June 2023
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Measuring and Improving Stakeholder Welfare Is Easier Said than Done
– Umit G. Gurun, Jordan Nickerson, David H. Solomon
While corporate social responsibility by firms aims at improving welfare for different social groups, whether it achieves this is often difficult to measure. After Apr. 2018 protests, Starbucks enacted policies that anybody could sit in their stores and use the bathroom without making a purchase. Using anonymized cellphone location data, we estimate this led to a 7.0% decline in attendance relative to other nearby coffee shops. The effect is 84% larger near homeless shelters and larger for Starbucks wealthier customers. The average time spent per visit declined by 4.1%. Public urination citations decreased near Starbucks locations, but other minor crimes were unchanged.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Bank Lines of Credit as a Source of Long-Term Finance
– Xin Chang, Yunling Chen, Ronald W. Masulis
Hand-collecting credit line drawdowns that firms classify as long-term debt, we first document how long-term drawdowns rise with high investment needs or weak external capital market conditions. Nearly all drawdown proceeds finance long-term investment, including M&A activity. Unrated and lower-rated firms rely more on long-term drawdowns than high or very poorly rated firms. We further find that credit lines have tighter covenants than terms loans. Drawdowns are repaid fairly quickly and often refinanced with other long-term debt. Our findings support the monitored liquidity insurance theory of credit lines and highlight that long-term drawdowns act as a valuable bridge financing mechanism.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Machine Learning and the Stock Market
– Jonathan Brogaard, Abalfazl Zareei
Practitioners allocate substantial resources to technical analysis whereas academic theories of market efficiency rule out technical trading profitability. We study this long- standing puzzle by applying a diverse set of machine learning algorithms. The results show that an investor can find profitable technical trading rules using past prices, and that this out-of-sample profitability decreases through time, showing that markets have become more efficient over time. In addition, we find that the evolutionary genetic algorithms attitude in not shying away from erroneous predictions gives it an edge in building profitable strategies compared to the strict loss-minimization-focused machine learning algorithms.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Crises as Opportunities for Growth: The Strategic Value of Business Group Affiliation
– Ronald W. Masulis, Peter K. Pham, Jason Zein, Alvin E. S. Ang
We document a novel strategic motive for family business groups to utilize their internal capital markets (ICMs) during financial crises. We find that crisis-period group ICM activity is targeted toward exerting product market dominance over standalone rivals. Groups make significant post-crisis gains in market share that are concentrated among affiliates (and industry segments within affiliates) operating in highly competitive product markets, where capturing such gains is difficult in normal times. These patterns are observed only in emerging markets, suggesting that ICMs enable groups to exploit crises to realize long-term competitive advantages only when rivals face chronic financing frictions.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Foreign Ties That Bind: Cross-Border Firm Expansions and Fund Portfolio Allocation Around the World
– Fariborz Moshirian, Peter K. Pham, Shu Tian, Eliza Wu
We investigate whether international operations enhance information links between firms and foreign investors. Exploiting novel subsidiary-level data and within-location variations, we show that, after expanding into another country, a firm attracts greater investment allocation from funds from that country than from other foreign funds. This increase is economically significant, equivalent to one-fifth of the average firm weight in a country-specific portfolio. The observed effect cannot be attributed to funds influence, persists even when funds are already familiar with the firm, and helps them generate superior risk-adjusted returns. Our results suggest that firms cross-border economic activities contribute to global financial interconnectedness.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Does Sunlight Kill Germs? Stock Market Listing and Workplace Safety
– Claire Y. C. Liang, Yaxuan Qi, Rengong (Alex) Zhang, Haoran Zhu
This study highlights the positive impact of a stock market listing on workplace safety. We find that workplace injuries in publicly listed firms are lower than those in comparable private firms, and this effect relates to heightened monitoring by the media and regulators. The media pays more attention to public firms safety issues than to those of private firms, and the reduced media scrutiny due to local newspaper closures leads to greater increases in injuries in public firms. Regulators also monitor public firms more strictly, evidenced by a higher likelihood of non routine inspections and larger penalties for detected violations.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers
– Ugur Lel, Gerald S. Martin, Zhongling Qin
