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Humans in Charge of Trading Robots: The First Experiment Rev. Financ. (IF 5.059) Pub Date : 2024-03-15 Elena Asparouhova, Peter Bossaerts, Xiaoqin Cai, Kristian Rotaru, Nitin Yadav, Wenhao Yang
We present results from an experiment where participants have access to automated trading algorithms, which they may deploy at will while still trading manually. Treatments differ in whether robots must not be halted, deployment is compulsory, or robots can be halted and replaced at will. We hypothesize that robot trading would reduce mispricing, and that the effect would be more pronounced as commitment
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Complementarity of Sovereign and Corporate Debt Issuance: Mind the Gap Rev. Financ. (IF 5.059) Pub Date : 2024-03-05 Bruce D Grundy, Sjoerd van Bekkum, Patrick Verwijmeren
We investigate the relation between sovereign and corporate bond issuance. Sovereign bond issues that increase a country’s maximum maturity are followed by increases in the maximum maturity of corporate issues. Our results point to issuance complementarities based on the benchmarking of corporate bonds to sovereign bonds. Sovereign and corporate bond issues are also substitutes, but substitutability
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Fresh Air Eases Work—the Effect of Air Quality on Individual Investor Activity Rev. Financ. (IF 5.059) Pub Date : 2024-02-22 Steffen Meyer, Michaela Pagel
This paper shows that contemporaneous and lagged air pollution significantly negatively affects the likelihood of German individual investors logging in and trading in their brokerage accounts, using intra-day data and controlling for investor-, weather-, traffic-, and market-specific factors. A one standard deviation increase in air pollution leads to a 1.3% reduction in the probability of logging
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Building Trust Takes Time: Limits to Arbitrage for Blockchain-Based Assets Rev. Financ. (IF 5.059) Pub Date : 2024-02-17 Nikolaus Hautsch, Christoph Scheuch, Stefan Voigt
A blockchain replaces central counterparties with time-consuming consensus protocols to record the transfer of ownership. This settlement latency slows cross-exchange trading, exposing arbitrageurs to price risk. Off-chain settlement, instead, exposes arbitrageurs to costly default risk. We show with Bitcoin network and order book data that cross-exchange price differences coincide with periods of
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Yield Curve Momentum Rev. Financ. (IF 5.059) Pub Date : 2024-02-11 Markus Sihvonen
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
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Common Risk Factors in Cross-Sectional FX Options Returns Rev. Financ. (IF 5.059) Pub Date : 2024-01-20 Xuanchen Zhang, Raymond H Y So, Tarik Driouchi
We identify a comprehensive list of thirty-eight characteristics for predicting cross-sectional FX options returns. We find that three factors—long-term straddle momentum, implied volatility, and illiquidity—can generate economically and statistically significant risk premia not explained by other return predictors. Meanwhile, the predictability of the other characteristics becomes insignificant after
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Credit Risk, Debt Overhang, and the Life Cycle of Callable Bonds Rev. Financ. (IF 5.059) Pub Date : 2024-01-09 Bo Becker, Murillo Campello, Viktor Thell, Dong Yan
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
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External Financing, Technological Changes, and Employees Rev. Financ. (IF 5.059) Pub Date : 2023-11-29 E Han Kim, Yuan Li, Yao Lu, Xinzheng Shi
Using exogenous shocks on the ability to issue seasoned equity offerings (SEOs), we show SEOs lead to a higher employee skill composition, i.e., a lower (higher) proportion of low (high) skilled workers. Low-skilled workers decrease more than high-skilled workers increase, leading to lower firm-level employment. These effects are more significant when firms invest more in technology following SEOs
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The saliency of the CEO pay ratio Rev. Financ. (IF 5.059) Pub Date : 2023-11-25 Audra Boone, Austin Starkweather, Joshua T White
The US Securities and Exchange Commission’s mandated CEO pay ratio is a simple, but salient, metric that could resonate with employees given it focuses on their compensation. Reporting a relatively or surprisingly high ratio reduces employee perceptions of their pay, views of the CEO, and hampers productivity growth. Employee pay satisfaction drops after disclosing a high ratio even if their wages
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When Passive Funds Affect Prices: Evidence from Volatility and Commodity ETFs Rev. Financ. (IF 5.059) Pub Date : 2023-11-06 Karamfil Todorov
