Research articles for the 2021-02-27
Are Passive Investors Also Passive Voters? Evidence From Securities Lending by Mutual Funds
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I study the effect of mutual funds’ securities lending activities on their participation in proxy voting using hand-collected fund securities lending data. Consistent with Shleifer and Vishny’s (1986) argument that a shareholder’s willingness to monitor a firm decreases as the cost of monitoring increases, I find that mutual funds that lend securities are less likely to vote in the shareholder meetings of their portfolio firms. The negative effect is weaker if a fund holds a larger stake in the stock, especially poorly performing stocks, suggesting that lending funds are more likely to give up securities lending income and recall stocks to vote when the potential gains from voting are greater. This negative effect of securities lending on voting participation is also weaker if other funds in the same fund family are active voters. Although securities lending impedes fund voting on average, I find that it increases fund voting, due to a “lock-in†effect, in a subset of fund families in which funds are restricted from selling upon short-selling signals and vote more actively.
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I study the effect of mutual funds’ securities lending activities on their participation in proxy voting using hand-collected fund securities lending data. Consistent with Shleifer and Vishny’s (1986) argument that a shareholder’s willingness to monitor a firm decreases as the cost of monitoring increases, I find that mutual funds that lend securities are less likely to vote in the shareholder meetings of their portfolio firms. The negative effect is weaker if a fund holds a larger stake in the stock, especially poorly performing stocks, suggesting that lending funds are more likely to give up securities lending income and recall stocks to vote when the potential gains from voting are greater. This negative effect of securities lending on voting participation is also weaker if other funds in the same fund family are active voters. Although securities lending impedes fund voting on average, I find that it increases fund voting, due to a “lock-in†effect, in a subset of fund families in which funds are restricted from selling upon short-selling signals and vote more actively.
Bank Liquidity Creation and Technological Innovation
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This paper examines the association between bank liquidity creation and technological innovation. Using a comprehensive measure of bank output, I find that bank liquidity creation decreases technological innovation, measured by patent-based criteria. This is robust to using the instrumental variable approach, time-varying unobserved factors that may drive the demand for commercial loans, and several other robustness checks. The state-industry-level results show that the observed negative relation between bank liquidity creation and technological innovation is mainly driven by the manufacturing and finance industries. I also find that bank liquidity creation enhances innovation by firms that have above-median asset tangibility. Further analysis reveals that the relationship between bank liquidity creation and technological innovation is asymmetric. Overall, the results in this paper stress the fundamental role played by innovation in the finance-growth nexus.
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This paper examines the association between bank liquidity creation and technological innovation. Using a comprehensive measure of bank output, I find that bank liquidity creation decreases technological innovation, measured by patent-based criteria. This is robust to using the instrumental variable approach, time-varying unobserved factors that may drive the demand for commercial loans, and several other robustness checks. The state-industry-level results show that the observed negative relation between bank liquidity creation and technological innovation is mainly driven by the manufacturing and finance industries. I also find that bank liquidity creation enhances innovation by firms that have above-median asset tangibility. Further analysis reveals that the relationship between bank liquidity creation and technological innovation is asymmetric. Overall, the results in this paper stress the fundamental role played by innovation in the finance-growth nexus.
Banks, Political Capital, and Growth
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We show that politically connected banks influence economic activity. We exploit shocks to individual banks’ political capital following close US congressional elections. We find that regional output growth increases when banks active in the region experience an average positive shock to their political capital. The effect is economically large, but temporary, and is due to lower restructuring in the economy rather than increased productivity. We show that eased lending conditions (especially for riskier firms) can account for the growth effect. Our analysis is a first attempt to directly link the politics and finance literature with the finance and growth literature.
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We show that politically connected banks influence economic activity. We exploit shocks to individual banks’ political capital following close US congressional elections. We find that regional output growth increases when banks active in the region experience an average positive shock to their political capital. The effect is economically large, but temporary, and is due to lower restructuring in the economy rather than increased productivity. We show that eased lending conditions (especially for riskier firms) can account for the growth effect. Our analysis is a first attempt to directly link the politics and finance literature with the finance and growth literature.
Bond Yield Changes and the Cross-Section of Global Equity Returns
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We document a new cross-sectional anomaly linking international government bond and equity markets. Using a unique long-run dataset of 61 countries for the years 1900â€"2019, we demonstrate that past bond yield changes predict future stock index returns in the cross-section. The quintile of countries with the largest decline (or smallest increase) in government bond yields outperforms the quintile of countries with the smallest decline (or largest increase) by 0.63% per month. The anomaly survives various robustness tests. Our findings support the behavioral roots of this effect and suggest that investors underreact to yield changes, and limits to arbitrage prevent investors from eliminating the anomaly. Global investors can employ this bond yield change effect to enhance international asset allocation decisions.
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We document a new cross-sectional anomaly linking international government bond and equity markets. Using a unique long-run dataset of 61 countries for the years 1900â€"2019, we demonstrate that past bond yield changes predict future stock index returns in the cross-section. The quintile of countries with the largest decline (or smallest increase) in government bond yields outperforms the quintile of countries with the smallest decline (or largest increase) by 0.63% per month. The anomaly survives various robustness tests. Our findings support the behavioral roots of this effect and suggest that investors underreact to yield changes, and limits to arbitrage prevent investors from eliminating the anomaly. Global investors can employ this bond yield change effect to enhance international asset allocation decisions.
Can Mandatory Dual Audit Reduce the Cost of Equity? Evidence from China
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In China, a mandatory dual audit system for domestic A-share firms cross-listed on the Hong Kong stock market (i.e. AH companies) was abolished in 2010. Since then, AH companies have been allowed to choose to have a dual audit or a single audit. We find that the mandatory dual audit regime before the deregulation is associated with a lower cost of equity than voluntary dual audit after the deregulation. Furthermore, the lower cost of equity under the mandatory dual audit regime is greater in companies exposed to stronger financial constraints and with higher agency costs, and is not attenuated by alternative voluntary audits. Our results are not affected by accounting standards convergence and audit quality, and are robust to various model specifications. Our results suggest that the role of mandatory dual audit in mitigating agency costs and information asymmetry is not replaceable by voluntary dual audit.
