Research articles for the 2019-12-19

Aggregate Accruals and Market Returns: The Role of Aggregate M&A Activity
Heater, John C.,Nallareddy, Suresh,Venkatachalam, Mohan
Extant literature documents that aggregate accruals positively predict future market returns and attributes this relation to either change in discount rates or systematic earnings management. We offer an alternative explanation: aggregate merger and acquisition (M&A) activity drives this relation. M&A activity affects the magnitude of accruals, which drives the market return predictability of aggregate accruals. We find that the ability of both aggregate accruals and discretionary aggregate accruals (a measure of systematic earnings management) to predict market returns disappears after controlling for aggregate M&A activity. Finally, aggregate M&A activity predicts future market returns, driven in part by improvements in macroeconomic outcomes.

Asset Pricing and Ambiguity: A Cross-Sectional Approach
Kvaerner, Jens,Kvamvold, Joakim,Rohrer, Maximilian
We use textual analysis to quantify how familiar investors are with any company’s business model. Our main result is that a portfolio that buys unfamiliar companies and sells familiar companies earns an annual premium of 5.3 %. Further, we find that unfamiliar companies have higher discount rates and lower listing prices in Initial Public Offerings (IPOs) than that of familiar companies. In particular, unfamiliar companies have about 50 % higher one-day returns after the IPO than firms with familiar business models. Overall, our results are consistent with previous empirical evidence on ambiguity premium. The data rejects investor recognition as an alternative explanation.

Attention to Dividends, Inattention to Earnings?
Ham, Charles (Chad),Kaplan, Zachary,Utke, Steven
We examine investor, market, and firm behaviors around earnings announcements (EAs) for dividend payers versus non-payers and show dividends affect the supply and demand for earnings information. First, holding all firm information constant across investors, we show dividend investors are longer horizon investors â€" they have longer holding periods and trade less around EAs. Our market-level tests suggest these investor effects aggregate up and affect the information environment as payers have less informative EAs, measured by abnormal volume, return volatility, and analyst forecasts. Valuation tests show payers have lower earnings response coefficients and less persistent earnings surprises, consistent with a rational reduction in attention to earnings information. Finally, at the firm-level, we show payers just meet or beat (miss) earnings expectations less (more) than non-payers. Overall, we document a novel benefit to dividend paying â€" enriching the information environment and reducing myopia â€" which contributes to our understanding of why firms pay dividends.

Bank Relationships, Earnings Quality and Cost of Debt: Cross-Country Evidence on Private Firms
Bigus, Jochen,Hillebrand, Christa,Grahn, Aline
We expect that private firms choose a close relationship with a bank â€" often based on private information â€" in order to save on direct or proprietary costs of disclosure. For a large sample of bank relationships in 12 European countries, we find evidence that close bank relationships are associated with lower earnings quality as measured by higher absolute discretionary accruals and less timely loss recognition. This effect is stronger for firms with high proprietary costs. Further, we find that the strength of creditor rights intensifies the link between close bank relationships and earnings quality, while tax-book conformity moderates it. Finally, we show that close bank relationships directly tend to decrease the borrowing firms’ cost of debt by about 40 basis points on average. Indirectly, the cost of debt increase, because relationship lending goes along with lower earnings quality and relationship banks charge higher interest rates for poorer earnings quality than do other lenders. The findings suggest that relationship lending and financial disclosures can be considered as substitutes and that this relation is affected by the institutional framework. The paper also highlights that relationship lending implies a direct negative and an indirect positive effect on the borrowing firm’s cost of debt.

Central Counterparty Exposure in Stressed Markets
Huang, Wenqian,Menkveld, Albert J.,Yu, Shihao
Time is valuable, particularly in stressed markets. As central counterparties (CCPs) have become systemically important, we need to understand the dynamics of their exposure towards clearing members at high frequencies. We track such exposure and decompose it, yielding the following insights. The composition of CCP exposure is fundamentally different in the tails. At extreme levels or during rapid increases, there is elevated crowding. This is the result of clearing members all concentrating their positions on a single security or a particular portfolio, which is desirable if motivated by hedging but worrying if due to speculation.

Competition and Market Concentration in the Municipal Bond Market
Cestau, Dario
Lack of competition among the underwriters of municipal bonds increases the borrowing costs of local municipalities. I find that the proportion of municipal bonds sold in competitive sales in the state has an economically significant effect on several measures of competitiveness. Competitive sales increase the number of active underwriters in the state and substantially decrease the concentration in the market for underwriting services for municipal bonds. I also find that state restrictions on the negotiated sale of municipal bonds can materially decrease market concentration. Market concentration has increased considerably over time, but only negotiated deals have contributed to greater concentration.

