoyu Zhang
2024
We provide novel evidence on the loan market benefits of high IPO underpricing. We show that greater underpricing is associated with a significantly larger within-firm reduction of post-IPO borrowing costs. This benefit of underpricing is less pronounced for firms with high ex-ante information asymmetry and is concentrated in firms with a high demand for advertisements. In addition, neither price revision before the IPO nor the short-term or long-term stock return after the IPO has a similar effect. Our results are supportive that underpricing affects borrowing costs through an attention channel and highlight a real economic effect of underpricing from the loan market. >more


Fund Benchmarks

SELF-DECLARED BENCHMARKS AND FUND MANAGER INTENT: 'CHEATING' OR COMPETING?
Huaizhi Chen, Richard B. Evans, and Yang Sun
2024
Using a panel of self-declared benchmarks, we examine funds’ use of mismatched benchmarks over time. Mismatching is high at the beginning of our sample (45% of TNA in 2008), consistent with prior studies, but declines significantly over time (27% in 2020), driven by existing specialized funds changing benchmarks to match their style. Market forces including investor learning, institutional investor governance, market competition, and product positioning all play a role in the benchmark correction decisions. For broad funds, mismatched benchmarks are not associated with a performance bias. Our study highlights the value of market solutions in aligning manager-investor interests. >more


IPOs

PRICE DISCOVERY FROM OFFER PRICE TO OPENING PRICE OF INITIAL PUBLIC OFFERINGS
Reena Aggarwal, and Yanbin Wu
2024
We examine the preopening process and price discovery from the offer price to the first open price in initial public offerings. The extent of price discovery during preopening is influenced by firm characteristics and preopening attributes, such as volume of shares executed in preopening, canceled orders, order imbalance, and changes in indicative price. Institutional investors cancel four orders for every executed order. Each phase of preopening contributes to incremental price discovery. In “hot” IPOs, almost all price discovery occurs during preopening, whereas in “cold” IPOs, half of the price adjustment occurs after the market opens. >more


Stock Indices

THE DISAPPEARING INDEX EFFECT
Robin M. Greenwood, and Marco Sammon
2024
The abnormal return associated with a stock being added to the S&P 500 has fallen from an average of 7.4% in the 1990s to less than 1% over the past decade. This has occurred despite a significant increase in the share of stock market assets linked to the index. A similar pattern has occurred for index deletions, with large negative abnormal returns during the 1990s, but only 0.1% between 2010 and 2020. We investigate the drivers of this surprising phenomenon and discuss implications for market efficiency. Finally, we document a similar decline in the index effect among other families of indices. >more


Financial Stability

PRIVATE EQUITY AND FINANCIAL STABILITY: EVIDENCE FROM FAILED BANK RESOLUTION IN THE CRISIS
Emily Johnston Ross, Song Ma, and Manju Puri
2022
We investigate the role of private equity (PE) in the resolution of failed banks after the 2008 financial crisis. Using proprietary failed bank acquisition data from the FDIC combined with data on PE investors, we find that PE investors made substantial investments in underperforming and riskier failed banks. Further, these acquisitions tended to be in geographies where the other local banks were also distressed. Our results suggest that PE investors helped channel capital to underperforming failed banks when the “natural” potential bank acquirers were themselves constrained, filling the gap created by a weak, undercapitalized banking sector. Next, we use a quasi-random empirical design based on proprietary bidding data to examine ex post performance and real effects. We find that PE-acquired banks performed better ex post, with positive real effects for the local economy. Our results suggest that private equity investors had a positive role in stabilizing the financial system in the crisis through their involvement in failed bank resolution. >more


Credit Spreads

CORPORATE LOAN SPREADS AND ECONOMIC ACTIVITY
Anthony Saunders, Alessandro Spina, Sascha Steffen, and Daniel Streitz
2024
We investigate the predictive power of loan spreads for forecasting business cycles, specifically focusing on more constrained, intermediary-reliant firms. We introduce a novel loan-market-based credit spread constructed using secondary corporate loan-market prices over the 1999 to 2023 period. Loan spreads significantly enhance the prediction of macroeconomic outcomes, outperforming other credit-spread indicators. The paper also explores the underlying mechanisms, differentiating between borrower fundamentals and financial frictions, with evidence suggesting that supply-side frictions are a decisive factor in loan spreads' forecasting ability. >more


Carbon Emissions

CARBON BURDEN
Lubos Pastor, Robert F. Stambaugh, and Lucian A. Taylor
2024
We quantify the U.S. corporate sector's carbon externality by computing the sector's "carbon burden"---the present value of social costs of its future carbon emissions. Our baseline estimate of the carbon burden is 131% of total corporate equity value. Among individual firms, 77% have carbon burdens exceeding their market capitalizations, as do 13% of firms even with indirect emissions omitted. The 30 largest emitters account for all the decarbonization of U.S. corporations predicted by 2050. Predicted emission reductions, and even firms' targets, fall short of the Paris Agreement. Firms' emissions are predictable by past emissions, investment, climate score, and book-to-market. >more