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In China, a mandatory dual audit system for domestic A-share firms cross-listed on the Hong Kong stock market (i.e. AH companies) was abolished in 2010. Since then, AH companies have been allowed to choose to have a dual audit or a single audit. We find that the mandatory dual audit regime before the deregulation is associated with a lower cost of equity than voluntary dual audit after the deregulation. Furthermore, the lower cost of equity under the mandatory dual audit regime is greater in companies exposed to stronger financial constraints and with higher agency costs, and is not attenuated by alternative voluntary audits. Our results are not affected by accounting standards convergence and audit quality, and are robust to various model specifications. Our results suggest that the role of mandatory dual audit in mitigating agency costs and information asymmetry is not replaceable by voluntary dual audit.
Consumer Loan Rate Dispersion and the Role of Competition: Evidence from the Turkish Banking Sector
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This paper aims to examine the degree of dispersion in the loan pricing of commercial banks and its association with competitive conditions. To this end, an indexation mechanism processing a novel bank-level dataset is proposed to quantify the lending rate variability in general-purpose, vehicle, and housing loans for the period January 2007-April 2020. In panel convergence tests, we show that there exists heterogeneity in long-term co-movements in banks’ loan pricing, while periods following the tightening in financial conditions display short-term deviations from general tendencies demonstrated by dispersion indices. The methodological setting also entails the construction of competition indicators for total and segment-based credit market developments. The competitive conditions monitored by Herfindahl-Hirschman Indicator (HHI) present that housing and vehicle loan segments have been concentrated in recent years. Quantile regression results further validate that improvements in the competition are associated with a lower level of lending rate dispersion in housing and vehicle segments in a statistically significant manner, whereas this relation is not applicable for general-purpose loans.
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This paper aims to examine the degree of dispersion in the loan pricing of commercial banks and its association with competitive conditions. To this end, an indexation mechanism processing a novel bank-level dataset is proposed to quantify the lending rate variability in general-purpose, vehicle, and housing loans for the period January 2007-April 2020. In panel convergence tests, we show that there exists heterogeneity in long-term co-movements in banks’ loan pricing, while periods following the tightening in financial conditions display short-term deviations from general tendencies demonstrated by dispersion indices. The methodological setting also entails the construction of competition indicators for total and segment-based credit market developments. The competitive conditions monitored by Herfindahl-Hirschman Indicator (HHI) present that housing and vehicle loan segments have been concentrated in recent years. Quantile regression results further validate that improvements in the competition are associated with a lower level of lending rate dispersion in housing and vehicle segments in a statistically significant manner, whereas this relation is not applicable for general-purpose loans.
Credit Reversals
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This paper studies episodes in which aggregate bank credit contracts alongside expanding economic activityâ€"credit reversals. Using data for 179 countries during 1960â€'2017, the paper finds that reversals are a relatively common phenomenon--on average, they occur every five years. By comparison, banking crises take place every eight years on average. Credit reversals and banking crises also appear related to each other: reversals become more likely in the aftermath of banking crises, while the likelihood of crises drops following reversals. Reversals are shown to be very costly in terms of foregone economic activityâ€"about two-thirds of the costs of banking crises, after taking into account their relative frequencies.
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This paper studies episodes in which aggregate bank credit contracts alongside expanding economic activityâ€"credit reversals. Using data for 179 countries during 1960â€'2017, the paper finds that reversals are a relatively common phenomenon--on average, they occur every five years. By comparison, banking crises take place every eight years on average. Credit reversals and banking crises also appear related to each other: reversals become more likely in the aftermath of banking crises, while the likelihood of crises drops following reversals. Reversals are shown to be very costly in terms of foregone economic activityâ€"about two-thirds of the costs of banking crises, after taking into account their relative frequencies.
Do State Subsidies Increase Corporate Environmental Spending?
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This study investigates the impact of state subsidies on corporate environmental spending of Chinese listed firms between 2011 and 2018, using a hand-collected data from corporate annual and environmental responsibility reports. We find a positive relationship between state subsidies and corporate environment spending, indicating firms receiving government subsidies are more likely to behave more environmentally responsible. In addition, the positive relationships are more pronounced among the non-state-owned enterprises (non-SOEs) and the firms experiencing financial constraints. It is because, non-SOEs are more likely to lose government support comparing to their SOE peers, thus making more efforts to address corporate pollution. Moreover, firms subject to financial difficulties tend to build an environmental responsible image and to contribute more in environment protection.
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This study investigates the impact of state subsidies on corporate environmental spending of Chinese listed firms between 2011 and 2018, using a hand-collected data from corporate annual and environmental responsibility reports. We find a positive relationship between state subsidies and corporate environment spending, indicating firms receiving government subsidies are more likely to behave more environmentally responsible. In addition, the positive relationships are more pronounced among the non-state-owned enterprises (non-SOEs) and the firms experiencing financial constraints. It is because, non-SOEs are more likely to lose government support comparing to their SOE peers, thus making more efforts to address corporate pollution. Moreover, firms subject to financial difficulties tend to build an environmental responsible image and to contribute more in environment protection.
Externalities of the Sharing Economy: Evidence from Ridesharing and the Local Housing Market
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This study highlights the externalities of the sharing economy on local economies. Using the introduction of Uber X as a staggered shock, I assess how ridesharing influences the local housing market through the interaction with public transit. After ridesharing’s entry, housing prices and market rents increase at the zip code level. The effect is more pronounced in locations with greater access to public transit and lower driving probability, consistent with the notion that ridesharing complements public transit. Similarly, there is a larger increase in housing prices and rents in zip codes with larger populations, lower median ages and more minorities, consistent with Uber X users’ characteristics. Also, price appreciation is strongest for houses that are just beyond walking distance to public transit, suggesting that ridesharing helps solve the “last mile†problem and redistributes the public transit premium. Overall, this study highlights the externalities of the sharing economy and provides important policy implications.