Upon the revelation of corporate misconduct by firms in their portfolios, institutional investors experience a significant discount in the market value of their portfolios, excluding misconduct firms, creating a short-term spillover that averages $92.7 billion losses per year. We examine an expansive set of channels under which this spillover to nontarget firms can occur, and find that it reflects the loss of the embedded value of monitoring by a common institutional owner, enforcement wave activity, and industry peer and business relationships. Institutional investors also experience a significant abnormal outflow of funds in the year following the misconduct event.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Recovery with Applications to Forecasting Equity Disaster Probability and Testing the Spanning Hypothesis in the Treasury Market
– Gurdip Bakshi, Xiaohui Gao, Jinming Xue
We investigate the implications of recovering real-world conditional expectation of return functions using options on the S&P 500 index and Treasury bond futures. First, we construct estimates of the probability of disasters, defined as higher than 6%, 5%, or 4% equity market declines over option expiration cycles. This measure of disaster probability forecasts realized disasters. Second, we employ options on the futures of the 10- and 30-year Treasury bonds to construct estimates for the expected return of bond futures. These measures display forecasting ability for subsequent futures returns beyond the level, slope, and curvature variables extracted from the yield curve.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
An Empirical Assessment of Empirical Corporate Finance
– Jeffrey L. Coles, Zhichuan F. Li
We empirically evaluate 20 prominent contributions across a broad range of areas in the empirical corporate finance literature. We assemble the necessary data and apply a single, simple econometric method, the connected-groups approach of Abowd et al. to appraise the extent to which prevailing empirical specifications explain variation of the dependent variable, differ in composition of fit arising from various classes of independent variables, and exhibit resistance to omitted variable bias and other endogeneity problems. We assess empirical performance across a wide spectrum of areas in corporate finance and indicate varying research opportunities for empiricists and theorists.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
CEO Selection and Executive Appearance
– Douglas O. Cook, Shawn Mobbs
Survey assessments have found limited evidence of benefits of executive attractiveness. We use an objective measure of facial attractiveness that is correlated with survey assessments but less noisy and identify several benefits from executive facial attractiveness previously found in the general population but heretofore empirically elusive among executives. We examine the effect of both measures on executive compensation, promotion to CEO and the corresponding shareholder reaction, and promotion to board chair. The objective measure identifies significantly positive labor market effects for executive attractiveness in all outcomes in contrast to survey assessments of attractiveness that do not correlate with any outcome.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Fragmentation and Strategic Market-Making
– Laurence Daures-Lescourret, Sophie Moinas
How does trading in one venue affect the quoting strategies of market makers in other venues? We develop a two-venue imperfect competition model in which market makers face quadratic costs when absorbing shocks. Non constant marginal costs imply that absorbing a shock in one venue simultaneously changes marginal costs in all other venues. Moreover, market makers strategically choose which shock(s) to absorb. These two forces may intensify competition, leading to enhanced liquidity. Using Euronext proprietary data, we track individual best bid and ask quotes of intermediaries in each venue. We uncover evidence of strategic cross-venue market-making behavior which is uniquely predicted by our model.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Speed and Expertise in Stock Picking: Older, Slower, and Wiser?
– Romain Boulland, Chayawat Ornthanalai, Kent L. Womack
There are significant differences among sell-side analysts in how frequently they revise recommendations. We show that much of this variation is an analyst-individual trait. Analysts who change recommendations more slowly make recommendations that are more influential and generate better portfolio returns. Slower-revising analysts tend to change recommendations following corporate news that are harder to interpret by non stock experts, and our evidence suggests that their investment value derives from their ability to better interpret hard-to-assess information. On average, analysts change recommendations less frequently as their career progresses; however, recommendation speed-style is the dominant predictor of their recommendation value.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Foreign Acquisition and Credit Risk: Evidence from the U.S. CDS Market
– Umit Yilmaz
This article empirically analyzes the effect of foreign block acquisitions on U.S. target firms credit risk as measured by their credit default swap (CDS) spreads. Foreign block purchases lead to a greater increase in the target firms CDS premia post-acquisition compared to domestic block purchases. This effect is stronger when foreign owners are geographically and culturally more distant, and when they obtain majority control. The findings are consistent with an asymmetric information hypothesis, in which foreign owners are less effective monitors due to information barriers.
