Finance Department Guest Seminar Archives 2010-Present
Browse the archives below to find information and working papers from past guest seminars hosted by the department of finance.
Date: September 7th, 2017
Room: CSOM 2-224
Title: (Why) do central banks care about their profits?
Authors: Igor Goncharov, Vasso Ioannidou, and Martin Schmalz*
We document that central banks are significantly more likely to report slightly positive profits than slightly negative profits. The discontinuity in the profit distribution is (i) more pronounced amid greater political or public pressure, the public’s receptiveness to more extreme political views, and agency frictions arising from governor career concerns, but absent when no such factors are present, and (ii) correlated with more lenient monetary policy inputs and greater inflation. These findings indicate that profitability concerns, while absent from standard theoretical models of central banking, are both present and effective in practice, and inform a theoretical debate about monetary stability and the effectiveness and riskiness of non-traditional central banking.
Date: September 22nd, 2017
Room: CSOM 2-233
Title: Asset Bubbles and Monetary Policy
Authors: Feng Dong, Jianjun Miao and Pengfei Wang
We provide an infinite-horizon model of rational asset bubbles in a dynamic new Keynesian framework. Entrepreneurs are heterogeneous in investment efficiency and face credit constraints. They can trade land as an asset, which also serves as collateral when borrowing from banks with reserve requirements. Land commands a liquidity premium and a land bubble can emerge. Monetary policy can affect the conditions for the existence of a bubble, its steady-state size, and its dynamics including the initial size. The ‘leaning against the wind’ interest rate policy reduces bubble volatility, but it could also raise inflation volatility. Whether monetary policy should respond to asset bubbles depends on the particular interest rate rule adopted by the central bank and on the type of exogenous shocks hitting the economy.
Date: September 29th, 2017
Room: CSOM 2-233
Title: Taking Orders and Taking Notes: Dealer Information Sharing in Financial Markets
Authors: Nina Boyarchenko, David O. Lucca, and Laura Veldkamp
The use of order flow information by financial firms has come to the forefront of the regulatory debate. Central to this discussion is whether a dealer who acquires information by taking client orders can share that information. We explore how information sharing affects dealers, clients, and issuer revenues in U.S. Treasury auctions. Because one cannot observe alternative information regimes, we build a model, calibrate it to auction results data, and use it to quantify counterfactuals. We estimate that yearly auction revenues with full information sharing (with clients and between dealers) would be $5 billion higher than in a “Chinese Wall" regime in which no information is shared. When information sharing enables collusion, the collusion costs revenue, but prohibiting information sharing costs more. For investors, the welfare effects of information sharing depend on how information is shared. Surprisingly, investors benefit when dealers share information with each other, not when they share more with clients. For the market, when investors can bid directly, information sharing creates a new financial accelerator: Only investors with bad news bid through intermediaries, who then share that information with others. Thus, sharing amplifies the effect of negative news. Tests of two model predictions support the model’s key features.
Date: November 3rd, 2017
Room: CSOM 2-233
Title: Relative Pay for Non-Relative Performance: Keeping up with the Joneses with Optimal Contracts
Authors: Peter M. DeMarzo, Ron Kaniel
We consider multi-agent contracting when agents have “keeping up with the Joneses” (KUJ) preferences. When a single principal can commit to a public contract, the optimal contract hedges agents’ relative wage risk without sacrificing efficiency, keeping output unchanged. Contracts appear inefficient, as performance seems inadequately benchmarked. With multiple principals, or a principal that is unable to commit, a “rat race” emerges in which agents are more productive, but wages increase even more, reducing profits and undermining efficiency. Renegotiation exacerbates (enhances) inefficiency (efficiency) when KUJ effects are weak(strong). Public disclosure of contracts across firms can cause output to collapse.