Disaster Risk

WAR DISCOURSE AND DISASTER PREMIA: 160 YEARS OF EVIDENCE FROM STOCK AND BOND MARKETS
David Hirshleifer, Dat Mai, and Kuntara Pukthuanthong
2023
Using a semi-supervised topic model on 7,000,000 New York Times articles spanning 160 years, we test whether topics of media discourse predict future stock and bond market returns to test rational and behavioral hypotheses about market valuation of disaster risk. Focusing on media discourse addresses the challenge of sample size even when major disasters are rare. Our methodology avoids look-ahead bias and addresses semantic shifts. War discourse positively predicts market returns, with an out-of-sample R2 of 1.35%, and negatively predicts returns on short-term government and investment-grade corporate bonds. The predictive power of war discourse increases in more recent time periods. >more


Interest Pass-Through

CROSS-SUBSIDIZATION OF BAD CREDIT IN A LENDING CRISIS
Nikolaos T. Artavanis, Brian Jonghwan Lee, Stavros Panageas, and Margarita Tsoutsoura
2024
We study the corporate-loan pricing decisions of a major, systemic bank during the Greek financial crisis. A unique aspect of our dataset is that we observe both the actual interest rate and the “breakeven rate” (BE rate) of each loan, as computed by the bank’s own loan-pricing department (in effect, the loan’s marginal cost). We document that low-BE-rate (safer) borrowers are charged significant markups, whereas high-BE-rate (riskier) borrowers are charged smaller and even negative markups. We rationalize this de facto cross-subsidization through the lens of a dynamic model featuring depressed collateral values, impaired capital-market access, and limit pricing. >more


Covenant Violations

COVENANT AI - NEW INSIGHTS INTO COVENANT VIOLATIONS
Vanessa Krockenberger, Anthony Saunders, Sascha Steffen, and Paulina Verhoff
2024
This paper introduces CovenantAI, a novel artificial intelligence (AI)-powered tool that tracks SEC-reported covenant violations with improved accuracy over existing text-search methods, covering data from 1996 to 2022. It accurately identifies amendments, waivers, and technical defaults, providing a detailed timeline of covenant breaches. We use a "quasi" regression discontinuity approach to analyze the effects of these violations on key firm outcomes such as investments, employment, or credit access, revealing complex patterns and pronounced effects during economic downturns such as the COVID-19 pandemic. The changing loan market, resembling bond markets with the rise of CLOs and secondary trades, has decreased covenant reliance and violations among non-investment grade firms. >more


Floor Trading

DOES FLOOR TRADING MATTER?
Jonathan Brogaard, Matthew C. Ringgenberg, and Dominik Rösch
2023
While algorithmic trading now dominates financial markets, some exchanges continue to use human floor traders. On March 23, 2020 the NYSE suspended floor trading because of COVID-19. Using a difference-in-differences analysis around the closure of the floor, we find that floor traders are important contributors to market quality. The suspension of floor trading leads to higher spreads and larger pricing errors for treated stocks, relative to control stocks. To explore the mechanism we exploit two partial floor reopenings which have different characteristics. Our finding suggest that in person human interaction facilitates the transfer of valuable information that algorithms lack. >more


Carbon Returns

CARBON RETURNS ACROSS THE GLOBE
Shaojun Zhang
2024
The pricing of carbon transition risk is central to the debate on climate-aware investments. This paper documents that emissions grow linearly with firm sales and the data is only available to investors with significant lags. The positive carbon return, or brown-minus-green return differential, documented in previous studies arises from the forward-looking firm performance information contained in emissions rather than risk premium. After accounting for the data release lag, carbon returns turn negative in the U.S. and insignificant globally. Developed markets experience lower carbon returns due to intense climate concern shocks, while countries with stringent climate policies exhibit higher carbon returns. >more


Mutual Funds

MOVING THE GOALPOSTS? MUTUAL FUND BENCHMARK CHANGES AND RELATIVE PERFORMANCE MANIPULATION
Kevin Mullally, and Andrea Rossi
2024
We analyze changes to mutual funds' self-declared benchmarks using hand-collected data from funds' prospectuses. Under existing rules, funds can freely change their benchmark indexes and, implicitly, the historical returns to which they compare their past performance. Funds exploit this loophole by adding (dropping) indexes with lower (higher) past returns, which materially improves the appearance of their benchmarkadjusted returns. High-fee funds, broker-sold funds, and funds experiencing poor performance and outflows are more likely to engage in this behavior. These funds subsequently attract additional flows despite continuing to underperform their peers. >more


ESG

IS CAPITAL STRUCTURE IRRELEVANT WITH ESG INVESTORS?
Peter Feldhütter, and Lasse Heje Pedersen
2024
This paper examines whether capital structure is irrelevant for enterprise value and investment when investors care about environmental, social, and governance issues, which we denote ``ESG-Modigliani-Miller" (ESG-MM). Theoretically, we show that ESG-MM holds with linear pricing and additive ESG. ESG-MM means that issuing low-yielding green bonds does not lower the overall cost of capital because it makes the issuer's other securities browner. Hence, a firm's incentive to make a green investment does not depend on its financing choice. Empirically, we provide suggestive evidence of failure of ESG-MM, implying that firms and governments can exploit inconsistent ESG attribution or segmented markets. >more