May 2023
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Synthetic Options and Implied Volatility for the Corporate Bond Market
– Steven Shu-Hsiu Chen, Hitesh Doshi, Sang Byung Seo
We synthetically create option contracts on a corporate bond index using CDX swaptions, overcoming the limitations that stem from the lack of traded corporate bond options. Our approach allows us to estimate forward-looking moments concerning the corporate bond market in a model-free manner. By constructing an aggregate volatility measure and the associated variance risk premium, we examine the role of volatility risk in the corporate bond market. We highlight that the ex ante conditional second and higher moments we estimate from synthetic corporate bond options carry important implications for credit risk models, providing an extra basis for testing their validity.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
The Response to Share Mispricing by Issuing Firms and Short Sellers
– Paul Schultz
Short sale constrained stocks are overpriced on average. I show that firms exploit mispricing by selling shares when their stock is short sale constrained and repurchasing shares when their stock is easily shorted. Stocks underperform following seasoned equity offerings (SEOs) if and only if the stock is difficult to short. This suggests that some SEOs are motivated by mispricing, whereas others are not. Short selling costs make it difficult for investors to profit from the poor performance following SEOs. Short selling and SEOs are alternative ways to supply shares to investors, and firms become the low-cost share provider when short selling is costly.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Inter-Firm Inventor Collaboration and Path-Breaking Innovation: Evidence From Inventor Teams Post-Merger
– Kai Li, Jin Wang
Using a large and novel data set over the period of 1976 to 2019 tracking inventors career paths following mergers and acquisitions, we show that collaboration between acquirer and target inventors post-merger is associated with more path-breaking patents than those filed by either acquirer or target inventor-only teams. We further show that such collaboration is more important in improving acquirers innovation capabilities than hiring target inventors and knowledge spill overs. Finally, we show that recombining tacit knowledge embodied in the human capital of acquirer and target inventors is likely the mechanism. We conclude that inter-firm inventor collaboration is one key means for achieving synergies.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Do Cross-Sectional Predictors Contain Systematic Information?
– Joseph Engelberg, R. David McLean, Jeffrey Pontiff, Matthew C. Ringgenberg
Firm-level variables that predict cross-sectional stock returns, such as price-to-earnings and short interest, are often averaged and used to predict market returns. Using various samples of cross-sectional predictors and accounting for the number of predictors and their interdependence, we find only weak evidence that cross-sectional predictors make good time-series predictors, especially out-of-sample. The results suggest that cross- sectional predictors do not generally contain systematic information.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Financial Costs of Judicial Inexperience: Evidence From Corporate Bankruptcies
– Benjamin Iverson, Joshua Madsen, Wei Wang, Qiping Xu
Exploiting the random assignment of judges to corporate bankruptcy filings, we estimate financial costs of judicial inexperience. Despite new judges prior legal experience, formal education, and rigorous hiring process, their public Chapter 11 case spend 19% more time in bankruptcy, realize 31% higher legal and professional fees, and 21% lower creditor recovery rates. Examining possible mechanisms, we find that new judges take longer to rule on motions and cases assigned to these judges file more plans of reorganization. Conservative estimates suggest that minor policy adjustments could increase creditor recoveries by approximately $16.8 billion for the public firms in our sample.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Does Finance Make Us Less Social?
– Henrik Cronqvist, Mitch Warachka, Frank Yu
Informal risk sharing within social networks and formal financial contracts both enable households to manage risk. We find that financial contracting reduces participation in social networks. Specifically, increased crop insurance usage decreased local religious adherence and congregation membership in agricultural communities. Our identification utilizes the Federal Crop Insurance Reform Act of 1994 that doubled crop insurance usage nationally within a year, although changes in usage varied across counties. Difference-in-difference and Spatial First Difference tests confirm that households substituted insurance for religiosity. This substitution was associated with reductions in crop diversification and crop yields, indicating an increase in moral hazard.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Maturity Clienteles and Corporate Bond Maturities
– Alexander W. Butler, Xiang Gao, Cihan Uzmanoglu
The average maturity of newly issued corporate bonds has declined substantially over the past 40 years, and the traditional determinants of debt maturity fail to explain this decline fully. We show that the changing composition of investors in the corporate bond market influences bond maturities. The results of a Granger causality test, an instrumental variable approach, and a natural experiment suggest that a decline in the insurance companies which prefer long-term bonds ownership share in the corporate bond market explains a significant part of the unexplained maturity decline. These findings illustrate how investor preferences can have real effects on corporations.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Earnings Growth and Acquisition Returns: Do Investors Gamble in the Takeover Market?