Date: November 17th, 2017
Room: CSOM 2-233
Title: Money Runs
Authors: Jason Roderick Donaldson, Giorgia Piacentino
We present a banking model in which bank debt circulates in decentralized secondary markets, like banknotes did in the nineteenth century and repos do today. We find that bank debt is susceptible to runs because secondary-market liquidity is subject to sudden, self-fulfilling dry-ups. When debt fails to circulate it is redeemed on demand in a “money run.” Even though demandable debt exposes banks to costly runs, banks still choose to issue it: the option to redeem on demand increases secondary-market debt prices and hence increases primary-market debt capacity—i.e. demandability and tradeability are complements, unlike in existing models.
March 10th, 2017
David Yermack, NYU
Where: CSOM 2-213
Ambiguity and The Trade Off Theory of Capital Structure
We examine the importance of ambiguity, or Knightian uncertainty, in the capital structure
decision. We develop a static tradeoff theory model in which agents are both risk averse and
ambiguity averse. The model confirms the usual idea that increased risk-the uncertainty over
known possible outcomes-leads rms to use less leverage. Conversely, greater ambiguity-the
uncertainty over the probabilities associated with the outcomes-leads firms to increase leverage.
Our empirical analysis provides results consistent with these predictions.
March, 31st, 2017
Stijn Van Nieuwerburgh, NYU
Where: CSOM 2-233
A Macroeconomic Model with Financially Constrained Producers and Intermediaries
We evaluate the quantitative effects of macroprudential policy. To do so, we solve a general equilibrium model with three types of agents and a government. Borrower-entrepreneurs produce output financed with long-term debt issued by financial intermediaries, subject to a leverage constraint. Intermediaries fund these loans combining deposits and their own equity, and are subject to a regulatory capital constraint. Savers provide funding to banks and to the government. Both entrepreneurs and banks make optimal default decisions. The government issues debt to finance budget deficits and to pay for bank rescue operations. We solve for macroeconomic quantities, the price of capital, the yield on safe bonds, and the credit spread. We study how financial and non-financial recessions differ, show that high credit spreads forecasts future declines in economic activity, and study macro-prudential policies. Policies that limit corporate leverage and financial leverage reduce welfare. Their benefits for financial and macro-economic stability are outweighed by the costs from a smaller-sized economy. The two types of macroprudential policies have different implications for the wealth distribution.
April 7th. 2017
Brent Neiman, Chicago
Where: CSOM 2-233
Unpacking Global Capital Flows: A Micro-Data Approach to Macro Facts
April 14th, 2017
Manuel Adelino, Duke
Where: CSOM 2-233
Are Lemons Sold First? Dynamic Signaling in the Mortgage Market
A central result in the theory of adverse selection in asset markets is that informed sellers can signal quality and obtain higher prices by delaying trade. This paper provides some of the first evidence of a signaling mechanism through trade delays using the residential mortgage market as a laboratory. We find a strong relation between mortgage performance and time to sale for privately securitized mortgages. Additionally, deals made up of more seasoned mortgages are sold at lower yields. These effects are strongest in the “Alt-A” segment of the market, where mortgages are often sold with incomplete hard information.
April 28th, 2017
Stefano Giglio, Chicago
Title: Inference on Risk Premia in the Presence of Omitted Factors
We propose a three-pass method to estimate the risk premia of observable factors in a linear asset pricing model, which is valid even when the observed factors are just a subset of the true factors that drive asset prices. Standard methods to estimate risk premia are biased in the presence of omitted priced factors correlated with the observed factors. We show that the risk premium of a factor can be identied in a linear factor model regardless of the rotation of the other control factors as long as they together span the space of true factors. Motivated by this rotation invariance result, our approach uses principal components to recover the factor space and combines the estimated principal components with each observed factor to obtain a consistent estimate of its risk premium. This methodology also accounts for potential measurement error in the observed factors and detects when such factors are spurious or even useless. The methodology exploits the blessings of dimensionality, and we therefore apply it to a large panel of equity portfolios to estimate risk premia for several workhorse linear models.