Bank Runs

LIQUIDITY TRANSFORMATION AND FRAGILITY IN THE US BANKING SECTOR
Qi Chen, Itay Goldstein, Zeqiong Huang, and Rahul Vashishtha
2024
A key role of banks is liquidity transformation, which is also thought to create fragility, as uninsured depositors face an incentive to withdraw money before others (a so-called panic run). Despite much theoretical work, there has not been much empirical evidence establishing this mechanism. In this paper, we provide the first large-scale evidence of this mechanism. Banks that perform more liquidity transformation exhibit higher fragility, manifested by stronger sensitivities of uninsured deposit flows to bank performance and greater levels of uninsured deposit outflows when performance is poor. We also explore the effects of deposit insurance and systemic risk. >more


Market Efficiency

EMPIRICAL DETERMINANTS OF MOMENTUM: A PERSPECTIVE FROM INTERNATIONAL DATA
Amit Goyal, Narasimhan Jegadeesh, and Avanidhar Subrahmanyam
2024
We use out-of-sample international data to consider U.S.-based empirical proxies for momentum explanations. We find that the proxy for the hypothesis that investor underreaction to information arriving in small bits rather than in large chunks results in momentum receives reliable support internationally. The market/book ratio as a proxy for valuation uncertainty, and potentially for investor overconfidence as well, receives secondary support, but we find no support for real options proxies. We confirm out-of-sample that momentum is stronger in up-markets and less-volatile markets; these market states represent high investor confidence in the original studies. >more


Sustainable Investing

SUSTAINABLE INVESTING: EVIDENCE FROM THE FIELD
Alex Edmans, Tom Gosling, and Dirk Jenter
2024
We survey 509 equity portfolio managers from both traditional and sustainable funds on whether, why, and how they incorporate firms’ environmental and social (“ES”) performance into investment decisions. ES performance influences stock selection, engagement, and voting for over three quarters of investors, including nearly two thirds of traditional investors. Financial considerations are a primary reason, even among sustainable funds. Few are willing to sacrifice financial returns for ES performance, largely due to fiduciary duty concerns, and voting and engagement are mainly driven by financial considerations. A second reason is constraints. Fund mandates, firmwide policies, or client wishes caused 71% to make stock selection, voting, or engagement decisions that they would otherwise not have. Some of these actions had financial consequences, such as avoiding stocks that would improve returns or diversification; others had ES consequences, such as avoiding stocks whose ES performance they could have improved. >more


Efficient Market Hypothesis

THE LESS-EFFICIENT MARKET HYPOTHESIS
Clifford S. Asness
2024
Market efficiency is a central issue in asset pricing and investment management, but while the level of efficiency is often debated, changes in that level are relatively absent from the discussion. I argue that over the past 30+ years markets have become less informationally efficient in the relative pricing of common stocks, particularly over medium horizons. I offer three hypotheses for why this has occurred, arguing that technologies such as social media are likely the biggest culprit. Looking ahead, investors willing to take the other side of these inefficiencies should rationally be rewarded with higher expected returns, but also greater risks. I conclude with some ideas to make rational, diversifying strategies easier to stick with amid a less-efficient market. >more


Profit-Sharing

THE EFFECTS OF MANDATORY PROFIT-SHARING ON WORKERS AND FIRMS: EVIDENCE FROM FRANCE
Elio Nimier-David, David Alexandre Sraer, and David Thesmar
2024
Since 1967, all French firms with more than 100 employees have been required to share a fraction of their excess profits with their employees. Through this scheme, firms with excess profits distribute, on average, 10.5% of their pre-tax income to workers. In 1990, the eligibility threshold was reduced to 50 employees. We exploit this regulatory change to identify the effects of mandated profit-sharing on firms and their employees. The cost of mandated profit-sharing for firms is evident in the significant bunching at the 100-employee threshold observed prior to the reform, which completely disappears post-reform. Using a difference-in-difference strategy, we find that, at the firm level, mandated profit-sharing (a) increases the labor share by 1.8 percentage points, (b) reduces the profit share by 1.4 percentage points, and (c) has no significant effect on investment and productivity. At the employee level, mandated profit-sharing increases low-skill workers' total compensation and leaves high-skill workers' total compensation unchanged. Overall, mandated profit-sharing redistributes excess profits to lower-skill workers in the firm without generating significant distortions or productivity effects. >more


Index Funds

WHY DO INDEX FUNDS HAVE MARKET POWER? QUANTIFYING FRICTIONS IN THE INDEX FUND MARKET
Zach Brown, Mark Egan, Jihye Jeon, Chuqing Jin, and Alex A. Wu
2024
The number of index funds increased drastically from 2000 to 2020, partially fueled by the emergence of exchange-traded funds (ETFs). Despite the growing availability of similar products, price dispersion persists, with many expensive funds still available, indicating significant market power among index funds. One explanation is that investor inertia limits the adoption of new products and interacts with other market frictions to restrict competition. To understand the sources and implications of market power, we develop a tractable quantitative dynamic model of demand for and supply of index funds that accounts for information frictions and heterogeneous preferences, in addition to inertia. These frictions on the demand side create market power for index fund managers, which fund managers can further exploit by price discriminating and charging higher expense ratios to retail investors. We find that inertia is high, with only 13% of households updating their portfolio at least once yearly. Although inertia is high, its impact on the investment behavior of households is limited because they struggle to optimize investment decisions due to information frictions. Thus, there is an interaction between the two frictions—inertia is more costly for investors when information frictions are low. We show that although the introduction of ETFs lowered expense ratios through both the cost advantage of ETFs and increased competition, demand-side frictions limited product adoption. >more