– Tingting Liu, Danni Tu
We document a strong positive initial market reaction to merger announcements from bidders with either large earnings growth or significant earnings decline, relative to those with neutral earnings change, reflecting a U-shaped pattern between bidders earnings growth and announcement returns. However, the higher initial returns for bidders with earnings decline subsequently reverse, whereas the higher returns for bidders with high growth do not. We further show that the return patterns are driven by a tendency for retail investors to gamble that merger and acquisition deals initiated by poorly performing bidders will generate high synergies.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Market Return Around the Clock: A Puzzle
– Oleg Bondarenko, Dmitriy Muravyev
We study how the market return depends on the time of the day using E-mini S&P 500 futures actively traded around the clock. Strikingly, 4 hours around European open account for the entire average market return. This periods returns have a 1.6 Sharpe ratio and remain high after transaction costs. Average returns are a noisy zero during the remaining 20 hours. High returns are consistent with European investors processing information accumulated overnight and thus resolving uncertainty. Indeed, uncertainty reflected by VIX futures prices rises overnight and falls around European open. The results are stronger during the 2020 COVID crisis.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Zeroing In on the Expected Returns of Anomalies
– Andrew Y. Chen, Mihail Velikov
We zero in on the expected returns of long-short portfolios based on 204 stock market anomalies by accounting for i) effective bid ask spreads, ii) post-publication effects, and iii) the modern era of trading technology that began in the early 2000s. Net of these effects, the average anomalys expected return is a measly 4 bps per month. The strongest anomalies net, at best, 10 bps after controlling for data mining. Several methods for combining anomalies net around 20 bps. Expected returns are negligible despite cost mitigations that produce impressive net returns in-sample and the omission of additional trading costs, like price impact.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Retail Attention, Institutional Attention
– Hongqi Liu, Lin Peng, Yi Tang
We document distinctly different clientele effects on investor attention and return responses to information. Macro news crowds out retail investor attention to firms earnings news by 49%. For stocks with high retail ownership, macro news dampens earnings announcement returns by 17% and substantially increases post-announcement drift, especially during high VIX periods. In contrast, macro news increases institutional investor attention to scheduled earnings announcements but not their attention to unscheduled analysts forecast revisions. The findings confirm the implications of rational inattention models and highlight the importance of considering clientele effects in understanding the effect of news on attention and asset prices.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Regulating Commission-Based Financial Advice: Evidence from a Natural Experiment
– Stanislav Sokolinski
Do limitations on commissions paid to financial advisers reduce prices of financial products and stimulate investment? I examine these questions by estimating the causal effects of regulating commissions for mutual fund distribution. I exploit the unique institutional setting in Israel and the 2013 policy change when the government reduced commissions differently for different fund types. The reform led to a major decline in fund expense ratios and a consequent increase in fund flows. Funds with price-sensitive investors experienced 35% larger inflows. I interpret these results as investor responses to price competition fostered by a reduction in distribution costs.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Selection Bias in Mutual Fund Fire Sales
– Elizabeth A. Berger
Liquidity trading following mutual fund outflows creates a potentially powerful empirical setting in which stock price variation is unrelated to changes in firm fundamentals. Instrumental variables (IVs) drawn from this setting impose an additional assumption that managers sell firms in proportion to portfolio weights. I show that this assumption causes selection bias in these IVs. It mis-allocates large price impacts to poorly performing, illiquid firms with lower growth firms that managers systematically avoid selling. Simulations show that selection bias doubles the magnitude of regression coefficients and precludes potential fixes. Numerous recent studies exploiting these IVs should be reevaluated.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Hedging Commodity Price Risk
– Hamed Ghoddusi, Sheridan Titman, Stathis Tompaidis
We present an equilibrium model of hedging for commodity processing firms. We show the optimal hedge ratio depends on the convexity of the firms cost function and the elasticity of the supply of the input and the demand for the output. Our calibrated model suggests that hedging tends to be ineffective. When uncertainty comes exclusively from either the supply or from the demand side, updating the hedge dynamically, and using nonlinear contracts improves hedging effectiveness. However, with both supply and demand uncertainty, hedging effectiveness can be low even with option-based and dynamic hedging strategies.