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This study highlights the externalities of the sharing economy on local economies. Using the introduction of Uber X as a staggered shock, I assess how ridesharing influences the local housing market through the interaction with public transit. After ridesharing’s entry, housing prices and market rents increase at the zip code level. The effect is more pronounced in locations with greater access to public transit and lower driving probability, consistent with the notion that ridesharing complements public transit. Similarly, there is a larger increase in housing prices and rents in zip codes with larger populations, lower median ages and more minorities, consistent with Uber X users’ characteristics. Also, price appreciation is strongest for houses that are just beyond walking distance to public transit, suggesting that ridesharing helps solve the “last mile†problem and redistributes the public transit premium. Overall, this study highlights the externalities of the sharing economy and provides important policy implications.
Getting on Board: The Monitoring Effect of Institutional Directors
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We identify a sample of firms with directors employed by institutional investors and examine the effect of a direct channel of institutional monitoring. Using difference-in-differences tests, we find weak evidence that institutional directors have a positive effect on informational efficiency. More importantly, institutional directors have a significantly positive impact on stock returns over the long run. Further analysis shows that the presence of institutional directors leads to a slight increase of managerial entrenchment. Consistent with the notion that entrenched managers reduce risk-taking, we also find significant decreases in R&D investments and financial leverage, and significant increases in payouts for firms with institutional directors. The findings suggest that aligning with the interest of long-term investors, institutional directors deter firms from pursuing potentially value-decreasing investment projects and influence firms to return value to investors through lower debts and higher payouts, mainly share repurchases.
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We identify a sample of firms with directors employed by institutional investors and examine the effect of a direct channel of institutional monitoring. Using difference-in-differences tests, we find weak evidence that institutional directors have a positive effect on informational efficiency. More importantly, institutional directors have a significantly positive impact on stock returns over the long run. Further analysis shows that the presence of institutional directors leads to a slight increase of managerial entrenchment. Consistent with the notion that entrenched managers reduce risk-taking, we also find significant decreases in R&D investments and financial leverage, and significant increases in payouts for firms with institutional directors. The findings suggest that aligning with the interest of long-term investors, institutional directors deter firms from pursuing potentially value-decreasing investment projects and influence firms to return value to investors through lower debts and higher payouts, mainly share repurchases.
International Equity and Debt Flows to Emerging Market Economies: Composition, Crises, and Controls
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Standard models of capital flows to emerging market economies focus on debt flows and a pecuniary externality. However, by offering better risk sharing, international equity flows can render such externality unimportant, yet many economies fail to attract equity investment in a large quantity. We propose a theory of endogenous composition of capital flows that highlights two asymmetries. In our model, poor institutional quality leads to an inefficiently low share of equity financing as well as an inefficiently high volume of total inflows. Somewhat surprisingly, a social planner would often impose taxes on both equity and debt inflows. Our story differs in important ways from an alternative narrative focusing on collateral constraint.
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Standard models of capital flows to emerging market economies focus on debt flows and a pecuniary externality. However, by offering better risk sharing, international equity flows can render such externality unimportant, yet many economies fail to attract equity investment in a large quantity. We propose a theory of endogenous composition of capital flows that highlights two asymmetries. In our model, poor institutional quality leads to an inefficiently low share of equity financing as well as an inefficiently high volume of total inflows. Somewhat surprisingly, a social planner would often impose taxes on both equity and debt inflows. Our story differs in important ways from an alternative narrative focusing on collateral constraint.
Jumps in Commodity Prices. New Approaches for Pricing Options.
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We present a new term-structure model for commodity futures prices based on Trolle and Schwartz (2009) which we extend by incorporating multiple jump processes. Our work explores the valuation of plain vanilla options on futures prices when the spot price follows a log-normal process, the forward cost of carry curve and the volatility are stochastic variables, and the spot price and the forward cost of carry allow for time-dampening jumps. We obtain an analytical representation of the characteristic function of the futures prices and, hence, also for option prices. We price options on WTI crude oil futures contracts using our model and extant models. We obtain higher accuracy than earlier models and save significantly in computing time.
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We present a new term-structure model for commodity futures prices based on Trolle and Schwartz (2009) which we extend by incorporating multiple jump processes. Our work explores the valuation of plain vanilla options on futures prices when the spot price follows a log-normal process, the forward cost of carry curve and the volatility are stochastic variables, and the spot price and the forward cost of carry allow for time-dampening jumps. We obtain an analytical representation of the characteristic function of the futures prices and, hence, also for option prices. We price options on WTI crude oil futures contracts using our model and extant models. We obtain higher accuracy than earlier models and save significantly in computing time.
Managerial Market Timing: What Is the Pot Size for Long-Term Shareholders Assuming Firm Management Acts in Their Best Interest and Does Have an Informational Advantage?
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Assumed managers act in best interest of their long-term shareholders and do have superior information, within this paper the potential value gain from the perspective of a diversified investor is quantified with a stochastic model. If firms have flexibility and are able to issue or buyback shares up to 25% of their market capitalization an annualized average value gain between 0.08% (fair low-opportunity market) and 14.41% (fair high-opportunity market) can be realized in case firms' management perfectly exploit the Market Timing opportunities. In case firms' management err in 5% of their equity transactions the corresponding annual gains amount to -0.13% and 5.41%. We conclude that managerial Market Timing provides significant potential for long-term shareholders with equity market characteristics, flexibility and firms' management skill being the key determinants. Long-term investors should grant limited flexibility to firm management and firm management should avoid too prompt exploitation of opportunities due to price pressure effects.
