Research articles for the 2020-03-03

A Re-examination of the MM Capital Structure Irrelevance Theorem: A Partial Payout Approach
Kouki, Mondher
Contrary to Modigliani and Miller (1958, MM hereafter), Capital Structure is not irrelevant when we consider a firm with a dividend payout policy. This article extends the MM capital structure theorem by relaxing the full payout assumption and introducing retention policy. The theoretical contribution shows that it is possible to verify the theorem when we suppose an investor who exchanges his initial holding for another portfolio composed of consumption and investment. The empirical analysis of this new approach is based on a data set of the USA Electric Utilities and Oil companies for the period 1990-1998. The results show that the relationships between leverage and firm value are significantly affected by the firm’s payout ratio. This finding is largely inconsistent with MM’s view that the division of a stream between cash dividend and retained earnings is a mere detail in dealing with the irrelevance of capital structure.

A Scalar Parameterized Mechanism for Two-Sided Markets
Mariola Ndrio,Khaled Alshehri,Subhonmesh Bose

We consider a market in which both suppliers and consumers compete for a product via scalar-parameterized supply offers and demand bids. Scalar-parameterized offers/bids are appealing due to their modeling simplicity and desirable mathematical properties with the most prominent being bounded efficiency loss and price markup under strategic interactions. Our model incorporates production capacity constraints and minimum inelastic demand requirements. Under perfect competition, the market mechanism yields allocations that maximize social welfare. When market participants are price-anticipating, we show that there exists a unique Nash equilibrium, and provide an efficient way to compute the resulting market allocation. Moreover, we explicitly characterize the bounds on the welfare loss and prices observed at the Nash equilibrium.

AI and Boards of Directors: Preliminary Notes from the Perspective of Italian Corporate Law
Mosco, Gian Domenico
Artificial Intelligence (hereafter: AI) is transforming our everyday life in many important respects. The corporate realm is no exception. Many corporations cannot avoid facing the variety of issues raised by the increasing importance that AI plays within firms. Can an AI-based system be appointed as a board member? Can boards delegate specific tasks to AI-based systems? What are the implications and consequences of AI-involvement when designing the corporate structure? How does the choice to resort to, or to depart from the suggestions of an AI-based system expose, eliminate, or alleviate directorial liability? After a general discussion of AI and its projected use in the corporate context, this article aims to address, in a preliminary fashion, these basic questions within the framework of Italian corporate law.

Asset Pricing vs Asset Expected Returning in Factor-Portfolio Models
Favero, Carlo A.,Melone, Alessandro
Standard factor-portfolio models focus on returns and leave prices undetermined. This approach ignores information contained in the time-series of asset prices, relevant for long-term investors and for detecting potential mis-pricing. To address this issue, we provide a new (co-)integrated methodology to factor modeling based on both prices and returns. Given a long-run relationship between the value of buy-and-hold portfolios in test assets and factors, we argue that a term---naturally labeled as Equilibrium Correction Term (ECT)---should be included when regressing returns on factors. We also propose to validate factor models by the existence of such a term.

CEO Overconfidence and the Speed of Adjustment of Cash Holdings
El Kalak, Izidin,Goergen, Marc,Guney, Yilmaz
We examine the link between CEO overconfidence and speed of adjustment (SOA) of cash holdings for listed US firms. We find a negative effect of overconfident CEOs on the SOA. Further, CEO overconfidence increases the asymmetry in the SOA between firms with excess cash and those with a cash deficit: The SOA is faster (slower) when there is excess cash (deficit). Importantly, we find that the SOA is value-relevant above and beyond cash holding levels. We address endogeneity concerns through difference-in-differences and propensity score matching specifications. Our results are robust to alternative measures of overconfidence, estimation methods, and corporate governance quality.

CEO Social Media Presence and Insider Trading Behavior
Li, Zhichuan Frank,Liang, Claire Y.C.,Tang, Zhenyang
Prior research finds that online social media usage may lower self-control and encourage indulgent behavior. We find that corporate CEOs show similar tendencies: CEOs with online social media presence are more likely to succumb to lower self-control and abuse their information advantage to profit from unethical opportunistic inside trades. Specifically, social media presence strongly predicts the incidence, intensity, and profitability of CEO insider trading activity. Our results only reside in buys (not in sells), especially opportunistic buys which likely contain more material non-public information.