Do Innovative Firms Communicate More? Evidence From the Relation Between Patenting and Management Guidance
Huang, Sterling,Ng, Jeffrey,Ranasinghe, Tharindra,Zhang, Mingyue
Successful innovations could induce more disclosure if the information asymmetry between the firm and its investors about post-innovation outcomes leads investors to demand more information. However, such innovations also likely entail greater proprietary cost concerns, deterring disclosure. This paper uses patent grants to examine the effect of innovation success on management guidance behavior. We find that more management guidance follows patent grants, suggesting that despite disclosure cost concerns, firms with successful innovations do respond to information demand. This association is stronger following the enactment of Regulation Fair Disclosure and for firms with greater institutional investor ownership, which further highlights the role of information demand. The association is weaker for firms facing more competition, consistent with proprietary cost concerns having a moderating impact. Overall, our findings suggest that innovation creates demand for more voluntary disclosure and that firms’ disclosure decisions following innovation outcomes vary in ways predicted by disclosure theory and economic intuition.

Earnings Properties of Co-Operative Firms
Bigus, Jochen,Grahn, Aline,Riediger, Monika
There is hardly any evidence on earnings properties of co-operatives for which profit maximisation is not a primary goal. We find that cooperatives in Germany exhibit higher levels of timely loss recognition when they have more members(owners), when they pursue charitable objectives, and when the local corporate income tax rate is high. Cooperatives are more prone to avoid reporting small losses when members can be held privately liable in the cooperative’s bankruptcy and when the local income tax rate is low. Housing cooperatives exhibit different earnings properties than other types of cooperatives. Overall, tax motives are strongly related to cooperatives’ earnings properties, but members’ private liability and agency problems of “equity” also have an influence.We also analyze how the earnings properties of cooperatives differ from those of (propensity- score matched) privately held corporations. Both types of firm typically have a relatively large number of owners, but in contrast to privately held corporations, cooperatives are generally not profit-maximizing firms and must be run by their owners. We find that cooperatives exhibit a significantly higher propensity to avoid reporting small losses, but also lower absolute discretionary accruals. The evidence on the differences in timely loss recognition is not conclusive. Managers of privately held corporations seem to engage in opportunistic earnings management more aggressively. Still, cooperatives try harder to avoid reporting small losses, indicating that the negative financial and non-financial consequences of “false alarms” seem to be relatively high for cooperatives and their members.

Extended Weak Convergence and Utility Maximization with Proportional Transaction Costs
Erhan Bayraktar,Leonid Dolinskyi,Yan Dolinsky

In this paper we study utility maximization with proportional transaction costs. Assuming extended weak convergence of the underlying processes we prove the convergence of the corresponding utility maximization problems. Moreover, we establish a limit theorem for the optimal trading strategies. The proofs are based on the extended weak convergence theory developed in [1] and the Meyer--Zheng topology introduced in [19].

Firm Characteristics and Credit Constraints across SMEs in the Philippines
Flaminiano, John Paul,Francisco, Jamil Paolo
This paper analyzed the relationship between firm characteristics and credit constraints among small and medium enterprises (SMEs) in the Philippines. In particular, we determined whether an SME’s firm characteristics are correlated to the predicted probability of being credit-constrained or “quasi-constrained” â€" i.e. able to borrow from informal sources. Estimates of marginal effects at the means (MEMs) from logistic regressions provide some suggestive evidence that firm size, previous purchase of fixed assets, and increased use of digital technologies for accounting and financial management are associated with a lower predicted probability of being credit-constrained for the average SME in our sample. However, with the exception of digital technology use, these firm characteristics are not significant in predicting the probability that the average SME is quasi-constrained. This implies that the firm characteristics that are significant in accessing finance solely through formal channels may not be significant when considering informal sources. We also found that the increased adoption of digital technologies has an inverse association with the predicted probability of being credit-constrained and quasi-constrained for the average SME in our sample, although our analysis did not establish the direction of causality.