This paper studies ETF price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. I propose a new way to measure ETF-related price distortions based on the specifics of futures contracts. This allows me to isolate a component in VIX futures prices that is strongly related to the rebalancing of ETFs. I derive a novel decomposition of ETF trading demand into leverage rebalancing
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Leveraged Speculators and Asset Prices Rev. Financ. (IF 5.059) Pub Date : 2023-11-06 Wenxi Jiang
I test the hypothesis that the use of leverage by market speculators can increase the likelihood and magnitude of crashes in asset prices. Using a direct leverage measure derived from U.S. public filings, I find that (1) stocks held by highly leveraged hedge funds subsequently have more negatively skewed returns than stocks held by less leveraged funds, and (2) upon extremely negative earnings surprises
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The Term Structure of Equity Yields—a Bottom-Up Approach Rev. Financ. (IF 5.059) Pub Date : 2023-10-23 David Schröder
This paper proposes a novel perspective on the term structure of market equity yields. Instead of using market dividend futures, we aggregate equity yields of individual firms to estimate the market equity yield curve. This approach allows studying the aggregation effect that shapes the market equity yield curve. During the period from 1990 to 2019, we find a positive aggregation effect: companies
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Stock Repurchasing Bias of Mutual Funds Rev. Financ. (IF 5.059) Pub Date : 2023-10-07 Mengqiao Du, Alexandra Niessen-Ruenzi, Terrance Odean
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
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Why Momentum Concentrates among Overvalued Stocks Rev. Financ. (IF 5.059) Pub Date : 2023-09-25 Jack Favilukis, Terry Zhang
We uncover a link between momentum and overvaluation: assets that generate strong momentum profits have lower risk-adjusted unconditional returns, conversely, trading momentum within overvalued assets doubles the profit of the standard momentum strategy. We compute the profits of a momentum strategy within various portfolios; portfolios within which momentum is profitable are defined as momentum trading
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Big Broad Banks: How Does Cross-Selling Affect Lending? Rev. Financ. (IF 5.059) Pub Date : 2023-09-11 Yingjie Qi
This paper investigates how cross-selling affects relationship lending using internal data from a large bank and the Swedish credit registry. I show that within a bank-firm relationship, profit earned from non-loan products cross-subsidizes loans and increases (1) credit supply and (2) the likelihood of the bank’s pausing or waiving interest payments for delinquent loans (lenience in delinquency).
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Do Anomalies Really Predict Market Returns? New Data and New Evidence Rev. Financ. (IF 5.059) Pub Date : 2023-08-09 Nusret Cakici, Christian Fieberg, Daniel Metko, Adam Zaremba
Using new data from U.S. and global markets, we revisit market risk premium predictability by equity anomalies. We apply a repertoire of machine learning methods to 42 countries to reach a simple conclusion: anomalies, as such, cannot predict aggregate market returns. Any ostensible evidence from the U.S. lacks external validity in two ways: it cannot be extended internationally and does not hold for
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Asymmetric Information and Corporate Lending: Evidence from SME Bond Markets Rev. Financ. (IF 5.059) Pub Date : 2023-07-05 Alessandra Iannamorelli, Stefano Nobili, Antonio Scalia, Luana Zaccaria
Using a comprehensive dataset of Italian SMEs, we find that differences between private and public information on firm creditworthiness affect the decision to issue bonds. Our evidence supports favorable (rather than adverse) selection in corporate bond markets. Specifically, holding public information constant, firms with better private fundamentals are more likely to access bond markets. These effects
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Inefficient Regulation: Mortgages versus Total Credit Rev. Financ. (IF 5.059) Pub Date : 2023-06-09 Artashes Karapetyan, Jens Soerlie Kvaerner, Maximilian Rohrer
We estimate the willingness-to-pay to bypass a loan-to-value (LTV) cap. Our identification relies on exogenous variation in debt exempt from the LTV regulation that can only be used as a substitute for a personal mortgage. Our baseline estimate reveals that homebuyers pay 7.3 SEK to avoid 1 SEK of equity down payment. The supply of debt not part of the LTV calculation increased by approximately 50%
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Optimal Capital Structure and Risk Management Policies of Banks that use CoCo Futures to Hedge Financial Sector Risk Rev. Financ. (IF 5.059) Pub Date : 2023-05-31 Robert S Goldstein, Fan Yang