Bankruptcy

ARE BANKRUPTCY PROFESSIONAL FEES EXCESSIVELY HIGH?
Samuel Antill
2024
Chapter 7 is the most popular bankruptcy system for U.S. firms and individuals. Chapter 7 professional fees are substantial. Theoretically, high fees might be an unavoidable cost of incentivizing professionals. I test this empirically. I study trustees, the most important professionals in Chapter 7, who liquidate assets in exchange for legally-mandated commissions. Exploiting kinks in the commission function, I estimate a structural model of moral hazard by trustees. I show that a policy change lowering trustee fees would harm trustee incentives, reducing liquidation values. Nonetheless, such a policy would dramatically improve creditor recovery, increasing small-business-lender recovery by 15.7%. >more


Equity Premium

A COMPREHENSIVE 2022 LOOK AT THE EMPIRICAL PERFORMANCE OF EQUITY PREMIUM PREDICTION
Amit Goyal, Ivo Welch, and Athanasse Zafirov
2023
Our paper reexamines whether 29 variables from 26 papers published after Goyal and Welch (2008), as well as the original 17 variables, were useful in predicting the equity premium in-sample and out-of-sample as of the end of 2021. Our samples include the original periods in which these variables were identified, but end later. About half of the new variables have no empirical significance even in-sample. Of those that do, about half have poor out-of-sample performance. A small number of variables still perform reasonably well both in-sample and out-of-sample. >more


Passthrough

MONETARY POLICY TRANSMISSION THROUGH ONLINE BANKS
Isil Erel, Jack Liebersohn, Constantine Yannelis, and Samuel Earnest
2024
Financial technology has the potential to alter the transmission of monetary policy by lowering search costs and expanding banking markets. This paper studies the reaction of online banks to changes in the federal funds rate. We find that a 100 basis points increase in the federal funds rate leads to a 30 basis points larger increase in the deposit rates of online banks relative to traditional banks. Consistent with the rate movements, online bank deposits experience inflows, while traditional banks experience outflows. Results are similar across markets with differing competitiveness and demographics, but vary with the stickiness of depositors. >more


Working Capital

THE WORKING CAPITAL CREDIT MULTIPLIER
Heitor Almeida, Daniel R. Carvalho, and Taehyun Kim
2024
We provide novel evidence that funding frictions can limit firms’ short-term investments in receivables and inventories, reducing their production capacity. We propose a credit multiplier driven by these considerations and empirically isolate its importance by comparing how a similar firm responds to shocks differently when these shocks are initiated in their most profitable quarter (“main quarter”). We implement this test using recurring and unpredictable shocks (e.g., oil shocks) and provide extensive evidence supporting our identification strategy. Our results suggest that funding constraints and credit multiplier effects are significant for smaller firms that heavily rely on financing from suppliers. >more


Inflation Expectations

HOW DO SUPPLY SHOCKS TO INFLATION GENERALIZE? EVIDENCE FROM THE PANDEMIC ERA IN EUROPE
Viral V. Acharya, Matteo Crosignani, Tim Eisert, and Christian Eufinger
2023
We document how the interaction of supply-chain pressures, heightened household inflation expectations, and firm pricing power contributed to the pandemic-era surge in consumer price inflation in the euro area. Initially, supply-chain pressures increased inflation through a cost-push channel and raised inflation expectations. Subsequently, the cost-push channel intensified as firms with high pricing power increased product markups in sectors witnessing high demand. Eventually, even though supply-chain pressures eased, these firms were able to further increase markups due to the stickiness of inflation expectations. The resulting persistent impact on inflation suggests supply-side impulses can generalize into broad-based inflation via an interaction of household expectations and firm pricing power. >more

 


Restructuring

NON-FINANCIAL LIABILITIES AND EFFECTIVE CORPORATE RESTRUCTURING
Bo Becker, and Jens Josephson
2024
Many countries’ insolvency systems focus on restructuring financial liabilities, and ignore operational liabilities such as leases and long-term supplier contracts. We model insolvency procedures with and without operational restructuring options. Such options avoid excessive liquidation of firms with significant non-financial obligations. Ex-ante, this option should increase debt capacity, especially in industries with inputs supplied under executory contract. We test this hypothesis around the introduction of a new law in Israel which facilitated the rejection of contracts, and by comparing capital structures for industries with high lease obligations between the U.S. and other countries. Empirical results confirm that operating restructuring is a key aspect of insolvency. >more


Cost of Capital

FIRMS' PERCEIVED COST OF CAPITAL
Niels Joachim Gormsen, and Kilian Huber
2024
We study hand-collected data on firms’ perceptions of their cost of capital. Firms with higher perceived cost of capital earn higher returns on invested capital and invest less, suggesting that the perceived cost of capital shapes long-run capital allocation. The perceived cost of capital is partially related to the true cost of capital, which is determined by risk premia and interest rates, but there are also large deviations between the perceived and true cost of capital. Only 20% of the variation in the perceived cost of capital is justified by variation in the true cost of capital. The remaining 80% reflects deviations that are consistent with managers making mistakes. These deviations lead to misallocation of capital that lowers long-run aggregate productivity by 5% in a benchmark model. Forcing all firms to apply the same cost of capital would improve the allocation of capital relative to current corporate practice. The deviations in the perceived cost of capital challenge standard models, in particular the production-based asset pricing paradigm, and lead us to reject the “Investment CAPM.” We describe actionable methods that allow firms to improve their perceptions and capital allocation. >more