Forest Through the Trees: Building Cross-Sections of Stock Returns
Bryzgalova, Svetlana,Pelger, Markus,Zhu, Jason
We show how to build a set of basis assets that captures complex information contained in a given list of stock characteristics. Our cross-section of portfolios is a small number of long-only strategies that (a) fully reflect the information in the cross-sectional return predictors, allowing for conditional interactions and non-linearities, (b) provide a small set of interpretable test assets for evaluating asset pricing models, (c) are substantially harder to price than conventional double or triple sorted portfolios constructed from the same information set, and (d) are the building blocks for a stochastic discount factor (SDF) projected on the characteristic space. We use decision trees to generalize the concept of conventional sorting, and develop a novel approach to the robust recovery of a sparse set of the SDF basis assets. Empirically, we show that traditionally sorted portfolios and factors present a too low hurdle for candidate models as they miss the complex information structure of the original returns. Our results have important implications for evaluating asset pricing models, and modeling expected returns.

Government Debt, Dividend Growth, and Stock Returns
Sun, Yulong
This paper documents that the higher debt-to-GDP ratio can predict both higher dividend growth and higher stock returns. The finding is consistent with Lettau and Ludvigson (2005)'s argument that there exists a common component among stock returns and dividend growth which resolves the US asset pricing puzzle that the dividend-price ratio can only predict discount rates but not cash flows. To rationalize this finding, we propose a production-based asset pricing model incorporating a cash-retention friction on the corporate sector. The model can produce testable predictions that the increase in public debt moves both dividend payment and the cost of capital in the same direction, resulting in the capture of the common component.

Hapag-Lloyd AG: Complying with IMO 2020
Esty, Benjamin,Fisher, Daniel
A new environmental regulation known as IMO 2020 was creating what one industry analyst called “the biggest shakeup for the oil and shipping industries in decades.” According to the new regulation, all ocean-going ships would have to limit their sulfur emissions by January 1, 2020. Senior leaders at Hapag-Lloyd, one of the world’s largest shipping companies, were evaluating three ways their ships could comply with the new regulation: use low sulfur fuel, use high-sulfur fuel but install scrubbers to clean the exhaust, or convert ships to use liquid natural gas (LNG) as fuel. Each of the options had its advantages and disadvantages, and the most attractive option depended on not only the values of key parameters (e.g., future fuel prices and equipment costs), but also the strategies adopted by the owners of the other 60,000 ocean-going ships subject to the regulation. For the industry as a whole, annual compliance could cost as much as $60 billion; for Hapag-Lloyd, annual compliance might cost as much as $1 billion or more. For a company with net income of $34 million (€28 million) in the prior year, and losses in two of the past four years, getting this decision right was of the utmost importance.Senior executives at Hapag-Lloyd had created a proposed compliance plan and were scheduled to present it to the firm’s supervisory board for approval in June 2018. Whether the team had the right plan and whether the board would approve it are the key questions in the case.This case explores the economic impact of a major new environmental regulation. It illustrates how discounted cash flow (DCF) analysis can be used to inform a critical business decision, and how the key inputs to a financial model and the preferred compliance option depended on what competing firms choose to do. The challenge of the case is to wrestle with, but not get paralyzed by, various sources of uncertainty in a high-stakes managerial decision.

Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles
Gonzalez, Rodrigo,Khametshin, Dmitry,Peydro , Jose-Luis,Polo, Andrea
We show that local central bank policies attenuate global financial cycle (GFC)'s spillovers. For identification, we exploit GFC shocks and Brazilian interventions in FX derivatives using three matched administrative registers: credit, foreign credit flows to banks, and employer-employee. After U.S. Federal Reserve Taper Tantrum (followed by strong Emerging Markets FX depreciation and volatility increase), Brazilian banks with larger ex-ante reliance on foreign debt strongly cut credit supply, thereby reducing firm-level employment. However, a large FX intervention program supplying derivatives against FX risks-hedger of last resort-halves the negative effects. Finally, a 2008-2015 panel exploiting GFC shocks and local related policies confirm these results.

