Research articles for the 2020-06-12

(R)Evolution in Entrepreneurial Finance? The Relationship between Cryptocurrency and Venture Capital Markets
Shakhnov, Kirill,Zaccaria, Luana
We propose a model of startup staged financing where entrepreneurs choose between ICO and traditional entrepreneurial finance sources such as Venture Capital (VC). While in early stages token sales allow startups to leverage network externalities by building a large customer base, VC's value-adding services enhance productivity in later stages. Due to complementarities between externality effects and value-adding services, the efficient solution to the entrepreneur's problem is to use both funding methods sequentially. However, the lack of transparency in cryptocurrency markets prevents most startups from choosing the optimal funding path. A selection equilibrium arises where entrepreneurs with low-externality projects choose to raise VC capital only in order to avoid adverse selection in later stages. Using data on funding rounds of blockchain startups, we provide empirical evidence for both the complementarity assumption and the selection result.

A Structural Model of Analyst Forecasts: Applications to Forecast Informativeness and Dispersion
Clarke, Jonathan,Kim, Soohun,Lee, Kyuseok,Seo, Kyoungwon
We modify Morris and Shin (2002) to develop a structural model of analyst earnings forecasts. The model allows for analysts to herd due to informational effects and non-informational incentives. The benefits of our model are twofold: (1) we can decompose earnings forecasts into informational and bias components, and measure the stock price response to each component, and (2) we can estimate the impact of bias on the dispersion in analyst forecasts. In a pair of empirical exercises, we find a strong relation between the informational component of analyst forecasts and announcement period stock returns. We also find that analyst biases do not have an impact on forecast dispersion.

Ambiguity, Earnings Surprises, and Stock Returns
Kozhan, Roman,Li, Lucius
This paper studies the implications of information ambiguity on the relation between earnings surprises and contemporaneous stock returns. The firm-level earnings response coefficient increases with the ambiguity about firm-specific cash-flow news. Furthermore, there is a positive contemporaneous relation between aggregate earnings growth and returns for portfolios with high firm-level ambiguity. A high degree of ambiguity impedes diversification of firm-specific news, thereby yielding significant cash-flow news effects on the aggregate returns. The ambiguity about discount-rate news further amplifies those effects. Our results emphasize the importance of information ambiguity when considering the return-earnings relation.

Are Bankers Crying Wolves? The Risk-Based Approach in Money Laundering Regulation and its Effects
Dalla Pellegrina, Lucia,Di Maio, Giorgio,Masciandaro, Donato,Saraceno, Margherita
Excessive and useless reporting, called “crying wolf effect”, is a crucial shortcoming that any anti-money laundering (AML) design aims to address and fix. For this reason, in these years the AML policy has switched both in the US and in Europe from a rule- to a risk-based approach. This study investigates theoretically and empirically whether the risk-based approach delivers the expected results. The theoretical model shows that a tradeoff can emerge between accuracy â€" less type-I and type-II errors â€" and deterrence. The empirical analysis, conducted in the aftermath of the introduction of the risk-based approach confirms such a tradeoff in the case of Italy, where deterrence is maximized while sacrificing accuracy. In this respect, data suggest that Italian bankers are likely to act as crying wolves.

Asymmetric Bitcoin Volatility under Structural Breaks
Ghoddusi, Hamed,Morovati, Mohammad,Rafizadeh, Nima
We show that incorporating endogenously determined structural breaks into an asymmetric GARCH model reduces volatility persistence in Bitcoin prices. We find that both good and bad news have less impact on volatility if structural breaks are incorporated in a GARCH-type model. Hence, previous studies have overestimated the impact of news on volatility due to inadvertently ignoring these structural breaks in Bitcoin volatility. In addition, the results indicate that Bitcoin shocks die out more quickly than previously thought. Our findings suggest that it is better to include both asymmetric effects and structural breaks in a GARCH model to correctly build Bitcoin price volatility models.

Bank Equity Ownership and Corporate Hedging: Evidence from Japan
Limpaphayom, Piman,Rogers, Daniel A.,Yanase, Noriyoshi
This study examines the relation between bank equity ownership and corporate hedging in Japan, an economy where banks are allowed, to a certain limit, to hold shares of firms to which they lend funds. The results show that bank equity ownership is positively related to the corporate usage of derivatives. We also find very little evidence that firm-level financial constraints affect derivatives usage. We further analyze the relation between derivatives usage and firm value to assess whether derivatives usage is driven by bank rent-seeking or speculative behavior. We find that derivatives usage is positively related to firm value providing support to the notion that bank equity ownership increases corporate hedging which, in turn, leads to high firm valuation. Robustness tests show that the relation between hedging and main bank equity ownership is not driven by endogeneity. In the end, our findings suggest that corporate hedging is driven by risk-averse incentives resulting from bank monitoring. We conclude that, in addition to relevant economic factors, ownership structure can also affect corporate hedging behavior.