Private Debt

THE CREDIT MARKETS GO DARK
Jared A. Ellias, and Elisabeth de Fontenay
2024
Over the past generation, conflicting trends have reshaped the ownership of corporate equity on the one hand and corporate debt on the other. In equity, the two great trends have been the shift from public markets to private ownership and the consolidation of American companies' stock in the hands of powerful investment funds. In debt, by contrast, the great trends have been a shift from private loans to quasi-public markets, democratization and dispersed ownership. In this Article, we chronicle the recent and dramatic reversal of these trends in the debt markets. Private investment funds executing a "private credit" strategy have become increasingly important corporate lenders, bringing into corporate debt the same forces of de-democratization and consolidation that have been reshaping the equity markets. We offer new data that illustrates the meteoric rise of the now $1.5 trillion private credit industry and explore the allure and implications of private credit. The transition from bank-intermediated finance to private credit will transform not only corporate finance, but also firm behavior and economic activity more generally. First, as the corporate debt markets go dark, we move to a world in which information about many firms and even entire industries will be lost to the investing public. For better or worse, these firms will act with unprecedented discretion-having been shielded from the discipline and scrutiny of regulators, the trading markets, and the general public. Second, corporate debt-like corporate equity-is poised to become the dominion of investment funds, some of which are almost unimaginably large. These funds will influence everything from firm operations and strategy to corporate distress, with uncertain consequences for social welfare. >more


Going Public

WHY DO STARTUPS BECOME UNICORNS INSTEAD OF GOING PUBLIC?
Daria Davydova, Rüdiger Fahlenbrach, Leandro Sanz, and René M. Stulz
2024
Unicorns are startups that choose to stay private even though they are large enough to go public. We propose an efficiency explanation for their existence. Startups relying highly on organization capital are more vulnerable to expropriation of their organization capital if they go public before their position is sufficiently secure. Our main empirical findings are that shocks to the fragility of organization capital decrease the IPO likelihood, unicorn status enables startups to stay private longer by giving them access to new sources of capital, and unicorns and their industries have higher organization capital intensity than other startups. >more

 


Private Debt

PRIVATE DEBT VERSUS BANK DEBT IN CORPORATE BORROWING
Sharjil Haque, Simon Mayer, and Irina Stefanescu
2024
This paper examines the interaction between private debt and bank debt in corporate borrowing. Combining administrative bank loan-level data with non-bank private debt deals, we document that about half of U.S. private debt borrowers also rely on bank loans. These dual borrowers are typically larger, riskier firms with fewer tangible assets, lower interest coverage ratios, and higher leverage. When co-financing the same borrowers, private debt lenders typically extend larger but relatively junior term loans with longer maturities and higher spreads, while banks provide more senior loans, typically in the form of credit lines. Once a bank borrower accesses private debt, it often obtains additional bank credit but at significantly higher spreads. During times of market-wide distress, a borrower's reliance on private debt is associated with increased drawdowns and higher default risk of bank credit lines. Our findings suggest that while private debt substitutes for relatively riskier bank term loans, it complements bank credit lines. However, this complementarity may also impose costly externalities on bank loans by exacerbating their drawdown risk. >more


Financial Advice

DO WOMEN RECEIVE WORSE FINANCIAL ADVICE?
Utpal Bhattacharya, Amit Kumar, Sujata Visaria, and Jing Zhao
2024
We arranged for trained undercover men and women to pose as potential clients and visit all 65 local financial advisory firms in Hong Kong. At financial planning firms, but not at securities firms, women were more likely than men to receive advice to buy only individual or only local securities. Women clients who signaled that they were highly confident, highly risk tolerant or had a domestic outlook, were especially likely to receive this suboptimal advice. Our theoretical model explains these patterns as the result of statistical discrimination interacting with advisors’ incentives. Taste-based discrimination is unlikely to explain the results. >more


EPS Management

INNOVATION UNDER PRESSURE
Heitor Almeida, Vyacheslav Fos, Po-Hsuan Hsu, Mathias Kronlund, and Kevin Tseng
2024
Firms become more efficient at innovation activities when they face pressure to meet EPS targets using stock repurchases. Using a regression-discontinuity framework, we find that incentives to engage in “EPS-motivated buybacks” are followed by more citations and higher values for firms’ new patents. We trace these effects to improved allocation of R&D resources and a greater focus on novel innovation. The positive effects are concentrated among ex-ante “innovation-efficient” firms that achieve better patenting outcomes after reorganizing (but not cutting) their R&D investments. Our findings illustrate that short-term earnings pressures can act through a free-cash-flow channel that motivates more efficient spending. >more


Artificial Intelligence

FROM MAN VS. MACHINE TO MAN + MACHINE: THE ART AND AI OF STOCK ANALYSES
Sean Cao, Wei Jiang, Junbo L. Wang, and Baozhong Yang
2024
An AI analyst trained to digest corporate disclosures, industry trends, and macroeconomic indicators surpasses most analysts in stock return predictions. Nevertheless, humans win “Man vs. Machine” when institutional knowledge is crucial, e.g., involving intangible assets and financial distress. AI wins when information is transparent but voluminous. Humans provide significant incremental value in “Man + Machine,” which also substantially reduces extreme errors. Analysts catch up with machines after “alternative data” become available if their employers build AI capabilities. Documented synergies between humans and machines inform how humans can leverage their advantage for better adaptation to the growing AI prowess. >more