April 2023
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
The Role of the Discount Rate in Investment and Employment Decisions
– Stig Vinther Mller, Richard Priestley
Time variation in the discount rate affects investment and employment decisions in a manner consistent with Q-theory predictions. This evidence is uncovered when using cyclical consumption as a proxy for the discount rate. The results, which are consistent across both U.S. and international data, suggest that firms respond rationally to variations in the cost of capital and that the discount rate has a substantial impact on macroeconomic dynamics and hence business cycle fluctuations.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Public Market Information and Venture Capital Investment
– Brian Gibbons
I study venture capital firms (VCs) use of public market information and how attention to this information relates to private market investment outcomes. I link web traffic to public filings hosted on EDGAR to individual VCs. VCs analyze public information about industry peers before most deals. An increase in industry filing views relates positively to the probability of an exit through acquisition, suggesting that public information helps identify paths to acquisition. The effect is stronger when the VC has less access to private information, especially for low-reputation VCs. Policymakers should consider spillover effects on private markets when setting public disclosure requirements.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
FIEs and the Transmission of Global Financial Uncertainty: Evidence from China
– Shujie Wu, Haichun Ye
This article provides micro-level evidence for the role of foreign-invested enterprises (FIEs) in the cross-border transmission of global financial uncertainty shocks. Using Chinese firm-level data, we find that rising uncertainty has a significantly larger contractionary effect on real investment for FIEs than their local counterparts. This effect is more pronounced for firms faced with greater investment irreversibility or financial constraints. The contractionary effect is mainly driven by downside uncertainty, whereas upside uncertainty is modestly expansionary. Similar effects are found for other firm-level performances. There is also a spillover effect to local private firms with FIEs concentrated in downstream sectors.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Shareholder Litigation Risk and Firms Choice of External Growth
– Chenchen Huang, Neslihan Ozkan, Fangming Xu
We provide novel evidence showing that shareholder litigation risk influences firms choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk and low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms choices of boundary- expanding transactions.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Shareholder Litigation and Corporate Social Responsibility
– Steven Freund, Nam H. Nguyen, Hieu V. Phan
This research examines the relation between shareholder litigation and corporate social responsibility (CSR). Exploiting exogenous changes in shareholder litigation rights following the staggered adoption of universal demand laws by U.S. states and the Ninth Circuit Court of Appeals ruling on securities class action lawsuits, we show that weaker shareholder litigation rights lead to lower CSR scores. Moreover, the relation is stronger for firms facing higher litigation risk, and a decreased CSR score enhances firm value. Our evidence suggests that firms engage in CSR activities partly to reduce shareholder litigation risk ex ante and mitigate its consequences ex post.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Trust and Debt Contracting: Evidence From the Backdating Scandal
– Veljko Fotak, Feng (Jack) Jiang, Haekwon Lee, Erik Lie
We study the effect of trust on debt contracting. We find that, after the revelation of option backdating, borrowers that likely backdated their previous option grants pay higher interest rates on loans. This adverse effect is mitigated by CEO replacements. Results are similar for public debt, but only if a third party identified the back daters. After the backdating revelation, firms that engaged in backdating increase their reliance on public debt, and those without access to the public debt market experience capital constraints.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Collateral Constraints, Financial Constraints, and Risk Management: Evidence From Anti-Recharacterization Laws
– Douglas (DJ) Fairhurst, Yoonsoo Nam
We use the staggered enactment of anti-recharacterization laws as a plausibly exogenous shock to the value of securitizing collateral through special purpose vehicles (SPVs) and test how collateral values impact corporate risk management. Following the laws enactment, we find increases in commodity, foreign exchange, and interest rate hedging, especially for firms with exposure to these risks and that rely on SPVs. Supporting the collateral constraints literature, the effect is weaker for firms that likely need the collateral for external financing, such as financially constrained firms. Our findings highlight fluctuations in collateral values as an important consideration in risk management decisions.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Public Attention to Gender Equality and Board Gender Diversity
– Mariassunta Giannetti, Tracy Yue Wang