Bank Lending in the Knowledge Economy
Dell'Ariccia, Giovanni,Kadyrzhanova, Dalida,Minoiu, Camelia,Ratnovski, Lev
We study the composition of bank loan portfolios during the transition of the real sector to a knowledge economy where firms increasingly use intangible capital. Exploiting heterogeneity in bank exposure to the compositional shift from tangible to intangible capital, we show that exposed banks curtail commercial lending and reallocate lending to other assets, such as mortgages. We estimate that the substantial growth in intangible capital since the mid-1980s explains around 30% of the secular decline in the share of commercial lending in banks' loan portfolios. We provide suggestive evidence that this reallocation increased the riskiness of banks' mortgage lending.

Beta in the tails
Bandi, Federico M.,Renò, Roberto
Do hedge funds hedge? In negative states of the world, often not as much as they should. For several styles, we report larger market betas when market returns are low (i.e., “beta in the tails”). We justify this finding through a combination of negative-mean jumps in the market returns and large market jump betas: when moving to the left tail of the market return distribution jump dynamics dominate continuous dynamics and the overall systematic risk of the fund is driven by the higher systematic risk associated with return discontinuities. Methodologically, the separation of continuous and discontinuous dynamics is conducted by exploiting the informational content of the high-order infinitesimal cross-moments of hedge-fund and market returns.

Capital Market Consequences of Audit Office Size: Evidence from Stock Price Crash Risk
Callen, Jeffrey L.,Fang, Xiaohua,Xin, Baohua,Zhang, Wenjun
This study examines the association between the office size of engagement auditors and their clients’ future stock price crash risk, a consequence of managerial bad news hoarding. Using a sample of U.S. public firms with Big 4 auditors, we find robust evidence that local audit office size is significantly and negatively related to future stock price crash risk. The evidence is consistent with the view that large audit offices effectively detect and deter bad news hoarding activities in comparison with their smaller counterparts. We further explore two possible explanations for these findings, the Auditor Incentive Channel and the Auditor Competency Channel. Our empirical tests offer support for both channels.

Convertible Bond Valuation with Regime Switching
Jang, Bong-Gyu,Kim, Byung-June
We provide an analytic valuation formula for convertible bonds with regime-switching market conditions. We divide the convertible bond into a coupon-bearing bond component and an American-type exchange option component. We develop a new valuation method of the exchange option component by combining Margrabe (1978)'s exchange option valuation approach and Geske and Johnson (1984)'s pseudo-American option valuation approach. A two-state regime-switching example shows the superiority of our model in both accuracy and computation speed compared to the Monte-Carlo simulation method.

Corona Crisis Cartels: Sense and Sensibility
Schinkel, Maarten Pieter,d'Ailly, Abel
Western competition authorities responded quick and united to the COVID-19 pandemic with a generous exemption from cartel law for any companies that aim to solve pressing scarcities in anticompetitive collaboration. However there is little reason to expect more supply, fair distribution, low prices or wider use of personal protective equipment from horizontal collaboration. The agencies should better have stood by competition instead. Embracing the policy might have been about public image, more than high expectations of collaboration amongst rivals contributing to solving the needs associated with COVID-19. That experimental treatment is not without side effects. By relaxing the first article of antitrust, the agencies undermined their authority, just when we need them to effectively control the many markets that are rapidly consolidating, due to the consequences of the lock-downs.

Debt De-risking
Parise, Gianpaolo,Cutura, Jannic,Schrimpf, Andreas
We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard.