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Assumed managers act in best interest of their long-term shareholders and do have superior information, within this paper the potential value gain from the perspective of a diversified investor is quantified with a stochastic model. If firms have flexibility and are able to issue or buyback shares up to 25% of their market capitalization an annualized average value gain between 0.08% (fair low-opportunity market) and 14.41% (fair high-opportunity market) can be realized in case firms' management perfectly exploit the Market Timing opportunities. In case firms' management err in 5% of their equity transactions the corresponding annual gains amount to -0.13% and 5.41%. We conclude that managerial Market Timing provides significant potential for long-term shareholders with equity market characteristics, flexibility and firms' management skill being the key determinants. Long-term investors should grant limited flexibility to firm management and firm management should avoid too prompt exploitation of opportunities due to price pressure effects.
Managerial Multi-tasking, Team Diversity and Mutual Fund Performance
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This study examines the impact of multi-tasking teams on fund performance. We find that while managerial multi-tasking has a negative impact on fund performance, teamwork can mitigate the adverse effect associated with managerial multi-tasking, which is indicative of superior performance of funds managed by multi-tasking teams. More importantly, it is the characteristics of the multitasking team that contribute to these superior results, which can be attributed to network cognitive diversity, suggesting that extended networks, facilitated by indirectly-connected managers via local teammates, can largely enhance the scale of cognitive diversity, thus generating significant gains through information pooling and integration. In assessing possible mechanisms for the observed superior performance, we find evidence of improved decision-making induced by network cognitive diversity through both transmission and sharing of value-relevant information, and speedy information diffusion.
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This study examines the impact of multi-tasking teams on fund performance. We find that while managerial multi-tasking has a negative impact on fund performance, teamwork can mitigate the adverse effect associated with managerial multi-tasking, which is indicative of superior performance of funds managed by multi-tasking teams. More importantly, it is the characteristics of the multitasking team that contribute to these superior results, which can be attributed to network cognitive diversity, suggesting that extended networks, facilitated by indirectly-connected managers via local teammates, can largely enhance the scale of cognitive diversity, thus generating significant gains through information pooling and integration. In assessing possible mechanisms for the observed superior performance, we find evidence of improved decision-making induced by network cognitive diversity through both transmission and sharing of value-relevant information, and speedy information diffusion.
O impacto de criptomoedas na performance de carteiras multi-ativos: análise sob a perspectiva de um investidor brasileiro
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Embora represente um tema de pesquisa relativamente extenso, a mensuração do efeito marginal da adição de criptomoedas em portfolios bem diversificados normalmente se restringe à perspectiva de um investidor nos EUA, Europa ou China. Este artigo contribui para a literatura ao avaliar essa temática sob a perspectiva de um investidor brasileiro. Partindo de portfólios-base compostos por ações (IBOV), renda fixa (IMAG), mercado imobiliário (IFIX) e commodities (OURO), avalia-se o incremento no retorno ajustado ao risco a partir da inclusão de criptomoedas sob oito estratégias de alocação de ativos dentro e fora-da-amostra. Os resultados, referentes ao perÃodo de novembro de 2015 a outubro de 2020, indicam que as estratégias “inverso da variância†(RPvar), “inverso da volatilidade†(RPvol), “retorno/risco†(RRT), e “mÃnima variância†(minVar) apresentaram Sharpes maiores com criptomoedas, muitas vezes estatisticamente diferentes do Sharpe do portfólio base. Por outro lado, os modelos de otimização de média-variância com criptomoedas performaram em geral pior, seja qual for o parâmetro de aversão a risco utilizado. Ainda, dentre os grupos de diversificação “Cripto Basketâ€, “Bitcoinâ€, “Altcoinsâ€, e “Stablecoinâ€, o último foi o que apresentou melhor performance na maior parte das estratégias testadas. Os resultados são robustos a diferentes janelas de estimação e frequências de rebalanceamento e expandem o entendimento da inclusão de criptomoedas sob a perspectiva de investidores em uma importante economia emergente.
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Embora represente um tema de pesquisa relativamente extenso, a mensuração do efeito marginal da adição de criptomoedas em portfolios bem diversificados normalmente se restringe à perspectiva de um investidor nos EUA, Europa ou China. Este artigo contribui para a literatura ao avaliar essa temática sob a perspectiva de um investidor brasileiro. Partindo de portfólios-base compostos por ações (IBOV), renda fixa (IMAG), mercado imobiliário (IFIX) e commodities (OURO), avalia-se o incremento no retorno ajustado ao risco a partir da inclusão de criptomoedas sob oito estratégias de alocação de ativos dentro e fora-da-amostra. Os resultados, referentes ao perÃodo de novembro de 2015 a outubro de 2020, indicam que as estratégias “inverso da variância†(RPvar), “inverso da volatilidade†(RPvol), “retorno/risco†(RRT), e “mÃnima variância†(minVar) apresentaram Sharpes maiores com criptomoedas, muitas vezes estatisticamente diferentes do Sharpe do portfólio base. Por outro lado, os modelos de otimização de média-variância com criptomoedas performaram em geral pior, seja qual for o parâmetro de aversão a risco utilizado. Ainda, dentre os grupos de diversificação “Cripto Basketâ€, “Bitcoinâ€, “Altcoinsâ€, e “Stablecoinâ€, o último foi o que apresentou melhor performance na maior parte das estratégias testadas. Os resultados são robustos a diferentes janelas de estimação e frequências de rebalanceamento e expandem o entendimento da inclusão de criptomoedas sob a perspectiva de investidores em uma importante economia emergente.
Performance Evaluation under Adverse Selection and Correlation Ambiguity
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We develop a model wherein a risk-neutral but ambiguity-averse principal contracts with a risk-averse agent who has a risky project. Both the agent and the principal can observe the project output and a public signal. The correlation between the output and the public signal is private information to the agent but is an ambiguous random variable to the principal. Then, apart from moral hazard, the optimal contract takes into consideration both adverse selection and ambiguity aversion simultaneously. Due to the classic trade-off between rent and efficiency, the principal lowers contract power for the agent with a low correlation project (the l-type agent) and compensates her for luck. However, aversion to correlation ambiguity counteracts with this rent reducing effect by making the principal weight the l-type agent more. Consequently, although ambiguity lessens the principal's value, it could improve social welfare by increasing efficiency of the l-type agent. We further extend the model by incorporating an aggregate signal whose variance depends on the ambiguous distribution of all the projects and allowing the agents to be ambiguity-averse. In this case, the principal has to respect the agent's model choice and compensates her for ambiguity premium, which again decreases contract power. With ambiguity-sharing, the pair of optimal separating contracts is metamorphosed compared to those in the baseline model.