May 5th, 2017
Lorenzo Garlappi, UBC
Title: The Carry Trade and Uncovered Interest Parity when Markets are Incomplete
Many of the leading models of the carry trade imply that, contrary to the empirical evidence,
a country's currency depreciates in times of high consumption and output growth, a manifestation
of the Backus and Smith (1993) puzzle. We propose a modication of these models to account for
nancial market incompleteness and show that such a modication can induce positive correlation
between currency appreciation and consumption or output growth while, at the same time, help-
ing resolve the Backus and Smith (1993) and Brandt, Cochrane, and Santa-Clara (2006) puzzles.
Furthermore, in many of the existing models, the assumed fundamental cross-country di erences
(output volatility, growth, and risk attitude) responsible for interest rate di erentials also appear
at odds with the data. We document that default risk and nancial openness are strongly related
to interest rate di erentials and carry trade prots in the data. The incomplete markets model we
propose is consistent with these novel empirical facts.
Friday, September 16th, 2016
Xiaoyun Yu, Indiana
Where: CSOM 2-215
Transporting Transparency: Director Foreign Experience and Corporate Information Environment
This paper examines how board directors’ foreign experience affects a firm’s informationenvironment in emerging markets. Using the staggered introduction of a policy in China to attract overseas returnees as a natural experiment, we document a positive, causal effect of directors’ foreign experience on the informativeness of the firm’s stock price. We examine potential channels, and find that after individuals with foreign experience join the board, earnings transparency increases, and firms are more likely to hire high-quality auditors and to engage in voluntary disclosure. Furthermore, the information benefit brought by directors with foreign experience spills over to peer firms. These findings provide direct evidence on how board directors help shape corporate transparency in emerging markets.
October 7th, 2016
Nobu Kiyotaki, Princeton
Where: CSOM L-110
The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities
We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: Can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 U.S. financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government provides liquidity in exchange for illiquid private paper? We find that the effects of the liquidity shock can be large, and show some numerical examples in which the liquidity facilities prevented a repeat of the Great Depression in 2008-2009.
November 11th, 2016
Ohad Kadan, Washington
Where: CSOM 2-219
Estimating the Value of Information
We derive a general expression for the value of information to a small price-taking investor in a dynamic environment and provide a framework for its estimation from index options. We apply this framework and estimate that a consumer-investor with commonly-used preference parameters would pay 1 to 4 percent of her wealth to preview and act on key macroeconomic in-
dicators (GDP, unemployment, etc.). The value of information increases with the time discount factor, decreases with risk aversion, and increases with the elasticity of intertemporal substitution. Rational expectations (or lack thereof) play an important role in the value of information.
November 18th, 2016
Nicolas Crouzet, Northwestern
Where: CSOM L-114
Default, Debt Maturity and Investment Dynamics
This paper studies the optimal maturity structure of debt in a dynamic investment model with financial frictions. External financing is costly because firms have limited liability, and default entails deadweight output losses. Firms operate long-term assets, and may thus want to issue long-term debt in order to reduce short-term refinancing risk. However, lack of commitment on the firms’ part makes long-term debt issuance costly, relative to short-term debt. In theory, the optimal maturity structure of debt should trade off these two forces. In numerical calibrations of the model, however, short-term financing strongly dominates. Optimal borrowing policies in fact often involve active maturity shortening, in particular via debt repurchases. The optimality of short-term financing suggests that none of the benefits traditionally associated with long-term financing — such as adressing maturity mismatch — are quantitatively significant in “neo-classical” models of the firm.
December 9th, 2016
David Sraer, Berkeley
Where: CSOM 2-213
Aggregating Well-Identified Estimates of Capital Constraints
This paper develops a framework to compute the aggregate effect of financing fric-
tions by aggregating well-identified estimates of the effect of these frictions on firm-leveloutcomes. We consider a general equilibrium model with imperfect competition and heterogeneous firms facing frictions in the capital market. We derive a set of statisticssufficient to compute the aggregate effect of these frictions. These sufficient statistics can all be consistently estimated from the same valid experiment. We apply these formulas in two contexts – a simulated dataset where firms invest dynamically subject to a collateral constraint; an actual empirical setting where the effect of collateral values is identified through variations in local real estate prices – and offer in both cases a decomposition of how firm-level estimates translate into aggregate effects. This framework can be applied to other frictions affecting firms’ input choices, such as taxes, regulation or imperfect competition.