We investigate the joint optimal risk-management and capital structure decisions of banks when they use contingent-convertible (CoCo) futures contracts to hedge financial-sector risk. In spite of banks choosing significantly higher leverage ratios, their default probabilities drop appreciably while their equity values increase, allowing banks to compete more favorably with the shadow-banking system
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Impact of Corporate Subsidies on Borrowing Costs of Local Governments: Evidence From Municipal Bonds Rev. Financ. (IF 5.059) Pub Date : 2023-05-15 Sudheer Chava, Baridhi Malakar, Manpreet Singh
We analyze the impact of $40 billion of corporate subsidies given by U.S. local governments on their borrowing costs. We find that winning counties experience a 15.2 bps increase in bond yield spread as compared to the losing counties. The increase in yields is higher (18 – 26 bps) when the subsidy deal is associated with a lower jobs multiplier or when the winning county has a lower debt capacity
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Do Banks Worry About Attentive Depositors? Evidence from Multiple-Brand Banks Rev. Financ. (IF 5.059) Pub Date : 2023-05-04 Matthieu Chavaz, Pablo Slutzky
Panic-based (non-fundamental) spikes in depositors’ attention can be a source of bank fragility in theory, but separating such spikes from underlying fundamentals is challenging empirically. Using online search data, we show that during the Global Financial Crisis, UK banks facing surges in attention respond by increasing retail deposit rates, but only for instant withdrawal deposits. Exploiting variation
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Regulatory Sandboxes and Fintech Funding: Evidence from the UK Rev. Financ. (IF 5.059) Pub Date : 2023-04-24 G Cornelli, S Doerr, L Gambacorta, O Merrouche
Over 50 countries have introduced regulatory sandboxes to foster financial innovation. This paper conducts the first evaluation of their ability to improve fintechs’ access to capital and attendant real effects. Exploiting the staggered introduction of the UK sandbox, we establish that firms entering the sandbox see an increase of 15% in capital raised post-entry. Their probability of raising capital
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The Term Structure of Short Selling Costs Rev. Financ. (IF 5.059) Pub Date : 2023-04-20 Gregory Weitzner
Short sellers care about i) how overvalued an asset is and ii) when the overvaluation will be corrected. Hence, short selling costs should be higher over horizons when negative information is more likely to arrive. This paper presents a model formalizing this intuition and tests the model using the put-call parity condition. Forward shorting costs predict future costs and stock returns, consistent
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Do Insiders Hire CEOs with High Managerial Talent? Rev. Financ. (IF 5.059) Pub Date : 2023-04-17 Jason D Kotter, Yelena Larkin
We examine the effect of the composition of the board of directors on the firm’s CEO hiring decision. Using a novel measure of managerial talent, characterized by an individual’s ascent in the corporate hierarchy, we show that firms with non-CEO inside directors tend to hire CEOs with greater managerial skills. This effect obtains for both internal and external CEO hires; moreover, the effect is pronounced
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Indirect Costs of Financial Distress Rev. Financ. (IF 5.059) Pub Date : 2023-04-12 Cláudia Custódio, Miguel A Ferreira, Emilia Garcia-Appendini
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
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Low carbon mutual funds Rev. Financ. (IF 5.059) Pub Date : 2023-04-04 Marco Ceccarelli, Stefano Ramelli, Alexander F Wagner
Climate change poses new challenges for portfolio management. In our not-yet-low carbon world, investors face a trade-off between minimizing their exposure to climate risks and maximizing the benefits of portfolio diversification. This paper investigates how investors and financial intermediaries navigate this trade-off. After the release of Morningstar’s novel carbon risk metrics in April 2018, mutual
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Are carbon emissions associated with stock returns? Rev. Financ. (IF 5.059) Pub Date : 2023-04-03 Jitendra Aswani, Aneesh Raghunandan, Shiva Rajgopal
An influential emerging literature documents strong correlations between carbon emissions and stock returns. We reexamine that data and conclude that these associations are driven by two factors. First, stock returns are correlated only with unscaled emissions estimated by the data vendor, but not with unscaled emissions actually disclosed by firms. Vendor-estimated emissions systematically differ
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Director Expertise and Corporate Sustainability Rev. Financ. (IF 5.059) Pub Date : 2023-04-03 Peter Iliev, Lukas Roth