Consumer Debt and Default: A Macroeconomic Perspective
Exler, Florian,Tertilt, Michèle
In this survey, we review the quantitative macroeconomic literature analyzing consumer debt and default. We start by providing an overview of consumer bankruptcy law in the US and document the relevant institutional changes over time. We proceed with a comprehensive empirical section, describing key facts about consumer debt, defaults and delinquencies, as well as charge-off and interest rates for the United States. In addition to the evolution of these variables over time, we construct life-cycle profiles using data from the Survey of Consumer Finances and show that debt and defaults display a clear hump-shaped profile by age. Third, we show how credit card debt has evolved along the income distribution. Finally, we document a large amount of heterogeneity in credit card interest rates across consumers.

Corporate Tax Avoidance and Mutual Fund Ownership
Doellman, Thomas,Huseynov, Fariz,Nasser, Tareque,Sardarli, Sabuhi
We document evidence that mutual funds, on average, are averse to investing in tax-avoiding firms, which seems anomalous given the potential for two likely motives. Mutual fund managers’ compensation incentives may lead them to prefer tax-avoiding firms, or the fact that mutual funds are well-diversified may lead to managers’ indifference. A less obvious motive, and one consistent with our results, is that mutual funds focus on decreasing their tax information processing costs. Our results remain similar when we address endogeneity concerns using several methods, including difference-in-differences and matching methodologies, and after running numerous robustness checks.

Crossing the Credit Channel: Credit Spreads and Firm Heterogeneity
Cesa-Bianchi, Ambrogio
We show that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a unique panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms' expected default -- the excess bond premium. Consistent with the spreads response, we also document that high-leverage firms experience a sharper contraction in debt and investment than low-leverage firms. Our results provide evidence that balance sheet effects are crucial for understanding the transmission mechanism of monetary policy.

Debt and Financial Crises
Koh, Wee Chian,Kose, M. Ayhan,Nagle, Peter Stephen Oliver,Ohnsorge, Franziska,Sugawara, Naotaka
Emerging market and developing economies have experienced recurrent episodes of rapid debt accumulation over the past fifty years. This paper examines the consequences of debt accumulation using a three-pronged approach: an event study of debt accumulation episodes in 100 emerging market and developing economies since 1970; a series of econometric models examining the linkages between debt and the probability of financial crises; and a set of case studies of rapid debt buildup that ended in crises. The paper reports four main results. First, episodes of debt accumulation are common, with more than 500 episodes occurring since 1970. Second, around half of these episodes were associated with financial crises which typically had worse economic outcomes than those without crises-after 8 years, output per capita was typically 6-10 percent lower and investment 15-22 percent weaker in crisis episodes. Third, a rapid buildup of debt, whether public or private, increased the likelihood of a financial crisis, as did a larger share of short-term external debt, higher debt service, and lower reserves cover. Fourth, countries that experienced financial crises frequently employed combinations of unsustainable fiscal, monetary and financial sector policies, and often suffered from structural and institutional weaknesses.

Dollar Borrowing, Firm-Characteristics, and Fx-Hedged Funding Opportunities
Gambacorta, Leonardo,Mayordomo, Sergio,Serena, José María
We explore the link between firms' dollar bond borrowing and their FX-hedged funding opportunities, as reflected in a positive corporate basis (the relative cost of local to synthetic currency borrowing). Consistent with previous research, we first document that firms substitute domestic for dollar borrowing when they have higher dollar revenues or long-term assets and when the corporate basis widens. Importantly, our novel firm-level dataset enables to show that when these funding opportunities appear, the currency substitution is stronger for high-grade firms, as they can offer to investors close substitutes for safe dollar assets. However, firms with higher dollar revenues or long-term assets do not react to changes in the corporate basis. Altogether, the composition of dollar borrowers shifts when the basis widens, as high-grade firms gain importance, relative to firms with operational needs.

Emerging and Developing Economies: Ten Years after the Global Recession
Kose, M. Ayhan,Ohnsorge, Franziska
Although emerging market and developing economies (EMDEs) weathered the global recession a decade ago relatively well, they now appear less well placed to cope with the substantial downside risks facing the global economy. In many EMDEs, the room for monetary and fiscal policies to respond to shocks has eroded; underlying growth potential has slowed; and the momentum for improving policy frameworks, institutions, and business climates seems to have slackened. The experience of the 2009 global recession highlights once again the critical role of policy room in shielding economic activity during adverse shocks. The subsequent decade of anemic growth underlines the need for sound policy frameworks, institutions, and business environments to promote sustained growth. With the global growth outlook weakening and vulnerabilities rising, the policy priority for EMDEs is now to improve resilience to shocks and to lift long-term growth prospects.