Friday, March 25th, 2016
Itay Goldstein, University of Pennsylvania
Where: CSOM 2-215
When: 10:30am - 12:00pm
Title: Commodity Financialization: Risk Sharing and Price Discovery in commodity Futures Markests
Abstract: We study how commodity financialization affects trading behavior, prices, and welfare through affecting risk sharing and price discovery in futures markets. Our analysis highlights a supply channel through which the futures price feeds back into the later spot price. This feedback effect tends to reduce price efficiency but improve welfare. Consistent with recent evidence, we show that financial traders either provide or demand liquidity in the futures market, depending on the information environment, and that commodity financialization reduces the futures price bias through broadening risk sharing and injecting information into
Friday, April 1st, 2016
Paige Ouimet, University of North Carolina
Where: CSOM L-126
When: 12:30pm - 2:00pm
Title: Going Entrepreneurial? IPOs and New Firm Creation
Abstract: Using matched employee-employer data from the US Census, we examine the impact of a successful initial public offering (IPO) on a firm’s existing employees and their future career choices. Using an instrumental variables strategy, we find strong evidence that going public induces employees to depart for start-ups. Moreover, this result is specific to start-ups. We find no change in the rate of employee departures for established firms. We suggest and find evidence consistent with two non-mutually exclusive mechanisms that can explain this pattern. First, following an IPO, many employees who received large stock grants in the past are able to cash out. This shock to employee wealth may allow employees to better tolerate the risks associated with joining a start-up. Alternatively, employees may leave in response to an undesirable cultural change following the IPO. Our results suggest that the recent declines in IPO activity and new firm creation in the U.S. may be causally linked. The recent decline in IPOs means fewer workers move to startups, decreasing overall new firm creation in the economy.
Friday, April 1st, 2016
Dimitri Vayanos, London School of Economics and Political Science
Where: CSOM 2-215
When: 10:30am - 12:00pm
Title: Going Entrepreneurial? IPOs and New Firm Creation
Abstract: We study the joint determintaion of fund managers' contracts and equilibium asset prices. Because of agency frictions, investors make managers' fees more sensitive to performance and benchmark performance against a market index. This makes managers unwilling to deviate from the index and exacerbates price distortions. Because trading against overvaluation exposes managers to greater risk of deviating from the index than trading against undervaluation, agency frictions bias the aggregate market upwards. They can also generate a negative relationship between risk and return because they raise the volatility of overvalued assets. Socially optimal contracts provide steeper performance incentives and cause larger pricing distortions than privately optimal contracts.
Friday, April 22nd, 2016
Philipp Schnabl, New York University
Where: CSOM 2-215
Friday, April 29th, 2016
Sam Hanson, Harvard
Where: CSOM 1-135
When: 12:00pm - 1:30pm
Title: Asset Price Dynamics in Partially Segmented Markets
Abstract: How do supply shocks in one financial market affect prices in other markets? We develop a model in which capital moves quickly within each asset class, but slowly between asset classes. While most investors specialize in a single market, a handful of generalists can gradually reallocate capital across markets. When a supply shock arrives, prices of risk in the impacted market become disconnected from those in others. Over the long-run, capital flows between markets and prices of risk become more closely aligned. While prices in the impacted market initially overreact to shocks, under plausible conditions, prices in related markets underreact.
