Research articles for the 2019-09-21
A Model of Corporate Self-Policing and Self-Reporting
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What are the effects of corporate self-reporting schemes on deterrence of corporate crime? This paper presents a model to analyze this question for the case in which a ï¬rm’s manager, who has stock-based compensation, commits a corporate crime and the ï¬rm conducts self-policing and self-reporting. Corporate self-reporting schemes may enhance deterrence if the level of corporate leniency is within a certain range. But the level of corporate leniency has a non-monotonic relationship with deterrence in that range: as the level of corporate sanctions decreases, receding from the upper limit of the range, the probability of crime occurring ï¬rst decreases and then increases.
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What are the effects of corporate self-reporting schemes on deterrence of corporate crime? This paper presents a model to analyze this question for the case in which a ï¬rm’s manager, who has stock-based compensation, commits a corporate crime and the ï¬rm conducts self-policing and self-reporting. Corporate self-reporting schemes may enhance deterrence if the level of corporate leniency is within a certain range. But the level of corporate leniency has a non-monotonic relationship with deterrence in that range: as the level of corporate sanctions decreases, receding from the upper limit of the range, the probability of crime occurring ï¬rst decreases and then increases.
Bridging the Valley of Death Through Financial Innovation: Written Testimony of Andrew W. Lo Prepared for the U.S. House of Representatives Financial Services Committee
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Written testimony of Andrew W. Lo for the September 11, 2019 hearing "Examining Private Market Exemptions as a Barrier to IPOs and Retail Investment" held by the House Financial Services Committee's Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets.
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Written testimony of Andrew W. Lo for the September 11, 2019 hearing "Examining Private Market Exemptions as a Barrier to IPOs and Retail Investment" held by the House Financial Services Committee's Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets.
Common Ownership, Creative Destruction, and Inequality: Evidence from U.S. Consumers
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Using over 12 billion observations from the consumer goods industry, we study pricing and non-pricing effects of common ownership at the product level. We find positive elasticity of consumer goods prices to common ownership and that firms pass along price increases to consumers through the marginal cost channel. Our results are robust to using Bartik-like shifters for market shares and common ownership, and variations in common ownership driven by financial mergers. We present the first large-scale systematic evidence on the relationship between common ownership and creative destruction at the product level. Our results show that common owners introduce new products at a faster rate and discontinue existing product items at a similar pace compared to control firms, resulting in greater net variety. Finally, we provide new insights in that the rate of increase in consumer goods prices is higher in product modules catering to lower-income households, whereas consumers in high-income segments benefit more from the increase in product variety due to higher common ownership. These results deliver important parameters to highlight the contrasting effects of increased common ownership on consumer segments across income distribution.
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Using over 12 billion observations from the consumer goods industry, we study pricing and non-pricing effects of common ownership at the product level. We find positive elasticity of consumer goods prices to common ownership and that firms pass along price increases to consumers through the marginal cost channel. Our results are robust to using Bartik-like shifters for market shares and common ownership, and variations in common ownership driven by financial mergers. We present the first large-scale systematic evidence on the relationship between common ownership and creative destruction at the product level. Our results show that common owners introduce new products at a faster rate and discontinue existing product items at a similar pace compared to control firms, resulting in greater net variety. Finally, we provide new insights in that the rate of increase in consumer goods prices is higher in product modules catering to lower-income households, whereas consumers in high-income segments benefit more from the increase in product variety due to higher common ownership. These results deliver important parameters to highlight the contrasting effects of increased common ownership on consumer segments across income distribution.