Financial Operating Systems
Zetzsche, Dirk A.,Birdthistle, William A.,Arner, Douglas W.,Buckley, Ross P.
One of the most consequential and unexamined developments in global finance has been the recent emergence of massive concentrations of financial technology under the control of individual firms. These financial operating systems are, like computing operating systems, relatively inconspicuous yet extraordinarily powerful. They already dominate the world’s $50 trillion investment fund industry, where they play a critical role in asset management for pensions and institutional investors, and their ambitions are far greater.A harbinger of their growth is a firm with massive size and scope that remains virtually unknown in the United States. China’s Ant Financial â€" an affiliate of Alibaba â€" is fifty percent more valuable than Goldman Sachs, and its payment system, Alipay, is the world’s largest, hosting more than 1 billion clients and executing more than $16 trillion in annual transactions, the equivalent of China’s annual GDP. Large U.S. financial institutions such as BlackRock, Vanguard, Fidelity, J,P.Morgan Chase, and Goldman are working hard to emulate Ant’s scale, to counter the efforts undertaken by dynamic FinTech start-ups and defend their very existence in light of Ant Financial's and other BigTech's scale.Despite intense scholarly focus upon FinTech start-ups, we argue that these financial operating systems created and operated by incumbents and BigTech firms will ultimately have far greater societal impact. Indeed, their quite rise constitutes a powerful effort by established financial houses to strike back against the splashy disruption of FinTech start-ups. We argue that the existence, growth, and success of Financial Operating Systems explains the ongoing concentration in the asset management industry that has so far been analyzed primarily from a corporate governance perspective. We identify the economic reasons for the dramatic ascendancy of these systems and the legal implications arising from their possible failures and successes, specifically analyzing national security, antitrust, cybersecurity, and related theoretical issues accompanying the rise of these financial leviathans.

Flooded through the Back Door: The Role of Bank Capital in Local Shock Spillovers
Rehbein, Oliver,Ongena, Steven
This paper demonstrates that low bank capital carries a negative externality because it amplifies local shock spillovers. We exploit a natural disaster that is transmitted to firms in non-disaster areas via their banks. Firms connected to a strongly disaster-exposed bank with lowest-quartile capitalization significantly reduce total borrowing by 4.8%, employment by 2.7% and tangible assets by 7.5% compared to similar firms connected to a well-capitalized bank. These findings translate to negative regional effects on GDP and unemployment. Banks also particularly reduce their exposure to this-time-unaffected but in general disaster-prone areas following a disaster.

Follow the Assets: Is the US Listing Gap 'Real'?
Eckbo, B. Espen,Lithell, Markus
Does the sharp post-1996 decline in the US listing count signify declining public-market competitiveness? We present an acquisition-based `real' listing count that accurately tracks movements of real assets to and from public companies. This real count hardly peaks and it does not exhibit a listing gap vis-a-vis real counts in other countries. Moreover, nominal listing peaks followed by sharp declines are common internationally. Importantly, while the US decline in large part reflects movement of real assets between public firms, declines elsewhere instead tunnel assets out of public markets, pointing to a US real listing advantage.

Global Imbalances and Policy Wars at the Zero Lower Bound
Caballero, Ricardo J.,Farhi, Emmanuel,Gourinchas, Pierre-Olivier
This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. We establish four main results: (i) Liquidity traps spread to the rest of the world through the current account, which we illustrate with a new Metzler diagram in quantities; (ii) Beggar-thy-neighbor currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (iii) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; (iv) At the ZLB, net issuers of safe assets experience a disproportionate share of the global stagnation.

Influence Of Climate Change On The Corn Yield In Ontario And Its Impact On Corn Farms Income At The 2068 Horizon
Antoine Kornprobst,Matt Davison

Our study aims at quantifying the impact of climate change on corn farming in Ontario under several warming scenarios at the 2068 horizon. It is articulated around a discrete-time dynamic model of corn farm income with an annual time-step, corresponding to one agricultural cycle from planting to harvest. At each period, we compute the income given the corn yield, which is highly dependent on weather variables. We also provide a reproducible forecast of the yearly distribution of corn yield for 10 cities in Ontario. The price of corn futures at harvest time is taken into account and we fit our model by using 49 years of historical data. We then conduct out-of-sample Monte-Carlo simulations to obtain the farm income forecasts under a given climate change scenario.