Friday, May 6th, 2016
Hanno Lustig, Stanford
Where: CSOM 2-215
When: 10:30am - 12:00pm
Title: National Income Accounting When Firms Insure Workers
Abstract:We analyze national income accounting in an equilibrium model of industry dynamics with long-term contracts between risk-averse workers and heterogeneous firms. In our model, firms insure workers against firm-specific productivity shocks. We use this model as a laboratory for analyzing the impact of firm-level risk on the stationary distribution of rents. An increase in firm-level risk always increases the aggregate capital share in the economy, but may lower the average firm's capital share. Because of selection, the aggregate capital share reported in national income accounts produces a biased estimate of ex ante profitability of firms which determines compensation. Workers effectively pay a larger insurance premium to the owners of capital.
Friday, September 18th, 2015
Edward Prescott, Arizona State University
Where: CSOM 2-215
When: 10:30am - 12:00pm
Title: Equilibrium with Mutual Organizations in Adverse Selection Economies
Abstract: We develop and equilibrium concept in the Debreu (1954) theory of value tradition for a class of adverse selection economies which includes the Spence (1973) signaling and Rothschild-Stiglitz (1976) insurance environments. The equilibrium exists and is optimal. Further, all equilibria have the same individual type utility vector. The economies are large with a finite number of types that maximize expected utility on an underlying commodity space. An implication of the analysis is that the invisible hand works for this class of adverse selection economies.
Friday, October 2nd, 2015
Where: COSM 2-215
Abstract: We decompose the abnormal profits associated with well-known patterns in the cross-section of expected returns into their overnight and intraday components. We show that, on average, all of the abnormal returns on momentum strategies remarkably occur overnight while the abnormal profits on the other trading strategies we consider occur intraday. These patterns are extremely robust across subsamples and indeed are stronger for large-cap and high-price stocks. Furthermore, we find that all of the variables that are anomalous with respect to the Fama-French-Carhart model have risk premiums overnight that partially offset their much larger intraday average returns. Indeed, a closer look reveals that in every case a positive risk premium is earned overnight for the side of the trade that might naturally be deemed as riskier. In fact, we show that an overnight CAPM explains much of the cross-sectional variation in average overnight returns we document. Finally, we argue that investor heterogeneity may explain why momentum profits tend to accrue overnight. We first provide evidence that, relative to individuals, institutions prefer to trade during the day and against the momentum characteristic. We then highlight conditional patterns that reveal a striking tug of war. Either in the time series, when the amount of momentum activity is particularly low, or in the cross-section, when the typical institution holding a stock has a particularly strong need to rebalance, we find that momentum returns are even larger overnight and more strongly reverse during the day. Both cases generate variation in the spread between overnight and intraday returns on the order of 2 percent per month.
Friday, October 9th, 2015
Where: CSOM 2-215
Title: Estimating Market Risk Factors Incorporating Stock Characteristics
Abstract: We estimate market risk factors using data on stocks' returns and characteristics. The new framework combines the insight of characteristic-based portfolio-spread estimators (eg Fama-French, Carhart, etc.) with the statistical precision of APT-based principal-component (PC) estimators. Using monthly returns over 1927-2013 for about 10,000 stocks, our estimated factors reduce average absolute pricing errors by 1/2 and 1/3 relative to Carhart-factors and PC-factors, respectively. This suggests that stock characteristics can be viewed as altering assets' systematic risk exposure, instead of giving rise to anomalous average returns. Simulation evidence suggests that our estimator more accurately estimates the true factor space in finite sample. Importantly, our estimator is calculated virtually instantaneously.
Friday, October 16th, 2015
Where: CSOM 2-215
Title: The Bright Side of Patents
Abstract: Motivated by concerns that the patent system is harming entrepreneurs and small inventors, this study investigates the bright side of patents. We examine whether patents help innovative start-ups grow, create jobs, and succeed using detailed micro data on all approved and rejected patent applications filed by U.S. start-ups at the U.S. Patent and Trademark Office (USPTO) between 2001 and 2009. We exploit the fact that patent applications are assigned quasi-randomly to USPTO examiners and instrument the probability that an application is approved with individual examiners’ approval rates. We find that start-ups whose first patent application is exogenously approved grow faster, create more jobs, and innovate more than otherwise similar firms whose first application is rejected. We also show that exogenous delays in the patent review process significantly reduce growth, job creation, and innovation, even when patent applications are eventually approved. Our results suggest that patent approval acts as a catalyst that sets a start-up on a growth path by facilitating its access to venture capital—particularly for those surrounded by high uncertainty and information asymmetry.