We document that heightened public attention to gender equality is associated with an increase in board gender diversity. Improvements in diversity are more pronounced in firms with a corporate culture that is already sympathetic to gender equality. When public attention to gender equality increases, firms reach out to a larger pool of women, such as women without industry experience or outside their network, but female director appointments do not appear to be dilutive of the boards skills. Instead, we observe less reliance on connections for director appointments and a decrease in the propensity to appoint connected men.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Determinants of International Buyout Investments
– Serdar Aldatmaz, Greg W. Brown, Asli Demirguc-Kunt
Using a proprietary data set on international private equity activity, we study the determinants of buyout investments across 61 countries and 19 industries over the period of 1990 to 2017. We find that countries with cyclically strong economies, more active stock and credit markets, and better rule of law experience more buyout activity. Countries also receive more buyout capital following investor protection and contract enforcement reforms. The set of determinants we identify appear somewhat unique to buyout investments, because other forms of investment such as foreign direct investment, gross capital formation, investments in R&D, and M&A activity do not respond similarly to these factors.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Equity Trading Activity and Treasury Bond Risk Premia
– Stefanie Schraeder, Elvira Sojli, Avanidhar Subrahmanyam, Wing W. Tham
We link equity and treasury bond markets via an informational channel. When macroeconomic state shifts are more probable, informed traders are more likely to have valid signals about fundamentals, so that uninformed traders are less willing to trade against informed ones. This implies low volume and high volatility, that is, a high volatility volume ratio (VVR). Central banks react to state shifts, but their actions are uncertain. Therefore, a higher state shift likelihood implies larger bond risk premia. These arguments together imply that VVR should positively predict bond excess returns. We empirically test and confirm this prediction, both in- and out-of-sample.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Information Intermediaries: How Commercial Bankers Facilitate Strategic Alliances
– Marc Frattaroli, Christoph Herpfer
We investigate how bankers use information from lending relationships to help borrowers find partners for strategic alliances. Firms that have borrowed from the same banker or share an indirect connection through a network of bankers are significantly more likely to enter an alliance. Consistent with bankers overcoming informational frictions, their ability to facilitate alliances decreases with banker-network distance, and is stronger for opaque borrowers. Firms connected to more potential partners via banker networks enter more alliances. These alliances are associated with positive announcement returns, and brokering banks are more likely to receive future underwriting mandates.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Technological Fit and the Market for Managerial Talent
– Fred Bereskin, Seong K. Byun, Jong-Min Oh
We show that the similarity of a firms technological expertise with that of other firms affects managerial labor market outcomes. Using each firms patent portfolio to estimate its technological expertise, we find that its similarity in technological expertise with other firms is strongly related to the benchmark group used for CEO compensation and job transitions. Furthermore, we show that a firms CEO pay is positively associated with the CEO compensation levels of technologically similar firms. Our results thus demonstrate the crucial role of technological similarity in determining the value of outside options and the boundaries of the managerial labor market.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Does Industry Competition Influence Analyst Coverage Decisions and Career Outcomes?
– Charles Hsu, Xi Li, Zhiming Ma, Gordon M. Phillips
We analyze whether industry competition influences analyst coverage decisions and whether analysts benefit from covering product market competitors. We find that analysts are more likely to cover a firm when this firm competes with more firms already covered by the analyst. We also find that the intensity of competition among these competitors is additionally important to the coverage decision. Moreover, we find that analysts who cover product market competitors are more likely to obtain analyst star status. These results are consistent with the importance to analysts of industry competition and product market knowledge accumulated through covering product market competitors.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Peer Effects in Equity Research
– Kenny Phua, Mandy Tham, Chishen Wei
We study the importance of peer effects among sell-side analysts who work at the same brokerage house, but cover different firms. By mapping the information network within each brokerage, we identify analysts who occupy central positions in the network. Central analysts incorporate more information from their coworkers and produce better research. Using shocks to network structures around brokerage mergers, we identify the influence of peer effects and the importance of industry expertise on analysts performance. A portfolio strategy that exploits the forecast revisions of central analysts earns up to 24% per annum.