Derivative Dealers’ Disclosures of Offsetting Derivatives: Real Effects and the Evaluation of Credit Risk Uncertainty
Ryan, Stephen G.,Seitz, Barbara
To mitigate counterparty risks, derivatives dealers and their frequent counterparties typically engage in bilateral master netting agreements (MNAs) that cover many derivatives with largely offsetting gross fair values. MNAs specify the close out and net settlement of the covered derivatives only in the event of a default, and they provide substantive control rights to the non-defaulting counterparty to implement any close out. These contractual features and related frictions raise uncertainty about the timing, completeness, and fairness of any close out, and thus about the credit risk of the dealers engaging in these agreements. Since 2013, IFRS and US GAAP have required firms to disclose the gross, reported, and net fair values of derivatives that are presented net on the balance sheet or are presented gross and covered under enforceable MNAs. These disclosures provide new information about net derivatives fair values for IFRS dealers but no new information for US GAAP dealers. We first hypothesize and provide evidence that the 2013 disclosure requirements have much larger and more significant real effects for IFRS dealers, which reduce the extent of their offsetting gross derivatives and increase the effectiveness of their use of MNAs, than for US GAAP dealers. We then hypothesize and provide evidence that the amounts of net derivative fair values reported by dealers under these requirements, as well as the quality of dealers’ disclosures provided under the requirements, help users of financial reports evaluate credit risk uncertainty for both sets of dealers.

Does Routine Labor Generate Routine Earnings?
Cao, Yi,Seybert, Nicholas
A substantial body of prior research investigates how skills and attributes of upper management affect firm policies and performance, but the impact of workers outside of upper management has received little attention due to scarcity of data involving lower-level workers. We propose that utilization of routine labor represents an important source of variation in firm earnings persistence and predictability. Defining routine labor as occupations at greater risk for future automation, we find that firms hiring more routine labor generate more predictable and persistent earnings. Interestingly, earnings persistence is driven by accruals rather than cash flows, indicating that routine labor may not create smoother underlying economics. Routine labor generates the most predictable and persistent accruals when managers have higher ability and when firm efficiency is higher. Analysis within the manufacturing industry shows that routine labor especially impacts accrual persistence when firms build up inventory and therefore accrue a greater proportion of labor cost. In addition, external economic policy in the form of state minimum wage increases negatively impacts the link between routine labor and accrual persistence, presumably due to a less flexible and more costly labor supply for routine jobs.

Doing Good When Doing Well: Evidence on Real Earnings Management
Grieser, William,Hadlock, Charles J.,Pierce, Joshua R.
We provide evidence on earnings management by exploiting temporary exogenous shocks to utility firms’ sales in the form of annual weather variation. We find that sample firms’ sales are highly sensitive to annual changes in average temperatures in the region where the firm operates, but this sensitivity disappears quickly moving down the income statement. We interpret this as indirect evidence of earnings management. In search of direct evidence, we study charitable giving decisions by sample firms and uncover a significant positive sensitivity of charitable spending to weather-driven demand shocks. Given the magnitude of this detected relation and the economic returns from charitable giving, this behavior appears to be driven by a desire to smooth earnings.

Equity Financing Risk
Medhat, Mamdouh,Palazzo, Berardino
A risk factor linked to aggregate equity issuance conditions explains the empirical performance of investment factors based on the asset growth anomaly of Cooper, Gulen, and Schill (2008). This new risk factor, dubbed equity financing risk (EFR) factor, subsumes investment factors in leading linear factor models. Most importantly, when substituted for investment factors, the EFR factor improves the overall pricing performance of linear factor models, delivering a significant reduction in absolute pricing errors and their associated t-statistics for several anomalies, including the ones related to R&D expenditures and cash-based operating profitability.

Estimating the Need for Additional Bankruptcy Judges in Light of the COVID-19 Pandemic
Iverson, Benjamin Charles,Ellias, Jared A.,Roe, Mark J.
This Essay (the “Essay”) assesses the bankruptcy system’s ability to absorb an anticipated surge of financial distress among American consumers, businesses and municipalities as a result of COVID-19. This document summarizes our research methodology, which uses economic data to estimate the court time pressure that consumers, small businesses and large firms could place on the bankruptcy system, district-by-district.Historically, an increase in the unemployment rate has been a leading indicator of the volume of bankruptcy filings that will occur months later. If prior trends hold constant, the May 2020 unemployment rate of 13.3% will result in a substantial increase in all types of bankruptcy filings. Clearly, mitigation, governmental assistance, the unique features of the COVID-19 pandemic, and judicial triage will help reduce the volume of bankruptcies to some extent, and it is plausible that the impact of the recent unemployment spike will be smaller than history would otherwise predict. We hope this will be so. Yet, even assuming that the worst-case scenario could be averted, our analysis suggests substantial, temporary investments in the bankruptcy system may be needed. Our model assumes that Congress would like to have enough bankruptcy judges such that the average judge would not be pressed to work more than was the case during the last bankruptcy peak in 2010, when the bankruptcy system was pressured and the public case-weights indicate that judges worked 50 hour weeks on average.To keep the judiciary’s workload at 2010 levels, we project that, in the worst-case scenario, the bankruptcy system could need as many as 246 temporary judges, a very large number. But even in our most optimistic model, the bankruptcy system will still need 50 additional temporary bankruptcy judgeships, as well as the continuation of all temporary judgeships.