Housing, wealth accumulation and wealth distribution: Evidence and stylized facts
Causa, Orsetta,Woloszko, Nicolas,Leite, David
This paper produces new evidence and stylised facts on housing, wealth accumulation and wealth distribution, relying on an in-depth analysis of micro-based data on household wealth across OECD countries. The analysis addresses several questions: i) How is homeownership and housing tenure distributed across the population along various socio-economic characteristics such as income, wealth and age? What is the weight of housing in households' balance sheets and how does this vary across socio-economic groups? ii) What is the incidence of mortgage debt across households and how does this vary across socio-economic groups? What is the impact of mortgage debt on access to homeownership and wealth accumulation, and on debt overburden and financial risks among vulnerable groups? iii) Is housing a vehicle for wealth accumulation? Can it be a barrier to residential mobility? iv) Is there a link between homeownership and wealth inequality? Between inequality in housing wealth and in total wealth? A key policy issue addressed in this paper is whether and how housing-related policies affect wealth distribution. Another important issue is whether housing-related policies raise potential trade-offs between equity, or inequality reduction, and other policy objectives such as employment and productivity growth as well as macroeconomic resilience. Informed by the stylised facts and existing evidence, this paper discusses preliminary policy implications of housing reform to promote inclusiveness and social mobility, to enhance efficiency in the allocation of labour and capital and to strengthen macroeconomic resilience.

Hybrid threats as an exogenous economic shock
Shteryo Nozharov

The aim of this study is to contribute to the theory of exogenous economic shocks and their equivalents in an attempt to explain business cycle fluctuations, which still do not have a clear explanation. To this end the author has developed an econometric model based on a regression analysis. Another objective is to tackle the issue of hybrid threats, which have not yet been subjected to a cross-disciplinary research. These were reviewed in terms of their economic characteristics in order to complement research in the fields of defence and security.

Income Inequality and the Great Recession in Central and Eastern Europe
Brzezinski, Michal
This paper uses the European Union Statistics on Income and Living Conditions (EU-SILC) data to study the changes in income inequality in Central and Eastern Europe during the Great Recession (2008-2012) and its determinants. Inequality changes are decomposed using an Oa-xaca-Blinder-like decomposition analysis based on the Recentered Influence Function (RIF) methodology, which allows to split the overall change in inequality into endowment effects associated with changes in the distribution of inequality covariates and coefficient effects, which are related to the changing returns to these covariates. Our results show that the Gini for disposable incomes has increased over 2008-2012 in a statistically significant way for Bulgaria, Estonia, Hungary and Slovenia. For most of the countries with significant inequality increases, falling full-time employment rate played the biggest role in explaining changes in inequality. It accounted for about 50-60% of the Gini change for disposable incomes and for about 60-80% of the Gini change for market incomes. The fall in full-time employment rate had a smaller inequality-increasing effect for disposable incomes in Hungary (about 15% of the Gini in-crease). Increased part-time employment during the recession had either no impact on inequal-ity or was rather inequality-decreasing. We did not find evidence that changes in the incidence of temporary jobs had any impact on income inequality.

Inefficiencies in Digital Advertising Markets
Brett R Gordon,Kinshuk Jerath,Zsolt Katona,Sridhar Narayanan,Jiwoong Shin,Kenneth C Wilbur

Digital advertising markets are growing and attracting increased scrutiny. This paper explores four market inefficiencies that remain poorly understood: ad effect measurement, frictions between and within advertising channel members, ad blocking and ad fraud. These topics are not unique to digital advertising, but each manifests in new ways in markets for digital ads. We focus on relevant findings in the academic literature, recent developments in practice, and promising topics for future research.

Intermediation Below Zero: Effects of Negative Interest Rates on Banks' Performance and Lending
Carbo-Valverde, Santiago,Cuadros-Solas, Pedro,Rodriguez-Fernandez, Francisco
Reducing interest rates below zero may be justified on theoretical grounds while, in practice, it is shown to create a number of distortions and malfunctions in several dimensions of banking and financial markets, which in turn may affect the whole economy. This paper surveys international experience of negative interest rates and the existing theoretical and empirical research of the impact on banks. It also investigates the impact of negative interest rates on the European banking sector using a dataset of 3,155 banks from 36 European countries over 2011â€"2018. Using a difference-in-differences methodology, we show that banks in negative interest-rate environments experienced a 18.4% decrease in their net interest margins compared to other banks operating in European countries that did not adopt negative interest rates. We also show banks taking more customer deposits are more affected.

Keeping It Real or Keeping It Simple? Ownership Concentration Measures Compared
Mavruk, Taylan,Overland, Conny,Sjögren, Stefan
We analyze the distributional properties of ownership concentration measures and find that measures come from different underlying statistical distributions. Consistent with theory, some measures that are classified to represent a monitoring dimension have a positive influence on firm performance; other measures that are interpreted to represent a shareholder conflict dimension are negatively related to firm performance. However, other measures deviate from this pattern, and therefore, we cannot conclude that simple measures can replace complicated measures. Some measures are more suitable for analyzing the relationship between management and owners, whereas other measures are more suitable for analyzing the relationships among owners.

