Research articles for the 2020-08-14

A Market-Based Alternative to Support Small Businesses Amid COVID-19 Lockdowns Using Dinner Bonds
Rodríguez-Reyes, Luis Raul
Lockdown measures to contain COVID-19 put a strain on firms’ liquidity. To support their cash flow some businesses issued dinner bonds to their clients, priced at a discount, redeemable when safe distance restrictions end. These contracts derived their value from a binary variable, in this case, being in-business post-lockdown, and bear significant associated problems. For instance, the value gained by customers with the advance purchase goes to zero if the business goes bankrupt. There are two contributions in this paper, first, a simple valuation model of dinner bonds is developed, and second, a proposal for a large-scale aid program for small businesses is set in a dinner bond based framework, with the addition of two features: (i) the support of a guarantor for businesses’ liabilities; and, (ii) the intervention of a financial regulator. The modified scheme also allows governments to leverage public policy actions on society’s goodwill.

A Real Option Approach to Sustainable Corporate Tax Behavior
Van de Vijver, Anne,Cassimon, Danny,Engelen, Peter‐Jan
Aggressive tax planning has become a sustainability problem, as governments have to cope with less tax revenue, which is crucial for investments in sustainable development goals. The OECD and the EU authorities have taken several initiatives against aggressive tax planning, such as the Action Plan against BEPS. However, these initiatives lack effectiveness, and aggressive tax planning is still omnipresent. We analyze the fight against aggressive corporate tax planning from a Real Option Theory perspective, in order to find an explanation for the difficult shift of companies’ aggressive tax planning strategies to more sustainable tax behavior. The Real Option Theory shows that, as long as the option to ‘delay’ the investment in sustainable tax behavior has too much value because the benefits of such investment are uncertain, companies will wait. Based on this new understanding, we suggest additional public policy interventions against aggressive tax planning. These interventions aim directly at reducing this real option value (of waiting).

Adapting to Radical Change: The Benefits of Short-Horizon Investors
Giannetti, Mariassunta,Yu, Xiaoyun
We show that following shocks that change an industry’s competitive environment, firms with more short-term institutional investors experience smaller drops in sales and investment and have better long-term performance than similar firms affected by the shocks. To do so, these firms introduce new products, file more trademarks, intensify their innovation efforts, conduct more diversifying acquisitions, and have higher executive turnover in the aftermath of the shocks. Our findings suggest that firms with more short-term investors adapt better to the new competitive environment. Endogeneity of institutional ownership and other selection problems do not appear to drive our findings.

Adjusted Expected Shortfall
Burzoni, Matteo,Munari, Cosimo,Wang, Ruodu
We introduce and study the main properties of a class of convex risk measures that refine Expected Shortfall by simultaneously controlling the expected losses associated with different portions of the tail distribution. The corresponding adjusted Expected Shortfalls quantify risk as the minimum amount of capital that has to be raised and injected into a financial position $X$ to ensure that Expected Shortfall $\ES_p(X)$ does not exceed a pre-specified threshold $g(p)$ for every probability level $p\in[0,1]$. Through the choice of the benchmark risk profile $g$ one can tailor the risk assessment to the specific application of interest. We devote special attention to the study of risk profiles defined by the Expected Shortfall of a benchmark random loss, in which case our risk measures are intimately linked to second-order stochastic dominance.

Between Multiculturalism and Assimilation: Muslim Immigrant and Sweden Welfare State
Pinto, Rui
The author is trying to demystify the integration conceptualization of pluralism framework studying the relationship between Muslim and Welfare state in Sweden. The most clear evidence is that Muslim immigration are living between assimilation on several social dimension albeit those dimension like work are crucial to be integrate within the Sweden social structure. A conflict between demands of welfare state regulation and Sweden social structure and Muslim social structures. It is essential about social justice.