Exchange Design and Efficiency
Rostek, Marzena J.,Yoon, Ji Hee
Most assets clear independently rather than jointly. This paper presents a model based on the uniform-price double auction which accommodates arbitrary restrictions on market clearing, including asset by asset market clearing (allowed when demand for each asset is contingent only on the price of that asset) and joint market clearing for all assets (required when demand for each asset is contingent on prices of all assets). Introducing additional trading protocols for traded assets - neutral when the market clears jointly - or linking existent trading protocols are generally not redundant innovations, even if all traders participate in all protocols. Multiple protocols that clear independently can always be designed to be at least as efficient as joint market clearing for all assets. Separation in market clearing can enhance diversification and risk sharing. When traders have price impact, regulation of innovation in trading technology should be guided by market characteristics.

Financial and Real Effects of Government Monitoring: Evidence From Commercial Bank Loans
De Simone, Rebecca
I use a 2009 redesign of the tax system in Ecuador to evaluate the effect of tax enforcement on firms' cost of capital and real decisions. I find that if a firm is included in a group that is disproportionately monitored, i.e., audited annually by the tax authority with certainty, then it accesses new bank debt at a significantly lower cost even though the average audited firm pays higher taxes. Additionally, monitored firms increased their investments in human and physical capital. I use a regression discontinuity design based on the decision rules of the Ecuadorian tax authority to control for selection bias in their decision of which firms to monitor. Finally, I provide evidence that tax enforcement reduces agency frictions between the firm and its lenders, which is reflected in the lower interest rate on new debt. The wider implications are: (1) that credible tax enforcement can play a corporate governance role, raising the value of the firm to outside stakeholders such as creditors; and, (2) that tax enforcement is an effective and fiscally positive way to stimulate firm investment in settings where high agency frictions constrains lending.

Firm Opacity and Islamic Securities Issuance
Al Balooshi, Sara,Iannino, Maria Chiara,Abedifar, Pejman
We study the relationship between opacity and external funding decisions when different types of sukuk and conventional financial instruments are available. For this purpose, we construct an opacity index for 107 Malaysian firms issuing sukuk and conventional financial instruments during 2005-2017. We apply a mixed-level multinomial logistic model for our analysis. We find that as opacity levels increase, the probability of firms issuing zero-coupon sukuk is the greatest followed by conventional bonds and profit-loss sharing sukuk, and equity. Our results suggest that issuing zero-coupon sukuk requires more supervision, which has important implications for policy-makers and investors.

Firm-Level Policy Risk in China: The Effects on Corporate Leverage Target Following Behaviour
Li, Xiaoming
This study proposes a new approach that bridges the asset pricing implications of economic policy uncertainty (EPU) and the dynamic debt-financing decisions of Chinese firms. The approach introduces a new variable, firm-level policy risk (FLPR), in empirical tests. FLPR embraces two elements, the exposure of a firm’s stocks to EPU shocks and the change of EPU as economy-wide policy risk. Our approach rectifies the defect that all firms respond homogeneously to EPU innovations and underpins the connection between EPU and capital structure with established theories. We show firms with positive (negative) EPU betas have their FLPRs impact negatively (positively) the leverage target, supporting the prediction derived from trade-off theory that rising economy-wide risk leads to falling optimum debt ratios. We also find that over-levered firms adjust towards the leverage target faster than under-levered firms.

How ETFs Amplify the Global Financial Cycle in Emerging Markets
Converse, Nathan,Levy-Yeyati, Eduardo Levy,Williams, Tomas
This paper examines how the growth of exchange-traded funds (ETFs) has affected the sensitivity of international capital flows to global financial conditions. Using data on individual emerging market funds worldwide, we employ a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. We find that the sensitivity of flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. We then show that our findings have macroeconomic implications. In countries where ETFs hold a larger share of the equity market, total cross-border equity flows and returns are significantly more sensitive to global financial conditions. Our results imply that the increasing role of ETFs as a channel for international capital flows has amplified the global financial cycle in emerging markets.