Manipulating the Narrative: Managerial Discretion in the Emphasis of GAAP Metrics in Earnings Announcement Press Releases
Bentley, Jeremiah W.,Stubbs, Kyle,Tian, Yushi,Whited, Robert Lowell
We analyze management’s emphasis (i.e., prominence, frequency, and textual highlighting) of GAAP metrics within the narrative portion of earnings announcement press releases; we assess whether management uses emphasis opportunistically, informatively, or both. We find that management emphasizes informative (i.e. persistent and value-relevant) metrics, but only when the metrics portray favorable performance, indicating that managers are selectively informative. In contrast, managers appear broadly opportunistic, in that they emphasize favorable metrics regardless of metric informativeness. Despite these efforts, analysis of subsequent stock returns reveals no evidence that managerial opportunism successfully misleads investors. These results provide important insights into managerial discretion over a largely unregulated aspect of disclosure. Overall, our results indicate nuances in management’s discretionary emphasis choices that extend beyond earnings management and non-GAAP reporting to the nature of the discussion of GAAP metrics in the narrative portion of earnings announcements. Our results also demonstrate managerial bias in the implementation of the SEC’s Plain English guidelines.

Natural Gas Storage Forecasts: Is the Crowd Wiser?
Fernandez-Perez, Adrian,Garel, Alexandre,Indriawan, Ivan
This paper examines the usefulness of crowdsourced relative to professional forecasts for natural gas storage changes. We find that crowdsourced forecasts are less accurate than professional forecasts on average. We investigate possible reasons for this inferior performance and find evidence of a greater divergence of opinions and a lower incorporation of publicly available information among crowd analysts. We further show that crowdsourced consensus forecast does not influence the market’s expectation of gas storage changes beyond what is already contained in professional consensus forecast, suggesting that crowdsourced forecasts provide little new information. Overall, our results indicate that the incremental usefulness of crowdsourced forecasts for gas market stakeholders is very limited.

Nexus Between Intellectual Capital Disclosure and Corporate Governance Quality: Evidence from IT Companies in India
harun, Yusaf,Kavida, V.
Present days economic situations are changing rapidly. In view of liberalization, globalization and privatization, the business organization is more towards following the system which not only caters to the national standard but also to cater information needed by the stakeholders to make decisions about the corporates. Prior studies are underlining that traditional information provided by the companies in the annual reports are not sufficient for the stakeholders to reach into the right decision. Hence the importance of disclosing additional information on intellectual capital and social, environment and governance practices of companies arisen. Such disclosure can give a further hand for the company on the market price and the previous studies are identified that the difference between one company's book value and market value is the effect made by the IC of the company. This paper is given an attempt to identify the extent of intellectual capital disclosure and the nexus between intellectual capital disclosure and corporate governance disclosure of IT companies in India. The study has revealed that the IT companies in India are decently reporting the information on IC for the selected period and the companies are giving more importance for relational capital. The current study identified that there have a significant relationship with IC disclosure and corporate governance disclosure practices among the selected companies.

On closedness of law-invariant convex sets in rearrangement invariant spaces
Made Tantrawan,Denny H. Leung

This paper presents relations between several types of closedness of a law-invariant convex set in a rearrangement invariant space $\mathcal{X}$. In particular, we show that order closedness, $\sigma(\mathcal{X},\mathcal{X}_n^\sim)$-closedness and $\sigma(\mathcal{X},L^\infty)$-closedness of a law-invariant convex set in $\mathcal{X}$ are equivalent, where $\mathcal{X}_n^\sim$ is the order continuous dual of $\mathcal{X}$. We also provide some application to proper quasiconvex law-invariant functionals with the Fatou property.

Pay-As-You-Drive Insurance Pricing Model
Safoora Zarei,Ali R. Fallahi

Every time drivers take to the road, and with each mile that they drive, exposes themselves and others to the risk of an accident. Insurance premiums are only weakly linked to mileage, however, and have lump-sum characteristics largely. The result is too much driving, and too many accidents. In this paper, we introduce some useful theoretical results for Pay-As-You-Drive in Automobile insurances. We consider a counting process and also find the distribution of discounted collective risk model when the counting process is non-homogeneous Poisson.