Investments

CHATGPT AND PERCEPTION BIASES IN INVESTMENTS: AN EXPERIMENTAL STUDY
Anastassia Fedyk, Ali Kakhbod, Peiyao Li, and Ulrike Malmendier
2024
Applications of artificial intelligence (AI) in finance have been met with concerns about algorithmic bias, following issues observed in domains such as medical treatment and lending. We ask whether AI models accurately capture investment preferences across demographics. We elicit investment preferences from over 1,200 survey participants and compare the data directly to investment ratings generated by OpenAI’s ChatGPT (GPT4). We find that ChatGPT predicts investment preferences with high accuracy across demographics. Specifically, ChatGPT correctly predicts that women rate stocks lower than men, older individuals prefer holding cash, and higher incomes are associated with higher ratings for stocks and bonds. Moreover, free-form responses from ChatGPT focus on the same aspects as human free-form responses. Most common themes in both responses are “risk" and “return," and "knowledge" and "experience" play an important role for stock market participation. One difference is that ChatGPT responses are almost always transitive, whereas human responses are more prone to violating transitivity, especially when expressing indifference. Overall, the use of AI in finance offers a promising direction for augmenting human surveys in preference elicitation, with important applications for areas such as robo-advsing.Applications of artificial intelligence (AI) in finance have been met with concerns about algorithmic bias, following issues observed in domains such as medical treatment and lending. We ask whether AI models accurately capture investment preferences across demographics. We elicit investment preferences from over 1,200 survey participants and compare the data directly to investment ratings generated by OpenAI’s ChatGPT (GPT4). We find that ChatGPT predicts investment preferences with high accuracy across demographics. Specifically, ChatGPT correctly predicts that women rate stocks lower than men, older individuals prefer holding cash, and higher incomes are associated with higher ratings for stocks and bonds. Moreover, free-form responses from ChatGPT focus on the same aspects as human free-form responses. Most common themes in both responses are “risk" and “return," and "knowledge" and "experience" play an important role for stock market participation. One difference is that ChatGPT responses are almost always transitive, whereas human responses are more prone to violating transitivity, especially when expressing indifference. Overall, the use of AI in finance offers a promising direction for augmenting human surveys in preference elicitation, with important applications for areas such as robo-advsing. >more


Mutual Funds

(NOT) EVERYBODY'S WORKING FOR THE WEEKEND: A STUDY OF MUTUAL FUND MANAGER EFFORT
Boone Bowles, and Richard B. Evans
2023
We develop a novel measure of effort and revisit the fundamental questions of asset management: how do incentives relate to effort; and how does effort affect performance? Using unique observations of daily work activity, we define mutual fund manager effort as the ratio of weekend work to weekday work. We find that investment advisors with stronger competitive incentives exert more effort on weekends. Focusing on within-advisor variation, we find that more effort follows poor performance, outflows and higher volatility. Regarding future performance, we show that more effort is associated with higher future returns, especially for mutual funds with strong competitive incentives, higher active share, and lower turnover. Finally, we demonstrate a causal link between effort and performance using exogenous variation in effort due to weather conditions. >more


FinTech

FROM COMPETITORS TO PARTNERS: BANKS' VENTURE INVESTMENTS IN FINTECH
Manju Puri, Yiming Qian, and Xiang Zheng
2024
We hypothesize and find evidence that banks use venture investments in fintech startups as a strategic approach to navigate fintech competition. We first document that banks' venture investments have increasingly focused on fintech firms. We find that banks facing greater fintech competition are more likely to make venture investments in fintech startups. Banks target fintech firms that exhibit higher levels of asset complementarities with their own business. Finally, instrumental variable analyses show that venture investments increase the likelihood of operational collaborations and knowledge transfer between the investing bank and the fintech investee. >more


Mutual Funds

ESG SKILL OF MUTUAL FUND MANAGERS
Marco Ceccarelli, Richard B. Evans, Simon Glossner, Mikael Homanen, and Ellie Luu
2024
We propose a new measure of ESG-specific skill based on fund manager trades and ESG rating changes. We differentiate between proactive ESG managers, whose trades predict future changes in ESG ratings, reactive ESG managers, who change their portfolio allocation after a change in ESG ratings occurs, and non-ESG managers. The predictive ability of proactive managers is persistent in out-of-sample tests, consistent with manager skill. For identification, we rely on an exogenous methodology change of one ESG rating provider that redefined ESG ratings levels without releasing new information. Reactive managers significantly change their holdings in firms whose ESG ratings exogenously change, consistent with a lack of ESG skill. Proactive managers do not trade in the direction of the change, consistent with their trading no new ESG information. This ESG skill has economic implications: Investors in mutual funds with an explicit sustainability mandate reward proactive managers with 58bps higher average quarterly flows. >more