We show that U.S. firms increase their sustainability performance when their directors acquire expertise through their exposure to sustainability reforms in foreign countries where they serve as directors. Our results suggest that a board that gains sustainability expertise increases a firm’s overall sustainability performance by 7.1%. The increase in sustainability comes both from improvements in
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Large Bets and Stock Market Crashes Rev. Financ. (IF 5.059) Pub Date : 2023-03-28 Albert S Kyle, Anna A Obizhaeva
Some market crashes occur because of significant imbalances in demand and supply. Conventional models fail to explain the large magnitudes of price declines. We propose a unified structural framework for explaining crashes, based on the insights of market microstructure invariance. A proper adjustment for differences in business time across markets leads to predictions which are different from conventional
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Dual Ownership and Risk-taking Incentives in Managerial Compensation Rev. Financ. (IF 5.059) Pub Date : 2023-03-09 Tao Chen, Li Zhang, Qifei Zhu
This paper studies how the three-way interaction among shareholders, creditors, and managers shapes firms’ executive compensation. Firms with a higher ownership share by “dual holders” – institutional investors that simultaneously hold equity and bond of the company—adopt a less risk-inducing compensation structure: less stock options and more inside debt. Exploiting financial institution mergers that
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The Variance Risk Premium in Equilibrium Models Rev. Financ. (IF 5.059) Pub Date : 2023-03-01 Geert Bekaert, Eric Engstrom, Andrey Ermolov
The equity variance risk premium is the expected compensation earned for selling variance risk in equity markets. The variance risk premium is positive and shows only moderate persistence. High variance risk premiums coincide with the left tail of the consumption growth distribution shifting down. These facts, together with risk neutral skewness being substantially more negative than physical return
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Leasing as a Mitigation of Financial Accelerator Effects Rev. Financ. (IF 5.059) Pub Date : 2023-02-18 Kai Li, Jun Yu
We document that leased capital accounts for about 20% of total physical productive assets used by US public firms, and its proportion is more than 40% among small and financially constrained firms. The leased capital ratio exhibits a strong counter-cyclical pattern over business cycles and a positive correlation with cross-sectional idiosyncratic uncertainty. We argue that existing macro models with
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The strategic use of corporate philanthropy: Evidence from bank donations Rev. Financ. (IF 5.059) Pub Date : 2023-02-10 Seungho Choi, Raphael Jonghyeon Park, Simon Xu
This paper examines the strategic nature of banks’ charitable giving by studying bank donations to local nonprofit organizations. Relying on the application of antitrust rules in bank mergers as an exogenous shock to local deposit market competition, we find that local competition affects banks’ local donation decisions. Using county-level natural disaster shocks, we show that banks with disaster exposure
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Cross-Border Bank Flows and Systemic Risk Rev. Financ. (IF 5.059) Pub Date : 2023-01-05 G Andrew Karolyi, John Sedunov, Alvaro G Taboada
We find that heightened cross-border bank flows are associated with lower systemic risk in a target country’s banking system. The reductions in systemic risk are stronger for flows coming from source countries with stronger regulatory oversight than the target country. Such cross-border bank flows linked to regulatory arbitrage are also associated with improvements in target banking sector profitability
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Trading on Talent: Human Capital and Firm Performance Rev. Financ. (IF 5.059) Pub Date : 2022-11-22 Anastassia Fedyk, James Hodson
How is technically-skilled human capital reflected in firm performance? We leverage a uniquely detailed employer-employee matched dataset to measure U.S. firms’ technical human capital in IT, Software Engineering, Mobile Networks, Data Analysis, and Web Development. All five technical skillsets are associated with higher firm valuations. However, they negatively forecast both financial and operational
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A Theory of the Nominal Character of Stock Securities Rev. Financ. (IF 5.059) Pub Date : 2022-11-07 Bernard Dumas, Marcel Savioz
We construct recursive solutions for, and study the properties of the dynamic equilibrium of an economy with three types of agents: (i) household/investors who supply labor with a finite elasticity, consume a large variety of goods that are not perfect substitutes and trade government bonds; (ii) firms that produce those varieties of goods, receive productivity shocks and set prices in a Calvo manner;