CEO Age and Dynamic Capital Structure â€" Evidence from Malaysia
Chua, Mei Shan,Ab Razak, Nazrul Hisyam,Md Nassir, Annuar,Dato Haji Yahya, Mohamed Hisham
This paper aims to investigate the dynamic capital structure of Malaysian firms from upper echelon perspective. Specifically, we test the speed of adjustment towards the target leverage and the age of Chief Executive Officers (CEOs) as a determinant of dynamic capital structure. Utilization of the System Generalized Method of Moments finds 33.93% of speed of adjustment for Malaysian firms. The CEOs age is also found to be inversely related to both the optimum leverage and speed of adjustment towards the optimum leverage. As the CEOs age increases, the optimum leverage and speed of adjustment decrease. Our results are robust using the long-term leverage while controlling several firm characteristics that are known to impact the firm’s capital structure, year of effect, and industry fixed effect. The results suggest that CEOs age is a potential factor of Dynamic Capital Structure decision. The findings also highlight the failure of older CEOs in maximizing the benefits of debt interest tax shield which prompts higher financial costs and lower firm value. The practical implication of our study lies on the need to attentively look at the CEOs age while hiring a qualified CEO that could improve the firms’ performance.

Complexities and Uncertainties in the Indian Aviation Sector: A Special Case of Jet Airways and Indi Go Airlines
Karthika, Dr. P.
The study is a bird’s eye view on various challenges currently faced by the Indian Aviation sector starting from the period of 2018. The most common problems in this sector are increasing air Turbine Fuel Charges, customer/passenger complaints, predatory pricing strategies adopted by dominant players. The information required for the study was collected from the media reports, sectoral reports published by rating agencies namely ICRA and CRISIL and performance reports published by DGCA. In the first section of the paper, overall aviation industry has been analysed in terms of market share, passenger complaints and the trend in Air Turbine Fuel prices. The second part analyses about the cost and revenue structure of selected private airlines namely Jet Airways Ltd and IndiGo Airlines. The major positive side for the Indian aviation sector includes the increase in Air traffic growth in the fiscal 2019 is predicted to be more than 15%, construction of new airports by the Government and scope for enhancing customer satisfaction by means of formulating uniform polices for ticket cancellation, baggage charges that may help the airline industry to retain more customers. On the other hand, the serious issues comprises increasing trend in air turbine fuel prices, volatile/weakening Indian rupee which led to increase in costs and foreign exchange losses. The Jet Airways and IndiGo airlines though they have increase in revenue in the year 2018-19 compared to 2017-18, the net profit is negative because of increasing fuel prices, finance costs, lease rentals and employee benefit expenses.

Corporate Bond Illiquidity and Bond Return Synchronicity
Zhang, Zehua,Zhao, Ran
This paper provides an innovative theoretical model and empirical evidence for how the illiquidity of corporate bonds, as trading noise, dampens firm-specific information incorporated into bond prices. We find a negative relation between bond illiquidity and synchronicity, and this empirical relation remains after applying robustness checks and endogeneity controls. Consistent with theoretical model implications, the effect of bond illiquidity as information friction is more pronounced for bonds with lower market sensitivity and for firms with higher degrees of information uncertainty and operating in weaker information environments. We also explore general bond return synchronicity determinants, including both bond attributes and firm fundamentals.

Corporate Social Responsibility, Shareholder Value, and Competition
Martins, Fernando
This study examines the relationship between corporate social responsibility (CSR), shareholder value, and competition by applying a regression discontinuity design to the outcome of CSR shareholder proposals. This approach effectively compares outcomes between proposals that pass or fail by a small margin which provides a causal estimate of the impact of CSR. I find that passing a proposal generates positive abnormal returns. This effect is stronger in firms with lower CSR scores, firms in more competitive industries, and firms subject to higher customer awareness. In addition, passing a proposal also increases the CSR scores of both firms and peers, suggesting that these votes induce higher CSR engagement by competitors. Finally, I identify an increase in the market share of companies that approve close-call proposals. Altogether, these results suggest that CSR improves shareholder value by enhancing the competitiveness of firms.

Extrapolation and House Price Overreaction: Evidence from Local Jurisdiction Mergers
Deng, Kuang Kuang,lang, henan,Zhou, Xiaoxia
This paper uses two similar local jurisdiction merger policies at different phases of a housing cycle to examine whether home purchasers form their expectations of future house prices based on lagged price changes. Using a detailed housing transaction data set, we find that, during the boom period, the relative home prices in the merged area increased significantly for a few months after a positive fundamental shock and then reverted. However, during the bust period, we find no overreaction of the relative house prices in the local merged districts after a similar shock. Moreover, we find that short-term speculators may be the main contributor to the housing price overreaction. Overall, our results confirm the role of over-extrapolation in house price dynamics.