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We develop a model wherein a risk-neutral but ambiguity-averse principal contracts with a risk-averse agent who has a risky project. Both the agent and the principal can observe the project output and a public signal. The correlation between the output and the public signal is private information to the agent but is an ambiguous random variable to the principal. Then, apart from moral hazard, the optimal contract takes into consideration both adverse selection and ambiguity aversion simultaneously. Due to the classic trade-off between rent and efficiency, the principal lowers contract power for the agent with a low correlation project (the l-type agent) and compensates her for luck. However, aversion to correlation ambiguity counteracts with this rent reducing effect by making the principal weight the l-type agent more. Consequently, although ambiguity lessens the principal's value, it could improve social welfare by increasing efficiency of the l-type agent. We further extend the model by incorporating an aggregate signal whose variance depends on the ambiguous distribution of all the projects and allowing the agents to be ambiguity-averse. In this case, the principal has to respect the agent's model choice and compensates her for ambiguity premium, which again decreases contract power. With ambiguity-sharing, the pair of optimal separating contracts is metamorphosed compared to those in the baseline model.
PoW Blockchain Network's Short-term Self-correction Mechanism
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This paper empirically analyzes PoW blockchain network’s short-term self- correction mechanism through examining the impact of daily network hashrate fluctuation on miner per hashrate income. Using data from Bitcoin blockchain network, we find that network hashrate fluctuation negatively affects miner per hashrate transaction fee income and positively affects miner per hashrate block re- ward income. Further tests show that network hashrate fluctuation affects miner transaction fee income through negatively influencing both per hashrate transaction number and average transaction fee. In robustness tests, we find that user trans- action fee might have heterogenous price rigidity. Our paper provides empirical evidence for theory on PoW blockchain network’s short-term stability.
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This paper empirically analyzes PoW blockchain network’s short-term self- correction mechanism through examining the impact of daily network hashrate fluctuation on miner per hashrate income. Using data from Bitcoin blockchain network, we find that network hashrate fluctuation negatively affects miner per hashrate transaction fee income and positively affects miner per hashrate block re- ward income. Further tests show that network hashrate fluctuation affects miner transaction fee income through negatively influencing both per hashrate transaction number and average transaction fee. In robustness tests, we find that user trans- action fee might have heterogenous price rigidity. Our paper provides empirical evidence for theory on PoW blockchain network’s short-term stability.
Present-Bias and the Value of Sophistication
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This paper develops a dynamic wealth management model for risk-averse investors displaying present-bias in the form of hyperbolic discounting. The investor chooses an optimal consumption policy and allocates her funds between a risk-free asset, a traded liquid asset, and a non-traded illiquid asset. We characterize these policies for both sophisticated and naive present-biased investors. There are three results. First, sophisticated investors over-consume more than their naive counterparts if and only if their coefficient of relative risk-aversion is smaller than one. As a result, sophistication is welfare reducing (increasing) when risk-aversion is low (high). Second, increasing asset illiquidity always benefits the sophisticated investor more than the naive investor. Thus, the welfare gap between sophisticated and naive investors is increasing in the proxy for asset illiquidity. Finally, present-biased investors accumulate a larger share of their wealth in the non-traded illiquid asset than in the traded risky stock compared to the neoclassical exponential discounter investor. As a consequence, from the perspective of present-biased investors, the equity premium puzzle (1985) and the private equity puzzle (2002) are two sides of the same coin.
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This paper develops a dynamic wealth management model for risk-averse investors displaying present-bias in the form of hyperbolic discounting. The investor chooses an optimal consumption policy and allocates her funds between a risk-free asset, a traded liquid asset, and a non-traded illiquid asset. We characterize these policies for both sophisticated and naive present-biased investors. There are three results. First, sophisticated investors over-consume more than their naive counterparts if and only if their coefficient of relative risk-aversion is smaller than one. As a result, sophistication is welfare reducing (increasing) when risk-aversion is low (high). Second, increasing asset illiquidity always benefits the sophisticated investor more than the naive investor. Thus, the welfare gap between sophisticated and naive investors is increasing in the proxy for asset illiquidity. Finally, present-biased investors accumulate a larger share of their wealth in the non-traded illiquid asset than in the traded risky stock compared to the neoclassical exponential discounter investor. As a consequence, from the perspective of present-biased investors, the equity premium puzzle (1985) and the private equity puzzle (2002) are two sides of the same coin.
Private Conversation Matters: Evidence from Sell-side Analyst Reports after Private Meetings
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Using a hand-collected database of Shenzhen Stock Exchange listed firms from 2013 to 2015, we examine the key characteristics of firms’ private meetings and their effects on analysts’ reports. We find that the short-term earnings forecast is more accurate and less optimistic during hosting periods after these meetings in general, but recommendations are still biased upwardly, even after the Fair Disclosure Regulation change in 2012. These results are robust regardless of whether the analyst attend meetings or whether the meeting is hold onsite so that analysts can observe the firm’s operations. We also investigate various aspects of private conversations in meetings, and show that the presence of managers, a smaller number of meeting participants, and discussing questions in more categories are associated with more accurate and less optimistic short-term forecasts during the hosting periods following the meeting. Our results suggest that private and small group conversations between managers and analysts can be significant information channels in these meetings.
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Using a hand-collected database of Shenzhen Stock Exchange listed firms from 2013 to 2015, we examine the key characteristics of firms’ private meetings and their effects on analysts’ reports. We find that the short-term earnings forecast is more accurate and less optimistic during hosting periods after these meetings in general, but recommendations are still biased upwardly, even after the Fair Disclosure Regulation change in 2012. These results are robust regardless of whether the analyst attend meetings or whether the meeting is hold onsite so that analysts can observe the firm’s operations. We also investigate various aspects of private conversations in meetings, and show that the presence of managers, a smaller number of meeting participants, and discussing questions in more categories are associated with more accurate and less optimistic short-term forecasts during the hosting periods following the meeting. Our results suggest that private and small group conversations between managers and analysts can be significant information channels in these meetings.