Impact of Social Unrest

THE ECONOMIC CONSEQUENCES OF SOCIAL UNREST: EVIDENCE FROM INITIAL PUBLIC OFFERINGS
Thomas J. Boulton, Philip Barrett, and Terry Nixon
2024
Prior research attributes negative stock market performance following episodes of social unrest to elevated uncertainty. However, social unrest does not solely increase uncertainty, but separately acts to decrease investor sentiment. To determine which effect dominates, we study initial public offering (IPO) underpricing, which responds differently to changes to uncertainty and investor sentiment. Consistent with the notion that social unrest dampens investor sentiment, we find robust evidence that IPO first-day returns are lower during times of greater social unrest. Limits to arbitrage intensify the negative relation between social unrest and underpricing. Notably, strong institutional frameworks mitigate the impact of social unrest on underpricing, suggesting that quality institutions weaken the link between investor sentiment and returns. >more


Speculation

HOW FINANCIAL MARKETS CREATE SUPERSTARS
Spyros Terovitis, and Vladimir Vladimirov
2024
By aggregating information into prices, financial markets help guide the efficient allocation of resources. We show, however, that speculators without information about firms' fundamentals can exploit this relationship and profit from inflating firm valuations. Such speculation is profitable because high valuations attract employees, business partners, and investors, creating value at targeted firms at the cost of diverting resources away from better firms. Uninformed speculation is most profitable in "normal" (neither hot nor cold) markets and when targeted firms use performance pay or equity to compensate stakeholders. Investors, such as VCs, can profit from inflating firm valuations also in private markets. >more


Sustainability

THE GREEN TRANSITION: EVIDENCE FROM CORPORATE GREEN REVENUES
Johannes Klausmann, Philipp Krueger, and Pedro Matos
2024
Using a novel measure of a firm's green revenues, this paper sizes up the green economy. We shed light on the factors driving global public companies' expansion of business activities in support of the green transition towards a low-carbon and more environmentally sustainable economy. Our analysis shows that the green economy grew at an accelerated pace after the Paris Agreement. Both regulatory initiatives and innovative US firms converting green patents into actual revenues from green products and services have led to this accelerated growth. We also document that a stronger presence of institutional investors prior to the Paris Agreement is associated with higher green revenues afterwards. Finally, we examine the stock returns of firms with high green revenues and find only modest evidence of a green alpha which seems to be concentrated in US stocks in the post-Paris period. >more


Passive Asset Management

STRATEGIC BORROWING FROM PASSIVE INVESTORS
Darius Palia, and Stanislav Sokolinski
2023
We find that short-sellers manage risks by strategically borrowing shares in stocks with significant ownership by passive investors. This practice increases securities lending demand for stocks with substantial passive ownership, resulting in improved price efficiency, higher lending fees, and increased short interest in these stocks. Consistent with the risk mitigation motive, these stocks show reduced risks of unexpected fee hikes and loan recall, longer loan durations, and attract more informed short-sellers. These effects are particularly pronounced in hard-to-borrow stocks where short-sale constraints are binding. Our study suggests that passive investing helps alleviate short-sale constraints by reducing the risks associated with stock borrowing. >more


Biodiversity and Risk Premium

DO INVESTORS CARE ABOUT BIODIVERSITY?
Alexandre Garel, Arthur Romec, Zacharias Sautner, and Alexander F. Wagner
2024
This paper introduces a new measure of a firm's negative impact on biodiversity, the corporate biodiversity footprint, and studies whether it is priced in an international sample of stocks. On average, the corporate biodiversity footprint does not explain the cross-section of returns between 2019 and 2022. However, a biodiversity footprint premium (higher returns for firms with larger footprints) began emerging in October 2021 after the Kunming Declaration, which capped the first part of the UN Biodiversity Conference (COP15). Consistent with this finding, stocks with large footprints lost value in the days after the Kunming Declaration. The launch of the Taskforce for Nature-related Financial Disclosures (TNFD) in June 2021 had a similar effect. These results indicate that investors have started to require a risk premium upon the prospect of, and uncertainty about, future regulation or litigation to preserve biodiversity. >more


Financial Statement Analysis

FINANCIAL STATEMENT ANALYSIS WITH LARGE LANGUAGE MODELS
Alex Kim, Maximilian Muhn, and Valeri V. Nikolaev
2024
We investigate whether an LLM can successfully perform financial statement analysis in a way similar to a professional human analyst. We provide standardized and anonymous financial statements to GPT4 and instruct the model to analyze them to determine the direction of future earnings. Even without any narrative or industry-specific information, the LLM outperforms financial analysts in its ability to predict earnings changes. The LLM exhibits a relative advantage over human analysts in situations when the analysts tend to struggle. Furthermore, we find that the prediction accuracy of the LLM is on par with the performance of a narrowly trained state-of-the-art ML model. LLM prediction does not stem from its training memory. Instead, we find that the LLM generates useful narrative insights about a company's future performance. Lastly, our trading strategies based on GPT's predictions yield a higher Sharpe ratio and alphas than strategies based on other models. Taken together, our results suggest that LLMs may take a central role in decision-making. >more


Empirical Asset Pricing

CAN CHATGPT GENERATE STOCK TICKERS TO BUY AND SELL FOR DAY TRADING?
Sangheum Cho
2024
This paper examines the generative feature of ChatGPT for empirical asset pricing. I show that ChatGPT can generate stock tickers that provide a profitable day trading strategy. Using input prompts as multiple Twitter posts, including both macro and firm-specific news by major news providers, I ask ChatGPT to generate lists of stock tickers to buy and sell. The trading strategy based on the buy and sell lists earns significant long-short returns in open-to-close intraday trading. By asking again about the reason for generating those stock tickers, keywords of ChatGPT’s answer suggest that tech stocks are important for generating the buy lists, whereas sector- or industry-level analysis is important for generating the sell lists. In particular, ChatGPT’s buy and sell lists consist of economically linked stocks through the supply chain, resulting in lower industry concentration than those of their matching groups. The performance is attributable to the stock selection within each industry, the short leg of the strategy, and stronger in the difficult-to-arbitrage stocks, implying that ChatGPT signals’ applicability of extracting mispricing signals in text data. As most of the Twitter data consists of non-firm-specific news, this finding sheds light on the literature by showing that ChatGPT can process a bulk of seemingly non-firm-specific news to generate firm-specific mispricing signals. >more