Financial Liberalization, Financial Development, and Macroeconomic Risks in an Open Economy
Hu, Jingxian
In an open economy with endogenous risks, financial development and capital account openness can reduce the volatility of home equity price and the volatility of home bond price, and can increase the home currency value at the stochastic steady state. The monetary policy should be countercyclical in response to higher volatility of home equity price and higher volatility of home bond price, and procyclical when the volatility of foreign bond price and the volatility of exchange rate go up. With floating exchange rate, a more open capital account leads to a higher real interest rate in equilibrium, whereas financial development lowers the equilibrium real interest rate. With fixed exchange rate, the equilibrium real interest rates are negative and both financial development and capital account liberalization increase the equilibrium real interest rate. The risk- adjusted interest rate parity shows that when risks are endogenously included in the model, the constraint imposed on policies by the Mundell-Fleming trilemma may break or not hold tightly.

Financial Literacy: An Overview Of Current Literature And Future Opportunities
Dube, Vibhuti Shivam
Financial Literacy is a term which is a combination of financial knowledge, attitude and behavior which helps an individual to take sound financial decisions. With the growing financial inclusion drives to include the financially excluded persons and with the expansion of financial markets financial literacy has become a hugely significant issue. This paper reviews, compares and analyses studies conducted on Financial Literacy on International Platform, in Asia and in India to determine areas of both commonality and inconsistency. As a result of this analysis, the paper presents recurrent themes that could be extended, research gap and potential new areas for research in financial literacy.

Financial Stability, Resolution of Systemic Banking Crises and COVID-19: Toward an Appropriate Role for Public Support and Bailouts
Arner, Douglas W.,Avgouleas, Emilios,Gibson, Evan
A wide range of approaches has been applied to address banking and other financial crises. The nature of the approach depends on the nature of the crisis, its origins, evolution and context. Systemic banking crises are among the most common and costly to address. The experiences of the three major international financial crises of the past 25 years â€" the Asian Financial Crisis, the Global Financial Crisis, and the European Debt Crisis â€" offer critical lessons regarding the most effective approaches in tackling bank solvency during a systemic crisis. One of the most common and also effective methods has been the transfer of non-performing loans (NPLs) to an Asset Management Company (AMC) that performs workouts or liquidates stressed loan portfolios at a more opportune time to amortize losses. In most cases the use of AMCs has delivered positive results for the taxpayer. Contemporary consensus as regards tackling bank solvency during a systemic financial crisis focuses heavily on prevention of government bailouts in order to protect state finances and curb moral hazard. However, an overly dogmatic focus on preventing public financial support in the context of a systemic bank solvency crisis may place insurmountable obstacles to the use of state-backed AMCs and other forms of resolution of NPLs and bank recapitalization. This paper provides a new perspective on the common belief that public support in the context of systemic bank insolvency â€" i.e. bank bailouts â€" is an inefficient use of public funds or conducive to moral hazard. Our study finds that state-backed AMCs can be effective in recapitalizing banking systems, depending on the modus operandi of the restructuring, funding and the conditions attached to the fiscal backstop. With respect to systemic banking crises or those caused by exogenous factors, such as the unprecedented disruption of economic activity due the COVID-19 pandemic, preservation of financial stability and not containment of moral hazard should be policy-makers’ predominant goal. Thus, we suggest that a combination of balance sheet restructuring and the use of AMCs to manage NPLs is the optimal approach.

Harming Banks and Helping Alternative Lenders: Negative Interest Rates as Game Changer
Bloechlinger, Andreas
Core bank deposits are a cheap funding source. Alternative lenders have to pay a spread above the banks' funding rate. However, by lending under the risk of negative rates, banks have to consider the zero-based floor option to close arbitrage opportunities. Alternative lenders, unlike banks, do not create money by lending, issue no floor options, cannot be arbitraged, and can offer more competitive loan rates at and below the zero lower bound. The Bertrand game changes. In a theoretical model, I show that profits and market shares shift from banks to alternative lenders. The empirical study supports my model's forecasts.