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Risk-Taking and Asymmetric Learning in Boom and Bust Markets Rev. Financ. (IF 5.059) Pub Date : 2022-11-04 Pascal Kieren, Jan Müller-Dethard, Martin Weber
An increasing number of studies depart from the rational expectations assumption to reconcile survey expectations with asset prices. While surveys are helpful to establish a link between subjective beliefs and investment decisions, precise inference about how investors depart from rational expectations can be challenging without relying on strong assumptions. In this paper, we provide direct experimental
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Social Media and Financial News Manipulation Rev. Financ. (IF 5.059) Pub Date : 2022-10-20 Shimon Kogan, Tobias J Moskowitz, Marina Niessner
We examine an undercover SEC investigation into the manipulation of financial news on social media. While fraudulent news had a direct positive impact on retail trading and prices, revelation of the fraud by the SEC announcement resulted in significantly lower retail trading volume on all news, including legitimate news, on these platforms. For small firms, volume declined by 23.5% and price volatility
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Life is Too Short? Bereaved Managers and Investment Decisions Rev. Financ. (IF 5.059) Pub Date : 2022-10-18 Clark Liu, Tao Shu, Johan Sulaeman, P Eric Yeung
We examine whether bereavement affects managerial investment decisions in large organizations using the exogenous events of managers’ family deaths. We find evidence that bereaved managers take less risk in separate samples of mutual funds and publicly traded firms. Mutual funds managed by bereaved managers exhibit smaller tracking errors, lower active share measures, and higher portfolio weights on
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Asset Prices and Portfolios with Externalities Rev. Financ. (IF 5.059) Pub Date : 2022-10-06 Steven D Baker, Burton Hollifield, Emilio Osambela
Elementary portfolio theory implies that environmentalists optimally hold more shares of polluting firms than non-environmentalists, and that polluting firms attract more investment capital than otherwise identical non-polluting firms through a hedging channel. Pigouvian taxation can reverse the aggregate investment results, but environmentalists still overweight polluters. We introduce countervailing
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Macroeconomic News and Stock–Bond Comovement Rev. Financ. (IF 5.059) Pub Date : 2022-09-28 Gregory R Duffee
Covariances between aggregate stock returns and changes in bond yields change sign over time. Existing theories emphasize either time-varying properties of expected inflation or time-varying properties of real yields. Using revisions in survey forecasts as proxies for macroeconomic news, neither approach succeeds empirically. Inflation-centric models require much more news about expected future inflation
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Precious Neighbors: The Value of Co-Locating with the Government Rev. Financ. (IF 5.059) Pub Date : 2022-09-27 Jörg R Stahl
In many countries, disproportionately many firms locate their headquarters in the capital city. Spatial proximity to a country’s leading politicians may be beneficial for a number of reasons. Since neither firms nor governments move randomly, the effects of firms' co-locating with the government are normally hard to identify. I solve this problem by examining a unique event—the decision to relocate
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Do Responsible Investors Invest Responsibly? Rev. Financ. (IF 5.059) Pub Date : 2022-09-21 Rajna Gibson Brandon, Simon Glossner, Philipp Krueger, Pedro Matos, Tom Steffen
We study whether institutional investors that sign the Principles for Responsible Investment (PRI), a commitment to responsible investing, exhibit better portfolio-level environmental, social, and governance (ESG) scores. Signatories outside the US have superior ESG scores than non-signatories, but US signatories have at best similar ESG ratings, and worse scores if they have underperformed recently
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The Term Structure of Equity Risk Premia: Levered Noise and New Estimates Rev. Financ. (IF 5.059) Pub Date : 2022-09-20 Oliver Boguth, Murray Carlson, Adlai Fisher, Mikhail Simutin
Levered noise occurs when no-arbitrage replication hedges fundamentals but amplifies price errors. Motivated by our theory, we use widely-available end-of-day OptionMetrics data to improve accuracy of synthetic dividend strip prices and provide longer samples than prior studies. Term-structure point estimates are approximately flat in simple returns (88 vs. 87 bp/month for short-term dividends vs.