Intermediated Asymmetric Information, Compensation, and Career Prospects
Kaniel, Ron,Orlov, Dmitry
Adverse selection harms workers, but benefits firms able to identify talent. An informed intermediary expropriates its agents’ ability by threatening to fire and expose them to undervaluation of their skill. Agents’ track record gradually reduces the intermediary’s information advantage. We show that in response, the intermediary starts churning well-performing agents she knows to be less skilled. Despite leading to an accelerated reduction in information advantage, such selectivity boosts profits as retained agents accept below-reservation wages to build a reputation faster. Agents prefer starting their careers working for an intermediary, as benefits from building reputation faster more than offsets expropriation costs. We derive implications of this mechanism for pay-for-performance sensitivity, bonuses, and turnover. Our analysis applies to professions where talent is essential, and performance is publicly observable, such as asset management, legal partnerships, and accounting firms.

Loan Insurance, Market Liquidity, and Lending Standards
Ahnert, Toni,Kuncl, Martin
We examine loan insurance when lenders can screen at origination, learn loan quality over time, and can sell loans in secondary markets. Loan insurance reduces lending standards but improves market liquidity. Lenders with worse screening ability insure, which commits them to not exploiting future private information about loan quality and improves the quality of uninsured loans traded. This externality implies insufficient insurance. A regulator achieves constrained efficiency by (i) guaranteeing a minimum price of uninsured loans to eliminate a welfare-dominated illiquid equilibrium; and (ii) subsidizing loan insurance in the liquid equilibrium. Our results can inform the design of government-sponsored mortgage guarantees.

Loan Types and the Bank Lending Channel
Ivashina, Victoria,Laeven, Luc,Moral-Benito, Enrique
Using credit-registry data for Spain and Peru, we document that four main types of commercial credit-asset-based loans, cash flow loans, trade finance and leasing-are easily identifiable and represent the bulk of corporate credit. We show that credit growth dynamics and bank lending channels vary across these loan types. Moreover, aggregate credit supply shocks previously identified in the literature appear to be driven by individual loan types. The effects of monetary policy and the effects of the financial crisis propagating through banks' balance sheets are primarily driven by cash flow loans, whereas asset-based credit appears to be largely insensitive to these types of effects.

Machine Learning Portfolio Allocation
Michael Pinelis,David Ruppert

We find economically and statistically significant gains from using machine learning to dynamically allocate between the market index and the risk-free asset. We model the market price of risk to determine the optimal weights in the portfolio: reward-risk market timing. This involves forecasting the direction of next month's excess return, which gives the reward, and constructing a dynamic volatility estimator that is optimized with a machine learning model, which gives the risk. Reward-risk timing with machine learning provides substantial improvements in investor utility, alphas, Sharpe ratios, and maximum drawdowns, after accounting for transaction costs, leverage constraints, and on a new out-of-sample test set. This paper provides a unifying framework for machine learning applied to both return- and volatility-timing.

Mobility Restrictions and Risk-Related Agency Conflicts: Evidence from a Quasi-Natural Experiment
Islam, Emdad,Masulis, Ronald W.,Rahman, Lubna
We exploit the staggered court adoption of the Inevitable Disclosure Doctrine (IDD) as a quasi-natural experiment to study whether restricting executive mobility affects corporate risk-taking. While strengthening trade secrets protection, IDD also aggravates managers’ career concerns by restricting their outside employment options. We use a unique dataset to assess managers’ reliance on external employment options. We find that managers experiencing exacerbated career concerns after IDD adoption, trade-off the benefits of trade secrets protection against costs of risk-related agency conflicts. Thus, career concerns that trigger risk-related agency conflicts distort corporate financing and investments, even when firms’ trade secret threats decline.

Monetary and Macroprudential Policy with Endogenous Risk
Adrian, Tobias,Duarte, Fernando,Liang, Nellie,Zabczyk, Pawel
We extend the New Keynesian (NK) model to include endogenous risk. Lower interest rates not only shift consumption intertemporally but also conditional output risk via the impact on risk-taking, giving rise to a vulnerability channel of monetary policy. The model fits the conditional output gap distribution and can account for medium-term increases in downside risks when financial conditions are loose. The policy prescriptions are very different from those in the standard NK model: monetary policy that focuses purely on inflation and output-gap stabilization can lead to instability. Macroprudential measures can mitigate the intertemporal risk-return tradeoff created by the vulnerability channel.