Considering the Allure and Peril of Nonprofit Social Impact Bond Arrangements
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This essay considers Social Impact Bonds not from the point of view of the Investor, or the Government, or the Service Population, but from the vantage point of nonprofit organization officers and directors who contemplate a SIB venture. From this perspective, not all the foreseeable perils have been fleshed out in the academic literature or elsewhereâ€"although perhaps they are fleshed out in the fine print of disclosure statements contained in private agreements among the parties that usually are read closely by lawyers for their nonprofit clients. Still, important elements of these agreements are not salient or even publicly available. What financial, litigation and reputational risks should be faced by a nonprofit organization that is considering entrance into a SIBS agreement? What does the embrace of SIBS say about the larger privatization of social contract? These and related questions are addressed in a presentation that was made to nonprofit law specialists in 2014 at the Annual Conference of the Association for Research on Nonprofit Organizations and Voluntary Associations.
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This essay considers Social Impact Bonds not from the point of view of the Investor, or the Government, or the Service Population, but from the vantage point of nonprofit organization officers and directors who contemplate a SIB venture. From this perspective, not all the foreseeable perils have been fleshed out in the academic literature or elsewhereâ€"although perhaps they are fleshed out in the fine print of disclosure statements contained in private agreements among the parties that usually are read closely by lawyers for their nonprofit clients. Still, important elements of these agreements are not salient or even publicly available. What financial, litigation and reputational risks should be faced by a nonprofit organization that is considering entrance into a SIBS agreement? What does the embrace of SIBS say about the larger privatization of social contract? These and related questions are addressed in a presentation that was made to nonprofit law specialists in 2014 at the Annual Conference of the Association for Research on Nonprofit Organizations and Voluntary Associations.
Reusing Natural Experiments
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Natural experiments are used in empirical research to make causal inferences. After a natural experiment is first used, other researchers often reuse the setting, examining different outcomes based on causal chain arguments. Using simulation evidence combined with two extensively studied natural experiments, business combination laws and the Regulation SHO pilot, we show that the repeated use of a natural experiment significantly increases the likelihood of false discoveries. To correct this, we propose multiple testing methods which account for dependence across tests and we show evidence of their efficacy.
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Natural experiments are used in empirical research to make causal inferences. After a natural experiment is first used, other researchers often reuse the setting, examining different outcomes based on causal chain arguments. Using simulation evidence combined with two extensively studied natural experiments, business combination laws and the Regulation SHO pilot, we show that the repeated use of a natural experiment significantly increases the likelihood of false discoveries. To correct this, we propose multiple testing methods which account for dependence across tests and we show evidence of their efficacy.
Social Preference and Group Identity in the Financial Cooperative
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We model the financial cooperative as an optimal institution sharing liquidity risks among agents with social preference and group identity. Stronger social concerns imply objectively better (worse) conditions for borrowers (depositors). Testing the model, we find that, indeed, deposit and loan rates offered by U.S. credit unions between 1995 and 2014 co-moved with (i) the number of members, and (ii) the common bond. Our theory explains how cooperatives coexist with banks, and why they have tended to be more resilient. However, the analysis also suggests that financial inclusion and advantages in resilience might quickly evaporate as membership requirements get diluted.
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We model the financial cooperative as an optimal institution sharing liquidity risks among agents with social preference and group identity. Stronger social concerns imply objectively better (worse) conditions for borrowers (depositors). Testing the model, we find that, indeed, deposit and loan rates offered by U.S. credit unions between 1995 and 2014 co-moved with (i) the number of members, and (ii) the common bond. Our theory explains how cooperatives coexist with banks, and why they have tended to be more resilient. However, the analysis also suggests that financial inclusion and advantages in resilience might quickly evaporate as membership requirements get diluted.