Friday, November 20th, 2015
Where: CSOM 2-215
Title: Managing Stigma During a Financial Crisis
Abstract: How should regulators design effective emergency lending facilities to mitigate stigma during a financial crisis? I explore this question using data from an unexpected disclosure of a partial list of banks that secretly borrowed from the lender of last resort during the Great Depression. I find evidence of stigma in that depositors withdrew more deposits-to-assets from banks included on the list in comparison to banks left off the list. However, when all banks were simultaneously revealed to have borrowed, there was no stigma. Overall, the results suggest that an emergency lending facility that reveals bank identities simultaneously will mitigate stigma. (JEL Codes: G01, G21, G28)
Friday, December 11th, 2015,
Where: CSOM 2-215
Title: Macroprudential Bank Capital Regulation in a Competitive Financial System
Abstract: We propose a general equilibrium model to examine the systemwide effects of bank capital requirements when firms can substitute between financing from public markets and banks. In our model banks can serve a socially beneficial role of monitoring firms that are credit rationed by public markets, but banks' access to deposit insurance creates socially undesirable risk-shifting incentives. Capital ratio requirements reduce banks’ risk taking incentives, but can also constrain banks’ balance sheets. Our framework allows full flexibility on the specification of the cross-sectional distribution of firm types, banks’ monitoring advantages vis-a-vis public markets, and the distribution of signals available to regulators. Absent balance sheet effects, increases in equity-ratio requirements unambiguously improve welfare and the stability of the banking system. However, when bank capital is scarce, increased equity-ratio requirements may cause banks to substitute from socially valuable projects to high-risk investments. Our model provides conceptual guidance on how the effects of regulatory policies depend on the development of public markets, the cross-sectional distribution of firms, and the risk signals available to regulators..
Friday, December 18th, 2015
Andrew Ang, Columbia University
We introduce a methodology to estimate the historical time series of returns to investment in private equity. The approach requires only an unbalanced panel of cash contributions and distributions accruing to limited partners, and is robust to sparse data. We decompose private equity returns into a component due to traded factors and a time-varying private equity premium. We find strong cyclicality in the premium component that differs according to fund type. The time-series estimates allow us to directly test theories about private equity cyclicality, and we find evidence in favor of the Kaplan and Strömberg (2009) hypothesis that capital market segmentation helps to determine the private equity premium.
Adriano Rampini, Duke University
"Household Risk Management (505.3 KB)"
Households' insurance against adverse shocks to income, expenditures for health and other spending needs, and the value of assets (that is, household risk management) is limited and at times completely absent, in particular for poor households. We explain this basic pattern in household insurance in an infinite horizon model in which households have access to complete markets subject to collateral constraints resulting in a trade-off between risk management concerns and the financing needs for consumption and durable goods purchases. Insurance, which is typically thought of as trade across states, is linked to intertemporal trade, that is, consumption smoothing and financing, when households' promises to pay are restricted by limited enforcement. Household risk management is increasing in household net worth and income, under quite general conditions, in economies with income risk and durable goods price risk. Household risk management is precautionary in the sense that an increase in uncertainty increases risk management; remarkably, risk aversion is sufficient for this result and no assumptions on prudence are required.
Guillermo Ordonez, Univeristy of Pennsylvania
"Debt Crises: For Whome the Bells Tolls (641.55 KB)"
What a country has done in the past, and what other countries are doing in the present can feedback for good or for ill. We develop a simple model that can address hysteresis and contagion in sovereign debt markets. When a country’s fundamentals change, those changes affect information acquisition about that country but also affect the allocation of investment funds worldwide, inducing changes in the dynamics of sovereign spreads in seemingly unrelated countries.