Persistence of Averages in Financial Markov Switching Models: A Large Deviations Approach
Stutzer, Michael J.
The behavior of time averages, or functions of them, is important in quantitative research. Over an investment horizon, both the time-averaged number of loan defaults and the time-averaged log gross returns from securities investment, a.k.a. the continuously compounded cumulative rate of return (CROR), are important random variables affecting the performance of loan and securities portfolios, respectively. In ergodic models, the randomness in such averages is eliminated only asymptotically. The statistical theory of Large Deviations provides simply computed and useful tools for analyzing this persistence, and is developed and applied to Markov Switching models of loan defaults and securities portfolio choice.

Project Selection and Competitive Cheap Talk: An Experimental Study
Hamman, John,Martinez-Carrasco, Miguel,Schmidbauer, Eric
When agents with private information compete for resources from a principal and are biased towards their own favored projects (e.g., a CEO decides which division manager’s project to fund) an agency problem arises. However, possible future interaction can mitigate this problem even without reputational concerns, since an agent who induces acceptance of a low-valued project today consumes resources that crowd out even better opportunities that may arrive in the future. Using the theoretical model from Schmidbauer (Games & Economic Behavior, 2017), we devise experiments to address this organizational environment. Specifically, we study the incentives of competing agents to strategically communicate about their own favored project’s value (high or low) to an uninformed decision maker when new projects arrive over time. After observing all advice from agents, the decision maker decides which project to adopt, if any. If no project is adopted subjects enter the next period with new independently drawn projects and continue indefinitely until one project is adopted. We hypothesize that truth telling is easier to support the larger is the benefit from a high-quality project or the less likely it is to occur, but harder to support as agent competition grows. Our findings are broadly consistent with these hypotheses.

Relationship Between Corporate Governance and Dividends: Outcome vs. Substitute Model
Larin, Alexander,Novak, Anna,Khvostova, Irina
The article discusses the relationship between dividend policy and the quality of corporate governance. On the one hand, decisions on payout policy can be viewed as a mechanism for resolving agency conflict or substitutes for best corporate governance practices, on the other hand, the quality of corporate governance itself is a determining factor in corporate financial decisions. Empirical literature fids proof for both types of the relationship. This paper aims to analyze different explanations of mixed results. We find a set of factors that can affect the link between corporate governance quality and dividend payouts. We show that in some cases substitution effect can dominate the payout policy, but the more often indicators tend to increase Outcome effect with the increase in their values. Positive addition of operational margin and beta as well as negative effects of ROA and firm size do not contradict to the shareholder’s interests and support the idea that dividends work in combination with corporate governance practices to meet the needs.

Social Preferences of Investors and Sustainable Investing
Shanker, Harshini
I study portfolio sustainability and capital flow dynamics in socially responsible and conventional mutual funds. I document that a large fraction of conventional funds systematically invests sustainably even without a social mandate, while several socially responsible funds persistently green-wash. Both conventional and socially responsible investors value sustainability as they reward sustainable fund portfolios, but they do not punish weak social performance to the same extent that they reward strong social performance. Socially responsible investors respond to portfolio sustainability only when the fund performs poorly financially. As a result, much green-washing goes unpunished. Further, sustainable portfolios do not financially outperform conventional portfolios, suggesting that investors value sustainability for non-economic reasons.

Status and Reputation Nudging
Rose, Julia,Kirchler, Michael,Palan, Stefan
Status and reputation concerns are conjectured to be important especially in markets with information asymmetries between buyers and sellers, such as in credence goods markets. To investigate the effects of status and reputation on reciprocal behavior of sales personnel in a financial credence goods market, we run a natural field experiment. We send e-mail requests to insurance brokers asking for an appointment. We find that status nudging and, with a larger effect size, reputation nudging in the e-mails increase brokers’ response rates compared to a neutral request. Both effects are robust across all responses, only counting affirmative responses, and in urban and rural areas.

Strategic Default and Tunneling by Firms: An Empirical Investigation
Shanker, Harshini,Subramanian, Krishnamurthy,K, Vaidya Nathan
Strategic default by firms remains a global concern. Although the theoretical literature studies this phenomenon, empirical evidence is scant as data categorizing defaults as strategic or distress-driven is unavailable. We use unique data from India to investigate how firms that strategically default on their debt differ ex-ante in their behavior from distress-driven defaulters. We find that strategic defaulters tunnel cash by making large loans to related parties and these loans are significant ex-ante predictors of strategic default as against distress default. Strategic defaulters make these loans despite their own need for external financing. Further, these loans carry lower rates of interest and are repaid over significantly longer periods than loans made by distress defaulters and non-defaulters. Thus, the magnitude and contractual features of related party loans contain information on the giver’s intent to strategically default on external debt.