How Does the Daily Volatility of Foreign Exchange Rates Depend on the Time of Day at Which the Daily Returns Are Calculated?
Doman, Małgorzata,Doman, Ryszard
In the paper, we show how the estimates of the daily volatility of major exchange rates, EUR/USD, AUD/USD, GBP/USD, and NZD/USD, depend on the hour at which the daily returns are calculated. FOREX market is open 24 hours a day, but traders from different parts of the world, if some local time is fixed, are most active in different times of a day. This is the reason why the dynamics of volatility changes during a trading day. To analyze this feature, we consider daily returns calculated using the exchange rates quoted at each full hour of a day. Volatility (the square root of the conditional variance) is described by means of GARCH models. The approach used enables us to scrutinize changes in the volatility, depending on the hour of a day, which can be useful in risk management. We investigate separately bid and ask prices, so we obtain some results concerning microstructure of the FOREX market as well.

Institutional Trading on Information Diffusion across Fundamentally Related Firms
Ying, Jie
I document a strong cross-predictability of stock returns driven by institutional investors' private information about firms' fundamental relations. A value-weighted arbitrage portfolio yields a monthly alpha of 1.65%. The magnitude of predicted returns increases with firm size, number of institutional shareholders, and institutional trading intensity while not changing with analyst coverage. Further evidences confirm that institutional investors strategically trade a stock in response to shocks to its peers, which subsequently causes permanent price movements. Overall, my results suggest that institutional trading propagates the diffusion of value-relevant information across firms but only gradually due to information asymmetries among investors.

Livestock Entrepreneurship and Financial Capital: The Nigerian Perspective
Lawan, Umar,D., Mohammed
The study examined livestock entrepreneurship and financial capital in Nigeria. The multi-stage sampling technique was employed in selecting 232 livestock entrepreneurs. Data were collected through well-structured questionnaires. The data were analyzed using descriptive statistics such as frequencies and percentages. Socio-economic characteristics of respondents revealed that the majority (95.3%) were male, 69.8% aged 18 -33 years old and 88.4% had one form of formal education or the other. About 42.3% and 40.5% reported that they engaged in farming and civil service as their primary occupation respectively. The majority (52.56%) of the respondents sourced financial capital through equity all through. About 39.22% of the respondents obtained financial support from Non-Governmental Organization (NGOs) and 48.4% reported high-interest rates on loans as their main barrier in sourcing financial capital for livestock entrepreneurship. The study recommended that in order to boost livestock entrepreneurship towards improving beef supply and sustainable environment, intensive livestock management should be encouraged through the provision of financial capital at a low-interest rate to livestock entrepreneurs by commercial Banks. Government at all levels should aid to livestock entrepreneurs in forms of financial resources. This will go a long way in assisting the entrepreneurs to diversify their livelihood activities and reduce poverty.

Measuring Efficiency in the Banking Market. An Empirical Investigation of the Last Decade Performance
Pampurini, Francesca,Quaranta, Annagrazia
The purpose of this paper is to suggest some managerial and policy recommendations deriving from the observation of the determinants of the best efficiency levels achieved by the Euro Area banking groups. Referring to the period 2009â€"2018 a stochastic frontier model, based on the proxy coming from the inter-mediation approach, is employed to quantify the efficiency levels of the banking groups for each single year. Then, with a cluster analysis, we identify the most relevant efficiency determinants of the best practice banking groups. From the analysis, it is clear that the main determinants of the high level of efficiency are linked to a particular business model devoted to the traditional lending activity and to specific managerial choices, such as the achievement of a medium size together with a rational valuation of the number of firms belonging to the same banking group and to suitable cost rationalization policies and liquidity reserves optimization policies. These research findings have great micro and macro implications. Indeed, from our analysis some important reflections emerge regarding managerial and strategic choices and their impact on the results in terms of efficiency of each banking group, as well as some key factors that Regulators might take into account too. In the light of the structural changes that are transforming the physiognomy of the banking system, it is important to analyze the dynamics of efficiency. Few studies focused on such a particular topic after the 2008 Global Financial Crisis. In particular, the period involved is characterized by a strong turbulence within the financial markets and by many economic difficulties. Therefore, it can be considered a period able to represent well the complexity of the banking and financial markets in the last decade.

Money Creation, Bank Liquidity and Non-neutrality of Monetary Policy
Wang, Tianxi
This paper studies the implication of banks' money creation and liquidity management for monetary policy. When borrowing fiat money banks use a government bond as collateral, which pays a fixed stream of nominal dividend. A variation in fiat money's quantity alters its unit real value, thereby changing the real value of the bond. Under certain conditions, this change moves banks' lending rates by impacting on their liquidity constraint; therefore, fiat money is non-neutral. In general, any monetary policy, modeled as a change to the aggregate nominal portfolio of the bond and fiat money, moves bank lending rates if it alters the bond-to-fiat money ratio. Moreover, the rates of liquidity unconstrained banks move in the opposite direction to the rates of those maximally constrained. Technological changes that expand digital ways of payment generate inflationary pressures by lightening banks' liquidity burden.