Risk Managing the LIBOR Transition
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By halting the LIBOR's publication, large volumes of fixed income securities, from loans to derivatives, will fall back to an alternative fixing reference. The initial proposal of a SOFR fallback eliminated any degree of subjectivity but opened up funding risk. Overlaying a credit spread over SOFR is a remedy that goes in the right direction, but neither guarantees a robust hedge for funding risk nor prevents accidental wealth transfers.To ensure robust funding risk hedges under all scenarios, we propose to complement the fallback rate by overlaying it with periodic exchanges of Funding Valuation Adjustment (FVA) reset amounts. Our proposal accomplishes the LIBOR indexing’s mandate of transferring banks’ funding risk to counterparties more accurately and robustly than the LIBOR itself while being objective and legally robust. We conclude that the LIBOR transition is an excellent stimulus and opportunity to improve funding strategies and, if implemented with foresight, can make the financial system more resilient and efficient.
SSRN
By halting the LIBOR's publication, large volumes of fixed income securities, from loans to derivatives, will fall back to an alternative fixing reference. The initial proposal of a SOFR fallback eliminated any degree of subjectivity but opened up funding risk. Overlaying a credit spread over SOFR is a remedy that goes in the right direction, but neither guarantees a robust hedge for funding risk nor prevents accidental wealth transfers.To ensure robust funding risk hedges under all scenarios, we propose to complement the fallback rate by overlaying it with periodic exchanges of Funding Valuation Adjustment (FVA) reset amounts. Our proposal accomplishes the LIBOR indexing’s mandate of transferring banks’ funding risk to counterparties more accurately and robustly than the LIBOR itself while being objective and legally robust. We conclude that the LIBOR transition is an excellent stimulus and opportunity to improve funding strategies and, if implemented with foresight, can make the financial system more resilient and efficient.
State Ownership: A Blessing Kitty and a Worrying Lion
SSRN
We provide firm-level evidence that a private firm may lower its financing costs by introducing a small (kitty) share of state ownership. However, if the state acquires the lion's share of the private firm, the firm may become inefficient. Therefore, the results show a non-linear relationship and an inverse U-shape between a firm's performance and its share of state ownership. Specifically, a firm with a small share of state ownership has better export performance than a pure private firm in financially more vulnerable sectors in China, but this superior performance deteriorates as the share of state ownership increases. These results are not driven by firm, sector, or time characteristics. This paper reconciles these findings with the fact that although a firm with state ownership is less liquidity constrained due to its low financing cost, while inefficiency, a frequent concomitant of state ownership, will eventually outweigh this credit advantage as the share of state ownership rises.
SSRN
We provide firm-level evidence that a private firm may lower its financing costs by introducing a small (kitty) share of state ownership. However, if the state acquires the lion's share of the private firm, the firm may become inefficient. Therefore, the results show a non-linear relationship and an inverse U-shape between a firm's performance and its share of state ownership. Specifically, a firm with a small share of state ownership has better export performance than a pure private firm in financially more vulnerable sectors in China, but this superior performance deteriorates as the share of state ownership increases. These results are not driven by firm, sector, or time characteristics. This paper reconciles these findings with the fact that although a firm with state ownership is less liquidity constrained due to its low financing cost, while inefficiency, a frequent concomitant of state ownership, will eventually outweigh this credit advantage as the share of state ownership rises.
Stochastic Asset Flow Equations: Interdependence of Trend and Volatility
SSRN
The interaction between the volatility and price dynamics is explored. We model stochastic asset prices using the asset flow model with randomness arising directly from supply and demand. We show that the volatility is smallest at the extrema of the price. Linearizing the stochastic differential equation (SDE) about equilibrium, we obtain an exact relation for the autocovariance function, and relate it to the (3 by 3) Jacobian of the linearized SDE. In particular, we find the conditions under which one has a pair of complex conjugate eigenvalues of the Jacobian resulting in oscillations. The frequency of the oscillations depends only on the imaginary part of the complex pair, while the decay rate depends only on the real eigenvalue and the real parts of the complex pair. For the deterministic system, oscillations typically decay rapidly. However, randomness induces oscillations to continue indefinitely with a frequency that depends on the parameters of the deterministic system. The computations and analytical results presented here demonstrate that volatility increases when traders place greater emphasis on trend, confirming a generally held belief among practitioners.
SSRN
The interaction between the volatility and price dynamics is explored. We model stochastic asset prices using the asset flow model with randomness arising directly from supply and demand. We show that the volatility is smallest at the extrema of the price. Linearizing the stochastic differential equation (SDE) about equilibrium, we obtain an exact relation for the autocovariance function, and relate it to the (3 by 3) Jacobian of the linearized SDE. In particular, we find the conditions under which one has a pair of complex conjugate eigenvalues of the Jacobian resulting in oscillations. The frequency of the oscillations depends only on the imaginary part of the complex pair, while the decay rate depends only on the real eigenvalue and the real parts of the complex pair. For the deterministic system, oscillations typically decay rapidly. However, randomness induces oscillations to continue indefinitely with a frequency that depends on the parameters of the deterministic system. The computations and analytical results presented here demonstrate that volatility increases when traders place greater emphasis on trend, confirming a generally held belief among practitioners.
Tailor-Made Asset Allocation: A Robust Framework to Implement Active Views
SSRN
Asset managers publish tactical asset allocation views regularly. The implementation of such (usually qualitative) views, in portfolios is often over-simplistic. We propose a robust framework to industrialize the construction of tailored portfolios consistent with the views. First, an unconstrained unique tactical portfolio is created by relating the conviction in each view to the allocation of risk budget to the assets underlying the view. Second, the tailored portfolios with investor-specific constraints and targets are constructed using robust portfolio optimization based on implied active returns derived from the unique unconstrained tactical portfolio. The implied returns are derived from reverse optimization using the same robust approach. Robust optimization is the core engine for the industrialization process. It produces portfolios consistent with the views while complying with constraints without requiring human intervention. Finally, a factor-based risk model endows the framework with transparency, by allowing for comparison of risk-factor exposures in portfolios with those in the original views’ exposures.