March 2023
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
The Role of the Discount Rate in Investment and Employment Decisions
– Stig Vinther Mller, Richard Priestley
Time variation in the discount rate affects investment and employment decisions in a manner consistent with Q-theory predictions. This evidence is uncovered when using cyclical consumption as a proxy for the discount rate. The results, which are consistent across both U.S. and international data, suggest that firms respond rationally to variations in the cost of capital and that the discount rate has a substantial impact on macroeconomic dynamics and hence business cycle fluctuations.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Public Market Information and Venture Capital Investment
– Brian Gibbons
I study venture capital firms (VCs) use of public market information and how attention to this information relates to private market investment outcomes. I link web traffic to public filings hosted on EDGAR to individual VCs. VCs analyze public information about industry peers before most deals. An increase in industry filing views relates positively to the probability of an exit through acquisition, suggesting that public information helps identify paths to acquisition. The effect is stronger when the VC has less access to private information, especially for low-reputation VCs. Policymakers should consider spillover effects on private markets when setting public disclosure requirements.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
FIEs and the Transmission of Global Financial Uncertainty: Evidence from China
– Shujie Wu, Haichun Ye
This article provides micro-level evidence for the role of foreign-invested enterprises (FIEs) in the cross-border transmission of global financial uncertainty shocks. Using Chinese firm-level data, we find that rising uncertainty has a significantly larger contractionary effect on real investment for FIEs than their local counterparts. This effect is more pronounced for firms faced with greater investment irreversibility or financial constraints. The contractionary effect is mainly driven by downside uncertainty, whereas upside uncertainty is modestly expansionary. Similar effects are found for other firm-level performances. There is also a spillover effect to local private firms with FIEs concentrated in downstream sectors.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Shareholder Litigation Risk and Firms Choice of External Growth
– Chenchen Huang, Neslihan Ozkan, Fangming Xu
We provide novel evidence showing that shareholder litigation risk influences firms choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk and low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms choices of boundary- expanding transactions.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Shareholder Litigation and Corporate Social Responsibility
– Steven Freund, Nam H. Nguyen, Hieu V. Phan
This research examines the relation between shareholder litigation and corporate social responsibility (CSR). Exploiting exogenous changes in shareholder litigation rights following the staggered adoption of universal demand laws by U.S. states and the Ninth Circuit Court of Appeals ruling on securities class action lawsuits, we show that weaker shareholder litigation rights lead to lower CSR scores. Moreover, the relation is stronger for firms facing higher litigation risk, and a decreased CSR score enhances firm value. Our evidence suggests that firms engage in CSR activities partly to reduce shareholder litigation risk ex ante and mitigate its consequences ex post.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Trust and Debt Contracting: Evidence From the Backdating Scandal
– Veljko Fotak, Feng (Jack) Jiang, Haekwon Lee, Erik Lie
We study the effect of trust on debt contracting. We find that, after the revelation of option backdating, borrowers that likely backdated their previous option grants pay higher interest rates on loans. This adverse effect is mitigated by CEO replacements. Results are similar for public debt, but only if a third party identified the back daters. After the backdating revelation, firms that engaged in backdating increase their reliance on public debt, and those without access to the public debt market experience capital constraints.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Collateral Constraints, Financial Constraints, and Risk Management: Evidence From Anti-Recharacterization Laws
– Douglas (DJ) Fairhurst, Yoonsoo Nam
We use the staggered enactment of anti-recharacterization laws as a plausibly exogenous shock to the value of securitizing collateral through special purpose vehicles (SPVs) and test how collateral values impact corporate risk management. Following the laws enactment, we find increases in commodity, foreign exchange, and interest rate hedging, especially for firms with exposure to these risks and that rely on SPVs. Supporting the collateral constraints literature, the effect is weaker for firms that likely need the collateral for external financing, such as financially constrained firms. Our findings highlight fluctuations in collateral values as an important consideration in risk management decisions.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Public Attention to Gender Equality and Board Gender Diversity
– Mariassunta Giannetti, Tracy Yue Wang