Implied Volatilities for Options on Backward-Looking Term Rates
Hofmann, Karl F.
We derive valuation formulas for caps and floors on backward-looking term rates in the Black-1976, Bachelier and Hull-White-1-Factor models explicitly regarding valuation in the fixing period, extending and detailing results of [Lyashenko & Mercurio 2019, Henrard 2019, Turfus 2020]. These formulae facilitate us to provide a consistent definition for implied volatility on backward-looking term rates.

Mind the Contagion, Your Honour
Nishesh, Naman,Subramanian, Krishnamurthy,, Prasanna,Yerabati, Meghana
Although court judgments on economic issues are frequent, their economic impact remains understudied. Unlike institutional reforms and laws studied extensively by law and finance literature, they are not publicly debated, not passed by elected legislators, and do not always take full economic implications into account. Studying an unexpected verdict of the Supreme Court of India that retrospectively cancelled allocation of coal blocks to firms, we find evidence of contagion through banks associated with affected firms. Such banks reduce lending to their borrowers who, subsequently, contract operations and investments, and default more. Night lights activity suggests broad-based economic slowdown after the judgment.

On Tree-Structured Linear and Quantile Regression Based Asset Pricing
Galakis, John,Vrontos, Ioannis D.,XIDONAS, Panos
A tree-structured linear and quantile regression framework is proposed for the analysis and modeling of equity market returns. The approach is based on the idea of a binary tree, where every terminal node parameterizes a local regression model for a specific partition of the data. A Bayesian stochastic method is developed including model selection and estimation of the tree structure parameters. The modeling framework is applied on numerous asset pricing models related to the whole U.S. equity market, using alternative mimicking factor portfolios, frequency of data and widely followed market indices. The findings reveal strong evidence that asset returns exhibit asymmetric effects and nonlinear patterns to different common factors.

Open Source Cross-Sectional Asset Pricing
Chen, Andrew Y.,Zimmermann, Tom
We provide data and code that successfully reproduces nearly all cross-sectional stock return predictors. Unlike most metastudies, we carefully examine the original papers to determine whether our predictability tests should produce t-stats above 1.96. For the 180 predictors that were clearly significant in the original papers, 98% of our reproductions find t-stats above 1.96. For the 30 predictors that had mixed evidence, our reproductions find t-stats of 2 on average. We include an additional 105 characteristics and 945 portfolios with alternative rebalancing frequencies to nest variables used in other metastudies. Our data covers all portfolios in Hou, Xue and Zhang (2017); 98% of the portfolios in McLean and Pontiff (2016); 90% of the characteristics from Green, Hand, and Zhang (2017); and 90% of the firm-level predictors in Harvey, Liu, and Zhu (2016) that use widely-available data.

Post-Crisis Signals in Securitization: Evidence from Auto Abs
Syron Ferris, Erin,Shin, Chaehee
We find significant evidence of asymmetric information and signaling in post-crisis offerings in the auto asset-backed securities (ABS) market. Using granular regulatory reporting data, we are able to directly measure private information and quantify its effect on signaling and pricing. We show that lenders "self-finance'' unobservably higher-quality loans by holding these loans for longer periods to signal private information. This signal is priced in initial offerings of auto ABS and accurately predicts ex-post loan performance. We also demonstrate that our results are robust to exogenous shifts in the demand and supply of auto loans. Despite an environment of post-crisis enhanced transparency and securitization standards, signaling may be motivated by inattentive investors and regulations enforcing "no adverse selection'' in constructing ABS.

Return Commonality in Cross Listings: Evidence from Hong Kong ADRs
Dey, Malay K.
ABSTRACT: In a return commonality framework, the authors estimate portfolio betas associated with changes in returns of 15 Chinese ADRs and their underlying H-shares, where the portfolios denote hosts (NYSE and SHSE) and home (Hang Seng) markets, and their returns are common determinants of ADRs and H-shares returns. In addition, the authors test whether returns on ADRs and H-shares portfolios determine their component ADRs and H-shares returns. Using a quantile regression methodology, the authors estimate those betas for four sample quartiles. The authors’ results indicate an asymmetric impact of changes in portfolio returns on changes in ADR and H-share returns; further, the asymmetries are enhanced across return quartiles. The authors interpret the market impact on ADR and H-share returns as denoting investor sentiments.