Relocation of Startups

THE STARTUP PERFORMANCE DISADVANTAGE(S) IN EUROPE: EVIDENCE FROM STARTUPS MIGRATING TO THE U.S.
Stefan Weik
2024
This paper uses novel data on the migration of European startups to the United States to understand Europe's main disadvantages in startup performance. I use positive sorting in migration as an identification strategy: because of positive sorting, the simple cross-sectional comparison gives an upper bound on the effect of the U.S. ecosystem compared to the European one. Results show that U.S. migrants receive much more venture capital (VC) funding, produce more innovation, and reach much bigger scale by exit than startups staying in Europe. More surprisingly, however, U.S. migrants do not increase revenue for many years after migration, incur higher losses for long time periods, and do not have a higher likelihood of successful exit than European stayers. Furthermore, a large part of the difference in innovation and scale can be explained by the U.S. funding advantage. These results are consistent with the view that technology, product, and exit markets hinder European startups little, if at all, but that Europe’s VC funding market is its major obstacle to startup performance. >more


Green Financing

FINANCING THE GLOBAL SHIFT TO ELECTRIC MOBILITY
Jan Bena, Bo Bian, and Huan Tang
2024
Using comprehensive auto loan data, we identify a gap in financing terms between Electric Vehicles (EVs) and non-EVs. EVs, compared to their non-electric counterparts in the same make-model or make-model-power category, are financed with higher interest rates, lower loan-to-value ratios, and shorter loan durations. The primary driver of this financing gap is the risk associated with EVs. The rapid and uncertain progress in EV-specific technologies accelerates obsolescence, reducing EVs' resale value and thus increasing the cost associated with loans for these vehicles. Factors such as car buyers' willingness to pay, socioeconomic characteristics, government incentives for EVs, lenders' market power, and macroeconomic conditions play minimal roles in explaining the higher cost of EV loans. Our findings highlight that technological carbon-transition risk is priced in financing terms of green durable assets consumption. >more


Ownership Structure

THE BLURRING LINES BETWEEN PRIVATE AND PUBLIC OWNERSHIP
Michelle Lowry
2024
As companies choose to stay private longer, they increasingly resemble their public counterparts. Along multiple dimensions, the shift from private to public status resembles a gradual transition rather than a regime shift. First, there is growing overlap between the sources of capital employed by private and public firms. Second, corporate governance structures such as the Board of Directors evolve over the years both preceding and following the IPO. As private firms become larger with more disperse ownership, their governance demands more closely resemble those of public firms; post-IPO dynamics are consistent with governance demands continuing to evolve over the firm’s life cycle. Third, while going public has been characterized as a means to obtain an acquisition currency, firms are increasingly growing via acquisition prior to the IPO. Macro-level changes reward economies of scale and scope, and the increased availability of capital to private firms facilitates acquisitions as a means to obtain rapid growth. >more


Mutual Funds

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


Investment Policies

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 Lending

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


Bond Markets

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


Mutual Funds

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

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


Startup Financing

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


Corporate Culture

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


PE-backed IPOs

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


Chinese Stock Market

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


Trading Activity

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

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


Investments

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


Startup Financing

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


Asset Pricing

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


Loan Pricing

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


ESG Investing

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


Sustainability

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


Stock Markets

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


Mutual Funds

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


Bond Collateral

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


Call Provision

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


Retail Trading

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


Secured Debt

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


Asset Pricing

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


Small Business Loans

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


Cov-Lite Loans

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


Mutual Funds

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


Startup Valuation

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 Provisions

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


IPOs

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

 


Capital Structure

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


Mutual Funds

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


Shareholder Activism

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


Carbon Premium

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


Startup Labor Market

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


Investment Managers

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 Disclosure

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


Inflation

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


Asset Class Correlations

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


Financial Stability

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


Intangible Capital

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


Carbon Risk Premium

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 and Underpricing

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


Climate Shocks

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


Mutual Fund Performance

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


Cov-Lite Loans

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


Divestments

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


FinTech

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


Asset Allocation

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


Commercial Banks

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


ETFs

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


Online Lending

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

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


ETFs

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


Central Banks

(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

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


SME IPOs

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


Cost of Capital

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


Equity-Commodity Correlation

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


Bankruptcy Costs

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


Sustainable Investing

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


Startup Financing

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


Cash Holdings

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


Comovement of Asset Classes

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
 


Investment Funds

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


Financial Distress

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


Earnings Calls

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

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

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


Banking

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

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


CLOs

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


ESG

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


ESG Factors

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


SPACs

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


Financial Markets

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


SME Financing

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


Meme Stocks

"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


Cost of Debt

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


Insider Trading

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

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


ESG

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


Stock Exchanges

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


Startups

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


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