We document that heightened public attention to gender equality is associated with an increase in board gender diversity. Improvements in diversity are more pronounced in firms with a corporate culture that is already sympathetic to gender equality. When public attention to gender equality increases, firms reach out to a larger pool of women, such as women without industry experience or outside their network, but female director appointments do not appear to be dilutive of the boards skills. Instead, we observe less reliance on connections for director appointments and a decrease in the propensity to appoint connected men.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Determinants of International Buyout Investments
– Serdar Aldatmaz, Greg W. Brown, Asli Demirguc-Kunt
Using a proprietary data set on international private equity activity, we study the determinants of buyout investments across 61 countries and 19 industries over the period of 1990 to 2017. We find that countries with cyclically strong economies, more active stock and credit markets, and better rule of law experience more buyout activity. Countries also receive more buyout capital following investor protection and contract enforcement reforms. The set of determinants we identify appear somewhat unique to buyout investments, because other forms of investment such as foreign direct investment, gross capital formation, investments in R&D, and M&A activity do not respond similarly to these factors.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Equity Trading Activity and Treasury Bond Risk Premia
– Stefanie Schraeder, Elvira Sojli, Avanidhar Subrahmanyam, Wing W. Tham
We link equity and treasury bond markets via an informational channel. When macroeconomic state shifts are more probable, informed traders are more likely to have valid signals about fundamentals, so that uninformed traders are less willing to trade against informed ones. This implies low volume and high volatility, that is, a high volatility volume ratio (VVR). Central banks react to state shifts, but their actions are uncertain. Therefore, a higher state shift likelihood implies larger bond risk premia. These arguments together imply that VVR should positively predict bond excess returns. We empirically test and confirm this prediction, both in- and out-of-sample.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Information Intermediaries: How Commercial Bankers Facilitate Strategic Alliances
– Marc Frattaroli, Christoph Herpfer
We investigate how bankers use information from lending relationships to help borrowers find partners for strategic alliances. Firms that have borrowed from the same banker or share an indirect connection through a network of bankers are significantly more likely to enter an alliance. Consistent with bankers overcoming informational frictions, their ability to facilitate alliances decreases with banker-network distance, and is stronger for opaque borrowers. Firms connected to more potential partners via banker networks enter more alliances. These alliances are associated with positive announcement returns, and brokering banks are more likely to receive future underwriting mandates.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Technological Fit and the Market for Managerial Talent
– Fred Bereskin, Seong K. Byun, Jong-Min Oh
We show that the similarity of a firms technological expertise with that of other firms affects managerial labor market outcomes. Using each firms patent portfolio to estimate its technological expertise, we find that its similarity in technological expertise with other firms is strongly related to the benchmark group used for CEO compensation and job transitions. Furthermore, we show that a firms CEO pay is positively associated with the CEO compensation levels of technologically similar firms. Our results thus demonstrate the crucial role of technological similarity in determining the value of outside options and the boundaries of the managerial labor market.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Does Industry Competition Influence Analyst Coverage Decisions and Career Outcomes?
– Charles Hsu, Xi Li, Zhiming Ma, Gordon M. Phillips
We analyze whether industry competition influences analyst coverage decisions and whether analysts benefit from covering product market competitors. We find that analysts are more likely to cover a firm when this firm competes with more firms already covered by the analyst. We also find that the intensity of competition among these competitors is additionally important to the coverage decision. Moreover, we find that analysts who cover product market competitors are more likely to obtain analyst star status. These results are consistent with the importance to analysts of industry competition and product market knowledge accumulated through covering product market competitors.
Journal of Financial and Quantitative Analysis
Journal of Financial and Quantitative Analysis | Cambridge Core
Peer Effects in Equity Research
– Kenny Phua, Mandy Tham, Chishen Wei
We study the importance of peer effects among sell-side analysts who work at the same brokerage house, but cover different firms. By mapping the information network within each brokerage, we identify analysts who occupy central positions in the network. Central analysts incorporate more information from their coworkers and produce better research. Using shocks to network structures around brokerage mergers, we identify the influence of peer effects and the importance of industry expertise on analysts performance. A portfolio strategy that exploits the forecast revisions of central analysts earns up to 24% per annum.