The Impact of COVID-19 on the Ethiopian Private Banking System
Lelissa, Tesfaye
To explore the impacts of the COVID-19 pandemic on Ethiopia's Private Banking System and inform interventions and policy responses, the study employed the input-output framework. It has used ten years historical data from 2010 to 2019 of the aggregate private commercial banks in order to explore trends and examine the effect of pandemic on the past critical success factors. The result shows that the pandemic has effect on both balance sheet and income statement of banks. The effect is shadowed during the current year due to good performance record all through pre COVID period. Nevertheless, it won’t take much time to feel the effect of the pandemic in the private banking system as well. Therefore, the notion of considering banks less vulnerable to the crisis should be swotted. The study identified immediate liquidity need of around Birr 17 billion to private banks so that they can comfortably meet the NBE’s liquidity requirement. This in fact will be challenged by less resource mobilization and reduced loan collection of Birr 10 billion per quarter. Early measures to improve the liquidity (infusing injection), capital position (setting dividend payout limit), asset quality (setting minimum provision level), earning (avoiding price pressure) and cost (controlling exchange losses) profile of banks will have paramount importance for sustainable soundness of the private banking system. In addition, the shock absorbing capability of each bank in the sector should be separately looked at for an effective remedial action. The banking business after COVID-19 shall be intensified with new sources of growth: advisory services, e-commerce, digitalization, e-banking services etc. Online and digitalization will be the way forward. Comprehensive reform and finance sector restructuring programs should be thought of in order to accommodate such changes and speed up the recovery process.

The Impact of U.S. Tax Reform on U.S. Firm Acquisitions of Domestic and Foreign Targets
Atwood, T. J.,Downes, Jimmy,Henley, Jodi,Mathis, Mollie
The Tax Cuts and Jobs Act of 2017 (TCJA) eliminated disincentives for U.S. multinational corporations (MNCs) to repatriate foreign subsidiaries’ earnings, but the TCJA included additional provisions that will impact U.S. firms’ acquisition decisions. We find that both the likelihood and number of domestic and foreign acquisition announcements made by U.S. firms decreased on average after the TCJA but increased with repatriation taxes that U.S. MNCs faced prior to the TCJA. This effect is stronger for those MNCs that held larger amounts of foreign cash prior to the TCJA. The post-TCJA increase in foreign target acquisitions is driven by MNCs that are more likely to be subject to the global intangible low-tax income (GILTI) provisions after the TCJA. Our results suggest that the GILTI provisions introduced a contradictory incentive for U.S. MNCs with higher returns from intangible assets to investment in foreign target firms with lower returns on tangible property.

The Irrelevance of ESG Disclosure to Retail Investors: Evidence from Robinhood
Moss, Austin,Naughton, James P.,Wang, Clare
Using an hourly dataset on retail investor security positions from Robinhood Markets, we find that ESG disclosures are irrelevant to retail investors’ portfolio allocation decisions. The response to ESG press releases by retail investors is no different than the routine portfolio adjustments that occur on non-event days. In contrast, these same investors make economically meaningful changes to their portfolios in response to press releases that do not pertain to ESG, especially those that pertain to earnings announcements. Our findings are not due to a lack of statistical power or other data shortcomings. Our conclusions contrast with evidence from experimental studies that retail investors respond favorably to ESG disclosures. In addition, while prior ESG studies have generally viewed investors as a single homogeneous group, our findings suggest that it is important to distinguish between retail and institutional investors.

The Value of Corporate Bond Restrictive Covenants during the COVID-19 Crisis
Lugo, Stefano
The secular decline in the use of secured debt by nonfinancial corporations and the relatively low level of corporate leverage observed in the 2010s have led to a decrease in the popularity and market value of bond covenants restricting negative pledge and sale-leaseback activities. Using a sample of 779 bonds issued by US nonfinancial companies and observable both before and during the COVID-19 pandemic, this study shows that the impact of these covenants on yields increases significantly once a crisis unfolds. In contrast, covenants restricting risky investments are not valued by the market in a period when companies do not have incentives to invest. Analyses accounting for the endogeneity of covenants' inclusion and focusing on the moderating role of tangible assets produce fully consistent results. Bondholders may underestimate the propensity of firms to issue secured debt during economic downturns.