Style Transfer with Time Series: Generating Synthetic Financial Data
Brandon Da Silva,Sylvie Shang Shi

Training deep learning models that generalize well to live deployment is a challenging problem in the financial markets. The challenge arises because of high dimensionality, limited observations, changing data distributions, and a low signal-to-noise ratio. High dimensionality can be dealt with using robust feature selection or dimensionality reduction, but limited observations often result in a model that overfits due to the large parameter space of most deep neural networks. We propose a generative model for financial time series, which allows us to train deep learning models on millions of simulated paths. We show that our generative model is able to create realistic paths that embed the underlying structure of the markets in a way stochastic processes cannot.

Sustainable Investing in Equilibrium
Pastor, Lubos,Stambaugh, Robert F.,Taylor, Lucian A.
We present a model of investing based on environmental, social, and governance (ESG) criteria. In equilibrium, green assets have negative alphas, whereas brown assets have positive alphas. The ESG investment industry is at its largest, and the alphas of ESG-motivated investors are at their lowest, when there is large dispersion in investors' ESG preferences. When this dispersion shrinks, so does the ESG industry, even if all investors' ESG preferences are strong. Greener assets are more exposed to an ESG risk factor, which captures shifts in customers' tastes for green products or investors' tastes for green holdings. Under plausible conditions, the latter tastes produce positive social impact.

The Benefits of Collusion: Trademark Similarity and Comovement Performance
Yang, Yiming
Firms are different but also similar. We construct a novel measure of firm-by-firm pairwise trademark similarity to capture product market overlap. We find empirical support for the similarity-comovement relation: (1) trademark similarity can positively predict future profitability correlation; (2) trademark similarity is associated with higher comovement of excess return, and it is more pronounced among firm pairs with indirect industry linkages, high advertising expenses, and large growth stocks in the long term; (3) a possible explanation is proposed: firms tend to collude with their peers by adopting similar corporate actions so as to realize economies of scale while sharing potential risks, as reflected in higher cost efficiency, higher operational profitability, and lower risk exposure. Overall, firms are rivals but also friends.

The Decline of Too Big to Fail
Berndt, Antje,Duffie, Darrell ,Zhu, Yichao
For globally systemically important banks (G-SIBs) with U.S. headquarters, we find large post-Lehman reductions in market-implied probabilities of government bailout, along with big increases in debt financing costs for these banks after controlling for insolvency risk. The data are consistent with significant effectiveness for the official sector's post-Lehman G-SIB failure-resolution intentions, laws, and rules. G-SIB creditors now appear to expect to suffer much larger losses in the event that a G-SIB approaches insolvency. In this sense, we estimate a major decline of "too big to fail.''

The Decoupling of Debt From Productivity (Unproductive Debt and the Impairment of the Real Economy)
Savvides, Savvakis C.
Unproductive debt and a broken banking system are identified as the main reasons why the real economies of developed countries are experiencing financial crises. It highlights concentration of money and power and largely unregulated financial markets as the main drivers impeding the efficient allocation of economic resources into productive uses. The pursuit of return without risk inevitably leads to the transfer of wealth through a failing banking system which collaborates with hedge funds and global wealth management groups who seek low risk and high returns for the benefit of their wealthy clients. It is argued that conditions conducive to economic development hardly exist in highly indebted countries and that wasteful finance inevitably brings about financial crises and recessions. The promise of a return without risk leads financial intermediaries to direct funding towards the capture of existing assets rather than being invested back in the real economy to create new wealth.

The Equivalent Constant-Elasticity-of-Variance (CEV) Volatility of the Stochastic-Alpha-Beta-Rho (SABR) Model
Choi, Jaehyuk,Wu, Lixin
This study presents new analytic approximations of the stochastic-alpha-beta-rho (SABR) model. Unlike existing studies that focus on the equivalent Black-Scholes (BS) volatility, we instead derive the equivalent volatility under the constant-elasticity-of-variance (CEV) model, which is the limit of the SABR model when the volatility of volatility approaches 0. Numerical examples demonstrate the accuracy of the CEV volatility approximation for a wide range of parameters. Moreover, in our approach, arbitrage occurs at a lower strike price than in existing BS-based approximations.