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Social Interaction in the Family: Evidence from Investors’ Security Holdings Rev. Financ. (IF 5.059) Pub Date : 2022-09-10 Samuli Knüpfer, Elias Rantapuska, Matti Sarvimäki
We show investors tend to hold the same securities as their parents. This intergenerational correlation is stronger for mothers and family members who are more likely to communicate with each other. An instrumental variables estimation and a natural experiment suggest the correlation reflects social influence. This influence runs not only from parents to children, but also vice versa. The resulting
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Debt Renegotiations Outside Distress Rev. Financ. (IF 5.059) Pub Date : 2022-09-10 Marc Arnold, Ramona Westermann
This paper develops a model to explore the implications of non-distressed debt renegotiation on debt prices and corporate policies. The model incorporates the empirical observation that creditors can influence firms also outside corporate distress through debt covenant renegotiation and not only in distress. We find that considering both distressed and non-distressed creditor interventions is key to
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Capital Gains Tax, Venture Capital and Innovation in Start-ups Rev. Financ. (IF 5.059) Pub Date : 2022-09-08 Lora Dimitrova, Sapnoti K Eswar
We examine the effect of staggered changes in the state-level capital gains tax on venture capital (VC)-backed start-ups and show that an increase in the tax rate of VC firms reduces the quantity and quality of patents by the start-ups. The results are consistent with a reduction in VC firms’ incentives to provide effort: increases in the capital gains tax for VC firms lead to incrementally lower innovation
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Financial Intermediation, Capital Accumulation and Crisis Recovery Rev. Financ. (IF 5.059) Pub Date : 2022-09-07 Hans Gersbach, Jean-Charles Rochet, Martin Scheffel
We integrate bank and bond financing into a two-sector neoclassical growth model and identify an automatic stabilization effect due to endogenous bank leverage adjustment. We show that although bank leverage amplifies shocks, the increase of leverage due to a decline in bank equity partially offsets the post crisis decline of bank lending and accelerates economic recovery by reducing the persistence
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Optimal Capital Structure with Stock Market Feedback Rev. Financ. (IF 5.059) Pub Date : 2022-08-17 Caio Machado, Ana Elisa Pereira
This paper studies optimal capital structure when firms learn from financial markets. We present a tractable model of stock market feedback with imperfect information aggregation. Debt issuance affects speculators’ incentives to trade both directly, by changing the payoff structure of equity holders, and indirectly, through an asset substitution effect. We show that issuing debt can increase market
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Do IPO Firms Become Myopic? Rev. Financ. (IF 5.059) Pub Date : 2022-08-12 Vojislav Maksimovic, Gordon Phillips, Liu Yang
We compare the growth and responsiveness to demand shocks of post-IPO firms and their private counterparts. Using multiple measures of myopia and multiple ways to match IPO firms with private firms, we do not find evidence of myopic behavior by public firms. IPO firms respond more to investment opportunities and have higher productivity in their early public years. Our results on public firms’ sensitivity
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Information in Financial Markets and Its Real Effects Rev. Financ. (IF 5.059) Pub Date : 2022-08-10 Itay Goldstein
Financial markets have a central role in allocating resources in modern economies. One of the main functions of financial markets is the discovery of information. This information in turn helps guide decisions in the real side of the economy. The literature on the “feedback effect” of financial markets explores this channel. Empirical work tries to identify the informational feedback from markets to
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DECOMPOSING LONG BOND RETURNS: A DECENTRALIZED THEORY Rev. Financ. (IF 5.059) Pub Date : 2022-08-10 Peter Carr, Liuren Wu
Classic bond pricing links, i.e., centralizes, bond valuation across all maturities by specifying the dynamics of the short-term interest rate. This paper develops a decentralized theory that prices each bond based purely on the near-term behavior of the bond’s own yield. The theory levers the domain expertise of an investor on a particular bond and allows the investor to make pricing and investment