The Winner Takes It All: Investor Sentiment and the Eurovision Song Contest
Abudy, Menachem (Meni),Mugerman, Yevgeny,Shust, Efrat
This paper investigates the stock market reaction to a change in investor mood following the Eurovision Song Contest â€" an annual international song competition and one of the most watched non-sporting events globally. In the Eurovision final, one country wins over all other participants simultaneously in a competition that occurs on one evening. We find a positive swing in investor sentiment in the winning country. This elevated atmosphere is reflected in a positive abnormal return of approximately 0.55% on the first trading day after the victory. This positive return is reversed several days later. Further, we do not find any indication of negative sentiment in other participating countries, specifically in countries perceived as the losers of the contest. Finally, we document that the leisure industry index in the winning country does not react to the victory, indicating that the market reaction stems from a change in investor mood rather than a possible economic effect. Overall, we document that contests with a certain structure can generate positive investor sentiment in stock markets.

Toward Fair Gainsharing and a Quality Workplace for Employees: How a Reconceived Compensation Committee Might Help Make Corporations More Responsible Employers and Restore Faith in American Capitalism
Strine, Leo,Smith, Kirby
In the three decades after World War II, workers and stockholders shared equitably in the nation’s growing wealth. But, during the last several decades, this fair gainsharing has diminished as the power of the stock market, in the form of institutional investors, has grown, and the comparative voice and leverage of workers has declined. As a result of these and other factors, a much greater share of the gains from increased corporate profitability and productivity has gone to stockholders and top management, on the one hand, and much less to employees, on the other. Contributing to this divide has been a push to tie top management pay to total stockholder return and to create incentives for management to deliver returns to stockholders, even if that requires decreasing the share that the workers primarily responsible for corporate success get. The resulting economic insecurity and inequality have caused demands for serious change in corporate governance to give greater weight to the interests of workers. In this Essay, we focus on one practical way to move toward that worthy end: reconceiving the compensation committee. That is, a reconceived compensation committee would focus on the company’s entire workforce, not just senior management, and have the responsibility for overseeing management’s implementation of an effective system to compensate workers fairly, ensuring they receive a fair share when corporate productivity and profitability increases, and analyzing what allocation of compensation within the company’s workforce will provide the most motivation to encourage corporate success. To accomplish this, compensation committees would be expected to understand the nation’s, the industry’s, and the company’s traditional gainsharing practices among workers, stockholders, and top management and develop and implement a corporate strategy to ensure that gainsharing is equitable. By doing so, compensation committees will also be able to more rationally set top executive compensation and establish metrics for top management and key personnel involved in gatekeeping functions that are tied to good EESG practices and not just to stock price. And the reconceived compensation committee should also be the committee charged with compliance and EESG responsibilities in the areas most important to workers, including not just worker pay and benefits, but also safety, racial and gender equality, sexual harassment and inclusion, and training and promotion policies. Not only that, the reconceived compensation committee should monitor company practices in its supply chain to ensure that the company’s adopted policies regarding fair treatment of workers extend to those workers who work for company contractors. By this evolutionary means that builds on the existing American corporate governance system, important strides can be taken toward making our capitalist system work better for the people most critical to its success: workers.

Value of Life and Annuity Demand
Pashchenko, Svetlana,Porapakkarm, Ponpoje
How does the value of life affect annuity demand? To address this question, we construct a portfolio choice problem with three key features: i) agents have access to life-contingent assets, ii) they always prefer living to dying, iii) agents have non-expected utility preferences. We show that as utility from being alive increases, annuity demand decreases (increases) if agents are more (less) averse to risk rather than to intertemporal fluctuations. Put differently, if people prefer early resolution of uncertainty, they are less interested in annuities when the value of life is high. Our findings have two important implications. First, we get better understanding of the well-known annuity puzzle. Second, we argue that the observed low annuity demand provides evidence that people prefer early rather than late resolution of uncertainty.

Zeroing in on the Expected Returns of Anomalies
Chen, Andrew Y.,Velikov, Mihail
We zero in on the expected returns of long-short portfolios based on 120 stock market anomalies by accounting for (1) effective bid-ask spreads, (2) post-publication effects, and (3) the modern era of trading technology that began in the early 2000s. Net of these effects, the average anomaly's expected return is a measly 8 bps per month. The strongest anomalies return only 10-20 bps after accounting for data-mining with either out-of-sample tests or empirical Bayesian methods. Expected returns are negligible despite cost optimizations that produce impressive net returns in-sample and the omission of additional trading costs like price impact.