SSRN
Asset managers publish tactical asset allocation views regularly. The implementation of such (usually qualitative) views, in portfolios is often over-simplistic. We propose a robust framework to industrialize the construction of tailored portfolios consistent with the views. First, an unconstrained unique tactical portfolio is created by relating the conviction in each view to the allocation of risk budget to the assets underlying the view. Second, the tailored portfolios with investor-specific constraints and targets are constructed using robust portfolio optimization based on implied active returns derived from the unique unconstrained tactical portfolio. The implied returns are derived from reverse optimization using the same robust approach. Robust optimization is the core engine for the industrialization process. It produces portfolios consistent with the views while complying with constraints without requiring human intervention. Finally, a factor-based risk model endows the framework with transparency, by allowing for comparison of risk-factor exposures in portfolios with those in the original views’ exposures.
The Dynamics of Pay-for-Performance Sensitivity in Private Equity Funds
SSRN
I explore the dynamics of pay-for-performance sensitivity in private equity funds arising from carried interest. Carry pay is conditional on beating a hurdle rate, making pay-for-performance sensitivity increase in fund performance. I show that within-fund variation in pay-for-performance sensitivity is positively related to company growth in portfolio companies acquired in buyouts. The effect is stronger when the importance of the direct component relative to the indirect component of pay for performance is high. Exogenous variation is generated by utilizing public market shocks, which impact the NAV of all private equity funds but have a heterogeneous impact on pay-for-performance sensitivity due to funds’ varying degrees of capital invested and the non-linear payoff structure of carried interest. My findings provide evidence of the importance of incentives for value creation in private equity.
SSRN
I explore the dynamics of pay-for-performance sensitivity in private equity funds arising from carried interest. Carry pay is conditional on beating a hurdle rate, making pay-for-performance sensitivity increase in fund performance. I show that within-fund variation in pay-for-performance sensitivity is positively related to company growth in portfolio companies acquired in buyouts. The effect is stronger when the importance of the direct component relative to the indirect component of pay for performance is high. Exogenous variation is generated by utilizing public market shocks, which impact the NAV of all private equity funds but have a heterogeneous impact on pay-for-performance sensitivity due to funds’ varying degrees of capital invested and the non-linear payoff structure of carried interest. My findings provide evidence of the importance of incentives for value creation in private equity.
The Effects of Disclosure and Enforcement on Payday Lending in Texas
SSRN
Inspired by the field experiment in Bertrand and Morse (2011), the state of Texas adopted an information disclosure for consumers taking out payday loans starting in January, 2012. The disclosure compares the cost of payday loans with other credit products, and presents their likelihood of renewal in easy-to-understand terms. Simultaneously, Austin and Dallas implemented stricter supply restrictions through city ordinances. We analyze both types of regulations, and find that the statewide disclosures led to a significant and persistent 13% decline in loan volume in the first six months after implementation. The city ordinances led to a 62% decline in loan volume in Austin and a 20% decline in Dallas, with the timing of the effect driven by the start of enforcement rather than the effective date of regulation. The results show that both behaviorally-motivated disclosures and city-level supply restrictions can have a significant impact on equilibrium loan quantities, with no effect on prices or evidence of evasive income falsification.
SSRN
Inspired by the field experiment in Bertrand and Morse (2011), the state of Texas adopted an information disclosure for consumers taking out payday loans starting in January, 2012. The disclosure compares the cost of payday loans with other credit products, and presents their likelihood of renewal in easy-to-understand terms. Simultaneously, Austin and Dallas implemented stricter supply restrictions through city ordinances. We analyze both types of regulations, and find that the statewide disclosures led to a significant and persistent 13% decline in loan volume in the first six months after implementation. The city ordinances led to a 62% decline in loan volume in Austin and a 20% decline in Dallas, with the timing of the effect driven by the start of enforcement rather than the effective date of regulation. The results show that both behaviorally-motivated disclosures and city-level supply restrictions can have a significant impact on equilibrium loan quantities, with no effect on prices or evidence of evasive income falsification.
The Eurozone Membership Impact on Sovereign Creditworthiness
SSRN
We examine the impact of eurozone membership on sovereign creditworthiness over the period 1996-2017. We find that: (a) membership significantly improved sovereign creditworthiness, on average by well over one ratings notch, over this period; (b) the ratings boost was significantly higher in the pre-crisis period (with countries in the periphery of the eurozone being the principal beneficiaries), but declined sharply after 2010; and (c) financial integration between member states is the principal driver of the improved creditworthiness. We also describe a number of other findings including an "entry" effect from joining the eurozone, and lowered borrowing costs (as measured by CDS spreads) in line with the ratings boost.
SSRN
We examine the impact of eurozone membership on sovereign creditworthiness over the period 1996-2017. We find that: (a) membership significantly improved sovereign creditworthiness, on average by well over one ratings notch, over this period; (b) the ratings boost was significantly higher in the pre-crisis period (with countries in the periphery of the eurozone being the principal beneficiaries), but declined sharply after 2010; and (c) financial integration between member states is the principal driver of the improved creditworthiness. We also describe a number of other findings including an "entry" effect from joining the eurozone, and lowered borrowing costs (as measured by CDS spreads) in line with the ratings boost.