No-Arbitrage Commodity Option Pricing with Market Manipulation
René Aïd,Giorgia Callegaro,Luciano Campi

We design three continuous--time models in finite horizon of a commodity price, whose dynamics can be affected by the actions of a representative risk--neutral producer and a representative risk--neutral trader. Depending on the model, the producer can control the drift and/or the volatility of the price whereas the trader can at most affect the volatility. The producer can affect the volatility in two ways: either by randomizing her production rate or, as the trader, using other means such as spreading false information. Moreover, the producer contracts at time zero a fixed position in a European convex derivative with the trader. The trader can be price-taker, as in the first two models, or she can also affect the volatility of the commodity price, as in the third model. We solve all three models semi--explicitly and give closed--form expressions of the derivative price over a small time horizon, preventing arbitrage opportunities to arise. We find that when the trader is price-taker, the producer can always compensate the loss in expected production profit generated by an increase of volatility by a gain in the derivative position by driving the price at maturity to a suitable level. Finally, in case the trader is active, the model takes the form of a nonzero-sum linear-quadratic stochastic differential game and we find that when the production rate is already at its optimal stationary level, there is an amount of derivative position that makes both players better off when entering the game.

Online Appendix to 'Liquidity, Information Production, and Debt-Equity Choice'
Cheung, William M.,Im, Hyun Joong,Noe, Thomas H. ,Zhang, Bohui
This appendix comprises three parts. The first part presents proofs of lemmas and propositions. The second part presents some additional robustness tests. The third part reports the results of analyses designed to reconcile our results with a prior empirical study on a closely related issue. The last part provides evidence that the Russell 1000/2000 reconstitution serves as a valid exogenous shock to stock liquidity.

Operational and Cyber Risks in the Financial Sector
Aldasoro, Iñaki,Gambacorta, Leonardo,Giudici, Paolo,, Thomas
We use a unique cross-country dataset at the loss event level to document the evolution and characteristics of banks' operational risk. After a spike following the great financial crisis, operational losses have declined in recent years. The spike is largely accounted for by losses due to improper business practices in large banks that occurred in the run-up to the crisis but were recognised only later. Operational value-at-risk can vary substantially - from 6% to 12% of total gross income - depending on the method used. It takes, on average, more than a year for operational losses to be discovered and recognised in the books. However, there is significant heterogeneity across regions and event types. For instance, improper business practices and internal fraud events take longer to be discovered. Operational losses are not independent of macroeconomic conditions and regulatory characteristics. In particular, we show that credit booms and periods of excessively accommodative monetary policy are followed by larger operational losses. Better supervision, on the other hand, is associated with lower operational losses. We provide an estimate of losses due to cyber events, a subset of operational loss events. Cyber losses are a small fraction of total operational losses, but can account for a significant share of total operational value-at-risk.

Private Credit Under Political Influence: Evidence from France
Delatte, Anne Laure,Matray, Adrien,Pinardon Touati, Noémie
Formally independent private banks change their supply of credit to the corporate sector for the constituencies of contested political incumbents in order to improve their reelection prospects. In return, politicians grant such banks access to the profitable market for loans to local public entities among their constituencies. We examine French credit registry data for 2007-2017 and find that credit granted to the private sector increases by 9%-14% in the year during which a powerful incumbent faces a contested election. In line with politicians returning the favor, banks that grant more credit to private firms in election years gain market share in the local public entity debt market after the election is held. Thus we establish that, if politicians can control the allocation of rents, then formal independence does not ensure the private sector's effective independence from politically motivated distortions.

Private Equity Portfolio Companies: A First Look at Burgiss Holdings Data
Brown, Gregory W.,Harris, Robert S.,Hu, Wendy,Jenkinson, Tim,Kaplan, Steven N.,Robinson, David T.
This paper provides a first look at newly available data on the holdings of private equity (PE) funds. Because research has been hampered by the lack of comprehensive, high-quality data on portfolio companies, this new source offers the potential for a wide range of research. Provided by Burgiss, a global provider of data and analytics to investors in PE funds (limited partner investors or LPs), the data are gathered from the financial reports of general partners (GPs) to LPs who are Burgiss clients. The sample covers over 45,000 investments in funds’ portfolio companies (in buyout and venture capital); moreover, the coverage is expected to grow through a phased release process. The paper describes preliminary findings on sample characteristics and offers a high-level view on aspects of performance in hopes of inspiring additional research. Returns to investments in portfolio companies are highly variable and skewed. This is particularly true of venture capital where many investments turn out worthless and average performance is boosted by a few spectacular successes that create the bulk of fund value. Performance is related to a number of factors (including investment size, duration of the investment and levels of fund raising), with patterns differing for buyout and venture capital investments.