New Bank Resolution Mechanisms: Is it the End of the Bailout Era?
Submitter, EBRD
We study the effectiveness of three common bank resolution mechanisms: bailouts, bank sales, and ‘bad banks’. We first apply the financial fragility model of Goodhart et al. (2005, 2006a) to analyze the impact of these resolution mechanisms on bank behavior. We then use a novel bank-level database on 39 countries that used these resolution mechanisms during 1992-2017 and analyze the relationship between the mechanisms applied and subsequent bank performance. We find that the effectiveness of resolution mechanisms depends crucially on the timing and severity of crises. While mergers can deliver good results at the beginning of a crisis, this is less likely at later stages of a crisis. In the event of severe crises, mechanisms aimed at restructuring bank balance sheets are most likely to deliver positive results. We find no support for bank bailouts as an optimal strategy. A calibration exercise shows that the effectiveness of resolution mechanisms to mitigate systemic risk declines with the severity of crises.

Online Appendix for: Regulatory Capital and Incentives for Risk Model Choice under Basel 3
Liu, Fred,Stentoft, Lars
Motivated by the recent changes made to the regulatory environment that governs how banks calculate minimum capital requirements Liu and Stentoft (2020) seek to answer the question of how regulation affect banks’ choice of risk-management models, whether it incentivizes them to use correctly specified models, and if it results in more stable capital requirements. This Online Appendix contain further details on the regulatory calculations, Appendix A, on how to select optimal thresholds for Extreme Value Theory models, Appendix B, on the back-testing methods used for ES, Appendix C, and some additional results, Appendix D and E.

Solving the Optimal Trading Trajectory Problem Using Simulated Bifurcation
Steinhauer, Kyle,Fukadai, Takahisa,Yoshida, Sho
We use an optimization procedure based on simulated bifurcation (SB) to solve the integer portfolio and trading trajectory problem with an unprecedented computational speed. The underlying algorithm is based on a classical description of quantum adiabatic evolutions of a network of non-linearly interacting oscillators. This formulation has already proven to beat state of the art computation times for other NP-hard problems and is expected to show similar performance for certain portfolio optimization problems. Inspired by such we apply the SB approach to the portfolio integer optimization problem with quantity constraints and trading activities. We show first numerical results for portfolios of up to 1000 assets, which already confirm the power of the SB algorithm for its novel use-case as a portfolio and trading trajectory optimizer.

Sustainable Finance and Fintech: Can Technology Contribute to Achieving Environmental Goals? A Preliminary Assessment of ‘Green FinTech'
Macchiavello, Eugenia,Siri, Michele
The Fintech Action Plan and the Sustainable Finance Strategy both represent important pillars of the current EU policy agenda. Nonetheless, the two areas have been treated as separate for a long time, while they present certain common features and great potential when combined. In particular, Fintech appears able to respond to some shortcomings in the current sustainable finance framework (e.g. access to retail financing, ESG disclosure, verification and ratings, etc.). The relevance of the link between sustainability, finance and technology has also been evidenced by the COVID-19 pandemic crisis, which has urged all countries to re-think the models traditionally deployed and rely more on technology and sustainability. However, Fintech still raises per se relevant legal issues that need to be addressed to fulfil its promises and potential in the sustainable finance sector. The present paper aims at starting a debate about “Green Fintech” in order to effectively connect the two worlds and spur the research in such a new and promising area.