The Impact of Board Composition on the Dividend Policy of US Firms
SSRN
Purpose: This paper examines whether the characteristics of boards are more important in determining dividend policy than management characteristics. We show that as the final declarers of dividend policy is a firm’s board, the composition of a firm’s board significantly subsumes the effect of management characteristics that may also influence dividend policy.Design/methodology/approach: Using the dividend declaration dummy variable, we run a fixed effect logistic regression of the dividend indicator on board characteristics, and managerial characteristics with firm level controls, year effects and industry effects while clustering standard errors at the firm level. For dividend yield variable which is censored at zero, we employ a fixed effect Tobit regression.Findings: The results of the study show that board characteristics such as average age, female presence, and size have a strong positive significant effect while board independent chair, and voting right of directors have a negative significant effect on the likelihood of dividend declaration. For dividend yields, the results suggest that the presence of directors with financial expertise and the board size are the main influencers of dividend policy. Managerial characteristics are subsumed by director characteristics for determining dividend policy. The results overall support the evidence on the monitoring role of boards on management.Originality/value: The originality and value of this study lies in the approach of including a comprehensive number of board characteristics unlike previous studies which makes the study of the influence of board composition on dividends more encompassing.
SSRN
Purpose: This paper examines whether the characteristics of boards are more important in determining dividend policy than management characteristics. We show that as the final declarers of dividend policy is a firm’s board, the composition of a firm’s board significantly subsumes the effect of management characteristics that may also influence dividend policy.Design/methodology/approach: Using the dividend declaration dummy variable, we run a fixed effect logistic regression of the dividend indicator on board characteristics, and managerial characteristics with firm level controls, year effects and industry effects while clustering standard errors at the firm level. For dividend yield variable which is censored at zero, we employ a fixed effect Tobit regression.Findings: The results of the study show that board characteristics such as average age, female presence, and size have a strong positive significant effect while board independent chair, and voting right of directors have a negative significant effect on the likelihood of dividend declaration. For dividend yields, the results suggest that the presence of directors with financial expertise and the board size are the main influencers of dividend policy. Managerial characteristics are subsumed by director characteristics for determining dividend policy. The results overall support the evidence on the monitoring role of boards on management.Originality/value: The originality and value of this study lies in the approach of including a comprehensive number of board characteristics unlike previous studies which makes the study of the influence of board composition on dividends more encompassing.
The medium is the message: learning channels, financial literacy, and stock market participation
RePEC
This paper investigates the effects of learning channels on stock market participation. More specifically, we investigate the direct effects of learning about financial matters from one's private network, financial advisors, and the media, as well as the interactive effects of financial literacy and these learning channels. Analyzing a unique cross-section data that combine survey data and bank register data on retail investors, we find that media are the only learning channel that increases the likelihood of stock market participation. Interactions point to the joint importance of financial literacy and media as a learning channel for individuals' stock market participation. Constructing theme–based literacy measures, we conclude that only financial knowledge related to investments in risky assets affects stock market participation. Our findings suggest implications to policymakers when designing financial education programs.
RePEC
This paper investigates the effects of learning channels on stock market participation. More specifically, we investigate the direct effects of learning about financial matters from one's private network, financial advisors, and the media, as well as the interactive effects of financial literacy and these learning channels. Analyzing a unique cross-section data that combine survey data and bank register data on retail investors, we find that media are the only learning channel that increases the likelihood of stock market participation. Interactions point to the joint importance of financial literacy and media as a learning channel for individuals' stock market participation. Constructing theme–based literacy measures, we conclude that only financial knowledge related to investments in risky assets affects stock market participation. Our findings suggest implications to policymakers when designing financial education programs.
Volatility-of-Volatility Risk in Asset Pricing
SSRN
This paper develops a general equilibrium model and provides empirical support that the market volatility-of-volatility (VOV) predicts market returns and drives the time-varying volatility risk. In asset pricing tests with the market, volatility and VOV as factors, the risk premium on VOV is statistically and economically significant and robust. The market risk and volatility risk are not priced in unconditional models but, consistent with theory, their factor loadings conditional on VOV are priced. The pricing impact of VOV strengthens during market crashes suggesting that VOV is particularly relevant during market turmoil when investors’ demand for compensation for VOV risk strengthens.
SSRN
This paper develops a general equilibrium model and provides empirical support that the market volatility-of-volatility (VOV) predicts market returns and drives the time-varying volatility risk. In asset pricing tests with the market, volatility and VOV as factors, the risk premium on VOV is statistically and economically significant and robust. The market risk and volatility risk are not priced in unconditional models but, consistent with theory, their factor loadings conditional on VOV are priced. The pricing impact of VOV strengthens during market crashes suggesting that VOV is particularly relevant during market turmoil when investors’ demand for compensation for VOV risk strengthens.
What Drives Intraday Reversal? Illiquidity or Liquidity Oversupply?
SSRN
We document and compare the cross-section intraday reversal patterns between Chinese and U.S. market, and further study the driving forces for each of them. Different from U.S. market, there is no significant dependence of intraday reversal on stock liquidity for Chinese market. Hence, the illiquid based explanation, which has been long documented in U.S. data, could not be automatically applied. Instead, we show there is a significant resilience pattern for accumulated returns after intraday reversal: the negative correlation between previous intraday return and future return in Chinese market is reversed afterwards. These results speak for liquidity oversupply explanation. Moreover, intraday reversal is significantly stronger for stocks with higher participation of retailed investors, providing further supporting evidence. Our results shed some new light on economic drivers for intraday return behaviors, which has important implications for empirical asset pricing tests and provides understandings for the limits of market efficiency.
SSRN
We document and compare the cross-section intraday reversal patterns between Chinese and U.S. market, and further study the driving forces for each of them. Different from U.S. market, there is no significant dependence of intraday reversal on stock liquidity for Chinese market. Hence, the illiquid based explanation, which has been long documented in U.S. data, could not be automatically applied. Instead, we show there is a significant resilience pattern for accumulated returns after intraday reversal: the negative correlation between previous intraday return and future return in Chinese market is reversed afterwards. These results speak for liquidity oversupply explanation. Moreover, intraday reversal is significantly stronger for stocks with higher participation of retailed investors, providing further supporting evidence. Our results shed some new light on economic drivers for intraday return behaviors, which has important implications for empirical asset pricing tests and provides understandings for the limits of market efficiency.