Supply Chain Concentration and Cost of Capital
Upson, James,Wei, Chao
This study examines the impact of supply chain concentration on firm’s financing costs. We show that purchasing firms engaging in multiple supplier relationships are subject to higher firm risk and cost of equity. This effect is more pronounced when the supplier’s financial performance deteriorates or when the purchasing firm’s purchase demand is large. We also provide evidence that lower supply chain concentration increases firm’s cost of debt. Lenders charge higher interest rate on the bank loans to compensate for additional risk implied from managing multiple supplier relationships, in particular when the loan is unsecured. Finally, our results are robust to combining the suppliers producing similar output and endogeneity issues.

The Case for Empowering Quality Shareholders
Cunningham, Lawrence A.
Special Note: This Article is part of The Quality Shareholder Initiative at the Center for Law, Economics and Finance (C-LEAF), at The George Washington University Law School, Prof. Lawrence A. Cunningham, Faculty Director.Anyone can buy stock in a public company, but not all shareholders are equally committed to a company’s long-term success. In an increasingly fragmented financial world, shareholders’ attitudes toward the companies in which they invest vary widely, from time horizon to conviction. Faced with indexers, short-term traders, and activists, it is more important than ever for businesses to ensure that their shareholders are dedicated to their missions. Today’s companies need “quality shareholders,” as Warren Buffett called those who “load up and stick around,” or buy large stakes and hold for long periods. While scholars in recent years have extensively debated indexers, short-term traders, and activists, they have paid scant attention to quality shareholders and their critical role in corporate finance and governance. This Article corrects this oversight by highlighting the quality shareholder cohort. Adding this fresh perspective confirms some of the angst about myopic short-termism on the one hand and ignorant indexing on the other, but rather than regulate related behaviors, the fresh perspective invites attention to empowering quality shareholders. In particular, rather than taxing short-term shareholders or passing through indexer voting rights to fund beneficiaries, this Article explains how companies could simply increase the voting power of their quality shareholders.

The Conundrum of Common Ownership
Hill, Jennifer G.
One of the most contentious debates in corporate law today, the common ownership debate. It focuses on the situation where large financial institutions with widely diversified portfolios own shares in competing companies within a particular economic sector. A number of scholars have argued that, even where these institutions have relatively small ownership stakes, their collective holdings in competing companies produce anticompetitive effects. The common ownership debate is a by-product of major changes to capital market structure, which have triggered concerns about the rise of institutional investors, the growth of index investing, and increasing ownership concentration in financial markets. Although the common ownership theory began in the United States, it is now attracting attention around the world. This article examines three possible narratives that exist in the literature relating to institutional investors and common ownership, and seeks to contextualize the theory within a broad range of international corporate governance developments relating to institutional investment since the early 1990s. The article analyzes certain aspects of the common ownership theory in the light of contemporary corporate governance developments and debate, and concludes that drawing regulatory and policy conclusions from current mixed empirical evidence relating to common ownership is premature.

The Impacts of Stricter Merger Legislation on Bank Mergers and Acquisitions: Too-Big-To-Fail and Competition
Carletti, Elena,Ongena, Steven,Siedlarek, Jan-Peter,Spagnolo, Giancarlo
The effect of regulations on the banking sector is a key question for financial intermediation. This paper provides evidence that merger control regulation, although not directly targeted at the banking sector, has substantial economic effects on bank mergers. Based on an extensive sample of European countries, we show that target announcement premia increased by up to 16 percentage points for mergers involving control shifts after changes in merger legislation, consistent with a market expectation of increased profitability. These effects go hand-in-hand with a reduction in the propensity for mergers to create banks that are too-big-to-fail in their country.