The Joint Impact of Bank Capital and Funding Liquidity on the Monetary Policy's Risk-Taking Channel: A Bird's Eye View from the Euro Area Early Days
De Menna, Bruno
Despite an extensive literature on the riskâ€"taking channel of monetary policy, the joint impact of bank capital and deposits on the latter remains poorly documented. Yet that prospect is essential for monetary policy taking action under the Basel III framework involving concomitant capital and funding liquidity standards. Using data on euro area from 1999 to 2018 and triple interactions between monetary policy, equity and funding liquidity, we shed light on a "crowdingâ€"out of deposits" effect prior to the 2008 GFC which supports the need for simultaneous capital and funding liquidity ratios to mitigate the monetary transmission to bank credit risk. Interestingly, our findings also highlight a missing "crowdingâ€"out of deposits" effect amongst poorly efficient banks in the aftermath of the GFC. As a result, a trade-off arises between financial stability and increased funding liquidity for these financial intermediaries, making a special treatment required for inefficient banks operating in a low interest rate environment. These results challenge the implementation of uniform funding liquidity requirements across the euro area.

The Korea Discount and Chaebols
Ducret, Romain,Isakov , Dušan
Finance practitioners frequently claim that stocks of Korean firms are undervalued and trade at a discount relative to foreign firms. This phenomenon is commonly called "the Korea discount". It is based on anecdotal evidence comparing either the price-earnings ratios of different market indexes or those of different individual stocks. This paper provides empirical evidence on the existence of such a discount using a large sample of stocks from 28 countries over the period 2002-2016. We find that Korean stocks have significantly lower price-earnings ratios than their global peers. We also investigate the role of large business groups called chaebols, which are often considered to be the main cause of the discount because of their poor corporate governance. Our findings show that it is not the case.

Trading by Professional Traders: An Experiment
Cipriani, Marco,De Filippis, Roberta,Guarino, Antonio,Kendall, Ryan
We examine how professional traders behave in two financial market experiments; we contrast professional traders’ behavior to that of undergraduate students, the typical experimental subject pool. In our first experiment, both sets of participants trade an asset over multiple periods after receiving private information about its value. Second, participants play the Guessing Game. Finally, they play a novel, individual-level version of the Guessing Game and we collect data on their cognitive abilities, risk preferences, and confidence levels. We find three differences between traders and students: Traders do not generate the price bubbles observed in previous studies with student subjects; traders aggregate private information better; and traders show higher levels of strategic sophistication in the Guessing Game. Rather than reflecting differences in cognitive abilities or other individual characteristics, these results point to the impact of traders’ on-the-job learning and traders’ beliefs about their peers’ strategic sophistication.

Trust of the Crowd and Audit Pricing
Chan, Konan,Cui, Jianxin,Kuo, Weiyu,Lin, Tse-Chun
Using a novel dataset that captures public perceptions of the trustworthiness of client firms by extracting and converting social media feeds into an index, we find that auditors charge higher fees for client firms with lower trustworthiness, as client firms with higher trustworthiness are less likely to incur lawsuits. This correlation is stronger for the shorter audit tenures, younger client firms, and more complex auditing practices after the enactment of the SOX Act. Our results are robust to:(i) including firm or county fixed effects, (ii) controlling for the internal control weaknesses and various corporate governance measures, and (iii) adding the trust index constructed from financial news. Our study highlights the role of the perceived trustworthiness of client firms in audit pricing decisions.

Undervaluation Alpha: Analyzing the Returns to Analyst-Claimed Mispricing
Green, Jeremiah,Hand, John R. M.,Sikochi, Siko
We separate the forecasted one-year-ahead stock return implied by an analyst’s target price into two parts: the expected compensation for bearing risk, and analyst-claimed mispricing. We use the cost of equity disclosed by analysts in their reports for the former, and the difference between the implied return and the cost of equity for the latter. When we regress realized one-year-ahead stock returns on the two components in an issuer, year and firm fixed effects design, we find that the coefficient on the cost of equity is close to one for US and international firms, but the coefficient on mispricing is reliably positive and far less than one. We also find that in a manner consistent with the asymmetric valuation incentives faced by analysts and firm managers, analysts do not on average identify overvaluation but do identify undervaluation alpha at the rate of 25 cents per analyst-claimed mispriced dollar.

What's Wrong with Annuity Markets?
Verani, Stephane,Yu, Pei Cheng
The annuity market in the US has been historically small. What drives this fact? The annuity market could be small because of adverse selection or supply-side frictions in insurance markets. Identifying demand- and supply-side frictions is difficult without data separately measuring exogenous shocks and endogenous responses. In this paper, we provide a novel identification using annuity price data and regulatory capital requirements. Using publicly available data, we document a robust relationship between shocks originating in the corporate bond market and annuity price markups. We show that this relationship supports a standard model of adverse selection with an incomplete bond market.