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The Coming Rise in Residential Inflation Rev. Financ. (IF 5.059) Pub Date : 2022-08-05 Marijn A Bolhuis, Judd N L Cramer, Lawrence H Summers
We study how the recent run-up in housing and rental prices affects the outlook for inflation in the United States. Housing held down overall inflation in 2021. Despite record growth in private market-based measures of home prices and rents, government measured residential services inflation was only four percent for the twelve months ending in January 2022. After explaining the mechanical cause for
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Comparing Past and Present Inflation Rev. Financ. (IF 5.059) Pub Date : 2022-08-05 Marijn A Bolhuis, Judd N L Cramer, Lawrence H Summers
There have been important methodological changes in the Consumer Price Index (CPI) over time. These distort comparisons of inflation from different periods, which have become more prevalent as inflation has risen to 40-year highs. To better contextualize the current run-up in inflation, this paper constructs new historical series for CPI headline and core inflation that are more consistent with current
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A new wolf in town? Pump-and-dump manipulation in cryptocurrency markets Rev. Financ. (IF 5.059) Pub Date : 2022-08-04 Anirudh Dhawan, Tālis J Putniņš
We investigate the puzzle of widespread participation in cryptocurrency pump-and-dump manipulation schemes. Unlike stock market manipulators, cryptocurrency manipulators openly declare their intentions to pump specific coins, rather than trying to deceive investors. Puzzlingly, people join in despite negative expected returns. In a simple framework, we demonstrate how overconfidence and gambling preferences
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The Real Effects of Judicial Enforcement Rev. Financ. (IF 5.059) Pub Date : 2022-08-04 Vincenzo Pezone
This paper shows that judicial enforcement has substantial effects on firms’ decisions with regard to their employment policies. To establish causality, I exploit a reorganization of the court districts in Italy involving judicial district mergers as a shock to court productivity. I find that an improvement in enforcement, as measured by a reduction in average trial length, has a large, positive effect
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A Sustainable Capital Asset Pricing Model (S-CAPM): Evidence from Environmental Integration and Sin Stock Exclusion Rev. Financ. (IF 5.059) Pub Date : 2022-07-21 Olivier David Zerbib
This paper shows how sustainable investing—through the joint practice of exclusionary screening and environmental, social, and governance (ESG) integration—affects asset returns. I develop an asset pricing model with partial segmentation and heterogeneous preferences. I characterize two exclusion premia generalizing Merton’s (1987) premium on neglected stocks and a taste premium that clarifies the
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Lending Relationships and the Collateral Channel Rev. Financ. (IF 5.059) Pub Date : 2022-07-18 Gareth Anderson, Saleem Bahaj, Matthieu Chavaz, Angus Foulis, Gabor Pinter
This article shows that lending relationships insulate corporate investment from fluctuations in collateral values. The sensitivity of corporate investment to changes in real-estate collateral values is halved when the length of relationship between a bank and a firm, or its board of directors, doubles. Long relationships with board members dominate relationships with the firm in dampening the collateral
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Leverage and Cash Dynamics Rev. Financ. (IF 5.059) Pub Date : 2022-07-05 Harry DeAngelo, Andrei S Gonçalves, René M Stulz
This paper documents new and empirically important interactions between cash-balance and leverage dynamics. Cash ratios typically vary widely over extended horizons, with dynamics remarkably similar to (and complementary with) those of capital structure. Leverage and cash dynamics interact approximately as predicted by the internal-versus-external funding regimes in Myers and Majluf (1984). Leverage
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Mobile Apps and Financial Decision Making Rev. Financ. (IF 5.059) Pub Date : 2022-06-29 Bruce Carlin, Arna Olafsson, Michaela Pagel
We exploit the release of a mobile application for a financial aggregation platform to analyze how technology adoption changes consumer financial decision making. The app reduced the cost of accessing personal financial information, and we find that this led to a drop in non-sufficient fund (NSF) fees. Because of the manner in which these fees are incurred, this represents an unambiguous welfare improvement