The Non-U.S. Bank Demand for U.S. Dollar Assets
Adrian, Tobias,Xie, Peichu
The USD asset share of non-U.S. banks captures the demand for dollars by these investors. An instrumental variable strategy identifies a causal link from the USD asset share to the USD exchange rate. Cross-sectional asset pricing tests show that the USD asset share is a highly significant pricing factor for carry trade strategies. The USD asset share forecasts the dollar with economically large magnitude, high statistical significance, and large explanatory power, both in sample and out of sample, pointing towards time varying risk premia. It takes 2-5 years for exchange rate risk premia to normalize in response to demand shocks.

The Nuisance of Stock Distributions
Guo, Rong,Rydqvist, Kristian
We re-examine the abnormal stock return over the ex-day of stock splits, stock dividends, and rights offers with an extended version of the model by Frank and Jagannathan (1998). Regression analysis suggests that an underlying nuisance cost in the amount of 0.57% of the stock price and a bid-ask bounce that occurs with probability 23% capture the essential cross-section variation in the abnormal stock return. Further analysis of bid and ask quotes questions the bid-ask-bounce interpretation. The nuisance cost of stock distributions decreases over time, and it vanishes with high-frequency trading. With the development of internet, share price management falls out of fashion, and stock distributions are no longer a concern.

The Regulatory Role of Credit Ratings and Voluntary Disclosure
Basu, Riddha,Naughton, James P.,Wang, Clare
We provide evidence suggesting that corporate credit rating changes have an effect on firms’ voluntary disclosure behavior that is independent of the information they convey about firm fundamentals. Our analyses exploit two separate quasi-experimental settings that generate either exogenous credit rating downgrades or credit rating upgrades (i.e., credit rating label changes). We find evidence of a negative relation between the direction of the credit rating label change and the provision of voluntary disclosure in both settings â€" firms respond to exogenous downgrades by increasing voluntary disclosure and to exogenous upgrades by decreasing voluntary disclosure. The effects we document are independent of the information role of credit ratings, and are instead attributable to the regulatory role of credit ratings. Overall, our analyses indicate that credit rating agencies as gatekeepers influence firms’ provision of voluntary disclosure.

The Role of Uncertainty in Controlling Climate Change
Yongyang Cai

Integrated Assessment Models (IAMs) of the climate and economy aim to analyze the impact and efficacy of policies that aim to control climate change, such as carbon taxes and subsidies. A major characteristic of IAMs is that their geophysical sector determines the mean surface temperature increase over the preindustrial level, which in turn determines the damage function. Most of the existing IAMs are perfect-foresight forward-looking models, assuming that we know all of the future information. However, there are significant uncertainties in the climate and economic system, including parameter uncertainty, model uncertainty, climate tipping risks, economic risks, and ambiguity. For example, climate damages are uncertain: some researchers assume that climate damages are proportional to instantaneous output, while others assume that climate damages have a more persistent impact on economic growth. Climate tipping risks represent (nearly) irreversible climate events that may lead to significant changes in the climate system, such as the Greenland ice sheet collapse, while the conditions, probability of tipping, duration, and associated damage are also uncertain. Technological progress in carbon capture and storage, adaptation, renewable energy, and energy efficiency are uncertain too. In the face of these uncertainties, policymakers have to provide a decision that considers important factors such as risk aversion, inequality aversion, and sustainability of the economy and ecosystem. Solving this problem may require richer and more realistic models than standard IAMs, and advanced computational methods. The recent literature has shown that these uncertainties can be incorporated into IAMs and may change optimal climate policies significantly.

The Side Effects of Safe Asset Creation
Acharya, Sushant,Dogra, Keshav
We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safety widens spreads, causing the ZLB to bind and increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. This entails permanently lower investment which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt is optimal if alternative instruments are unavailable. Alternative policies which permit negative real interest rates - higher inflation targets, negative nominal rates - achieve full employment without reducing investment.

Twin Default Crises
Mendicino, Caterina,Nikolov, Kalin,Rubio Ramírez, Juan,Suarez, Javier,Supera, Dominik
We study the interaction between borrowers' and banks' solvency in a quantitative macroeconomic model with financial frictions in which bank assets are a portfolio of defaultable loans. We show that ex-ante imperfect diversification of bank lending generates bank asset returns with limited upside but significant downside risk. The asymmetric distribution of these returns and their implications for the evolution of bank net worth are important for capturing the frequency and severity of twin default crises -simultaneous rises in firm and bank defaults associated with sizeable negative effects on economic activity. As a result, our model implies higher optimal capital requirements than common specifications of bank asset returns, which neglect or underestimate the impact of borrower default on bank solvency.