The Market Impact of Uninformed Flows: Evidence from the VIX Futures Market
Brøgger, Søren Bundgaard
I find that rebalancing flows from leveraged and inverse volatility products to the VIX futures market significantly amplify end-of-day price changes. Consistent with the uninformed nature of the flows, the price impact is reversed over the following trading day. While these dynamics generate substantial implicit costs to investors in leveraged volatility products â€" on the same order of magnitude as the management fees â€" I find no evidence that they are driven by predatory trading against the rebalancing flows. On the contrary, my results indicate that the combination of predictability and lack of adverse selection leads arbitrageurs to provide liquidity ahead of rebalancing flows, thereby mitigating the price impact.

Toward an Empirical Investigation of the Pecking Order Theory: Evidence from Chinese Listed Firms
Jiang, Xiaochen,Shen , Jim Huangnan,Lee, Chien-Chiang
The financing method of Chinese listed firms has been studied for a long time, but with inconclusive indications. This paper thus adopts Chinese listed firms’ data from 2003 to 2015 to investigate the pecking order theory by testing the relationship between financing deficit and long-term debt to capital ratio. The empirical analysis documents a positive relationship between financing deficit and changes in the long-term debt ratio, which indicates, to some extent, that the pecking order theory is justified in these firms. Moreover, we find that the market timing effect exudes a substantial negative impact on the pecking order theory, resulting in the listed firms having a considerable incentive to use equity financing when their market value is high. Furthermore, the dynamics of the state ownership structure of Chinese firms adheres to the pecking order theory, suggesting that state-owned enterprises (SOEs) prefer to use long-term debt financing. Finally, the ownership concentration ratio also verifies the pecking order theory, implying that controlling shareholders’ preferred financing method is long-term debt. In general, our empirical analysis shows that stock market performance has a strong impact on capital structure, SOEs have easier access to long-term debt financing, and Chinese listed firms with greater concentrated ownership structure are more prone to use long-term debt.

Trading Under Uncertainty About Other Market Participants
Papadimitriou, Dimitris
I present an asymmetric information model of financial markets that features rational, but uninformed, hedge fund managers who trade against informed and noise traders. Managers are uncertain not only about fundamentals, but also about the proportion of informed to noise traders in the market and use prices to update their beliefs about these uncertainties. Extreme news leads to an increase in both types of uncertainty, while it decreases price informativeness. Prices react asymmetrically to positive and negative news, with higher expected returns at times of increased uncertainty about market composition. The model generates a price-volume relationship that is consistent with established stylized facts. I then extend to a three-period model and study the dynamics of expected returns and volatility.

Transition-Based Expected Credit Losses Calculation under CECL/IFRS 9
Kan, Kin Hung (Felix),Xu, Rui
The new accounting standards, namely, IFRS 9 and CECL, require calculating the expected credit losses (ECL). In this article, we focus on the ECL calculation within the transition-based framework for retail lending products, including residential mortgages, home equity lines of credit (HELOCs), and credit cards. Given the estimated parameters, the ECL calculation for credit cards is exact, whereas the ECL calculations for mortgages and HELOCs are approximate. Particularly, we proposed an upper bound and a lower bound for mortgage ECL under mild assumptions, whereby their approximation errors are typically less than 2% and 0.2%, respectively. Moreover, compared to the path-dependent tree method, the upper and lower bounds can be computer much faster, making them practical candidates for ECL calculations on a long horizon.

Would Ambiguity Averse Investors Hedge Risk in Equity Markets?
Gertsman, Gleb,Frehen, Rik,Werker, Bas J. M.
This paper studies the conjecture that investors prefer derivative markets over the equity market when hedging risks. An investor who wants to hedge, say inflation or crash risk, faces substantially more beta uncertainty in the stock market than in the derivatives market. We show theoretically, that an investor with smooth ambiguity aversion preferences avoids a hedge portfolio consisting of stocks, which is typically subject to large beta uncertainty. The ambiguity averse investor prefers to hedge using derivatives (TIPS and options) which are not subject to beta uncertainty. More specifically, we show that equilibrium risk premiums for assets with large beta uncertainty (long-short portfolio of stocks) decline once derivatives with less beta uncertainty (TIPS and options) are introduced. In line with this theory, we find that the inflation risk premium in the equity market disappears after TIPS were introduced.