Some Proposals for Interpreting the Tax 'Straddle' Rules
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This article proposes a solution to a vexing problem of significance when the article was written in 2007, namely how to match up long and short positions in a tax straddle. It also addresses rarely discussed questions relating to the application of the tax straddle rules to liabilities and to positions in a corporation’s own stock, and proposes frameworks for answering those questions.The tax “straddle†rules are important to taxpayers that engage in investment and trading activities because they are the principal rules of the Internal Revenue Code that deal with the hedging of positions in capital assets. The straddle rules are anti-abuse rules, generally intended to prevent taxpayers from deducting tax losses or expenses incurred with respect to an investment asset in the absence of corresponding economic costs, from aging the holding period for an investment asset from short-term to long-term in the absence of risk, and from converting unrelated short-term capital gain or ordinary income to long-term capital gain. They are very broad in scope. Their breadth is in some ways unfortunate, as they were extended only a few years after their original enactment to transactions in stock for which the rules are not ideally crafted.There have been numerous changes in market practice and some changes in other related areas of the law since the straddle rules were first enacted in 1981. The most important amendments to the rules were made in 1986. In 2004, Congress made the first significant changes to the tax “straddle†rules in two decades. The 2004 amendments do not, for the most part, address some important conceptual questions that have arisen over the years, although the commentary on those amendments has made a number of them more visible. This article addresses some of those questions. The principal focus of the article is on the rules addressing timing and holding period arbitrage. Part I discusses the history of the straddle rules and summarizes the rules. It is intended to give readers not familiar with the straddle rules a sense of how they have developed, without addressing many of the details important to applying the rules in practice. Readers familiar with the straddle rules may want to skim Part I, since it is intended to set up the issues and arguments made in Part II.Part II of the article discusses the long-standing question of how to determine which positions held by a taxpayer are part of a straddle. It suggests a line of analysis that explains the limited answers we have to that question to date, and that provides answers consistent with most practitioners’ instincts for unanswered questions. Part III then considers some issues relating to the application of the straddle rules to liabilities. Part IV discusses the question of whether a position in a corporation’s own stock can give rise to a straddle.
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This article proposes a solution to a vexing problem of significance when the article was written in 2007, namely how to match up long and short positions in a tax straddle. It also addresses rarely discussed questions relating to the application of the tax straddle rules to liabilities and to positions in a corporation’s own stock, and proposes frameworks for answering those questions.The tax “straddle†rules are important to taxpayers that engage in investment and trading activities because they are the principal rules of the Internal Revenue Code that deal with the hedging of positions in capital assets. The straddle rules are anti-abuse rules, generally intended to prevent taxpayers from deducting tax losses or expenses incurred with respect to an investment asset in the absence of corresponding economic costs, from aging the holding period for an investment asset from short-term to long-term in the absence of risk, and from converting unrelated short-term capital gain or ordinary income to long-term capital gain. They are very broad in scope. Their breadth is in some ways unfortunate, as they were extended only a few years after their original enactment to transactions in stock for which the rules are not ideally crafted.There have been numerous changes in market practice and some changes in other related areas of the law since the straddle rules were first enacted in 1981. The most important amendments to the rules were made in 1986. In 2004, Congress made the first significant changes to the tax “straddle†rules in two decades. The 2004 amendments do not, for the most part, address some important conceptual questions that have arisen over the years, although the commentary on those amendments has made a number of them more visible. This article addresses some of those questions. The principal focus of the article is on the rules addressing timing and holding period arbitrage. Part I discusses the history of the straddle rules and summarizes the rules. It is intended to give readers not familiar with the straddle rules a sense of how they have developed, without addressing many of the details important to applying the rules in practice. Readers familiar with the straddle rules may want to skim Part I, since it is intended to set up the issues and arguments made in Part II.Part II of the article discusses the long-standing question of how to determine which positions held by a taxpayer are part of a straddle. It suggests a line of analysis that explains the limited answers we have to that question to date, and that provides answers consistent with most practitioners’ instincts for unanswered questions. Part III then considers some issues relating to the application of the straddle rules to liabilities. Part IV discusses the question of whether a position in a corporation’s own stock can give rise to a straddle.
Supplemental Material to 'Competition, Profitability, and Risk Premia'
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This is the supplemental material to the paper titled "Competition, Profitability, and Risk Premia." It includes additional empirical, theoretical, and quantitative results. It also includes illustration for the numerical algorithm for our model solution.
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This is the supplemental material to the paper titled "Competition, Profitability, and Risk Premia." It includes additional empirical, theoretical, and quantitative results. It also includes illustration for the numerical algorithm for our model solution.
