RESEARCH PAPERS | CORPORATE FINANCE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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