Lukas Schmid, Duke University
"Competition, Markups, and Predictable Returns (511.79 KB)"
Imperfect competition is an important channel for time-varying risk premia in asset markets. We build a general equilibrium model with monopolistic competition and endogenous firm entry and exit. Endogenous variation in industry concentration generates countercyclical markups, which amplifies macroeconomic risk. The nonlinear relation between the measure of firms and markups endogenously generates countercyclical macroeconomic volatility. With recursive preferences, the volatility dynamics lead to countercyclical risk premia forecastable with measures of competition. Also, the model produces a U-shaped term structure of equity returns.
Annette Vissing-Jorgensesn, University of California, Berkeley
“Stock Returns over the FOMC Cycle (653.93 KB)”
We document that since 1994 the US equity premium follows an alternating weekly pattern measured in FOMC cycle time, i.e. in time since the last Federal Open Market Committee meeting. The equity premium is earned entirely in weeks 0, 2, 4 and 6 in FOMC cycle time (with week 0 starting the day before a scheduled FOMC announcement day). We show that this pattern is likely to reflect a risk premium for news (about monetary policy or the macro economy) coming from the Federal Reserve: (1) The FOMC calendar is quite irregular and changes across sub-periods over which our finding is robust. (2) Even weeks in FOMC cycle time do not line up with other macro releases. (3) Volatility in the fed funds futures market and the federal funds market (but not to the same extent in other markets) peaks during even weeks in FOMC cycle time. (4) Information processing/decision making within the Fed tends to happen bi-weekly in FOMC cycle time: Before 1994, when changes to the Fed funds target in between meetings were common, they disproportionately took place during
Geoffrey Tate, Univeristy of North Carolina – Chapel Hill
We find evidence of systematic optimism and pessimism among credit analysts, comparing contemporaneous ratings of the same firm across rating agencies. These biases carry through to debt prices and negatively predict future changes in credit spreads, consistent with mispricing. Moreover, they affect corporate policies: firms covered by more pessimistic analysts issue less debt, use more equity financing, and experience slower revenue growth. We find that MBAs provide higher quality ratings; however, optimism increases and accuracy decreases with tenure covering the firm. Our analysis uncovers a novel mechanism through which debt prices become distorted and demonstrates its effect on corporate decisions.
Lucian Taylor, Wharton, Univeristy of Pennsylvania
“Intangible Capital and the Investment-q Relation (352.62 KB)”
Including intangible capital in measures of investment and Tobin’s q produces a stronger investment-q relation. Specifically, regressions of investment on q produce higher R2 values and larger slope coefficients, both in firm-level and macroeconomic data. Including intangible capital also produces a stronger investment-cash flow relation. These results hold across a variety of firms and periods, but some results are even stronger where intangible capital is more important. These findings change our assessment of the classic q theory of investment, and they call for the inclusion of intangible capital in proxies for firms’ investment opportunities.
Howard Kung, London Business School
“Government Maturity Structure Shocks (414.34 KB)”
This paper examines the impact of government debt maturity restructuring on inflation and the real economy using a New Keynesian model that features a stochastic maturity structure of nominal debt and allows for changes in the monetary/fiscal policy mix. The irrelevance of open market operations changing the duration of government liabilities (holding the market value constant) is violated when the slope of the yield curve is nonzero in a fiscally-led policy regime. When the yield curve is downward-sloping, shortening the maturity structure increases the government discount rate, which generates fiscal inflation and an expansion in output. The opposite results obtain when the yield curve is upward-sloping. Conditional maturity restructuring policies depending on the slope of the yield curve can smooth macroeconomic fluctuations and over substantial welfare benefits. In a liquidity trap, lengthening the maturity structure can be effective in attenuating deflationary pressure and output losses. In short, this paper highlights the importance of bond risk premia, in conjunction with the government debt valuation equation, as a transmission channel for open market operations.
Tyler Muir, Yale
“Financial Crises and Risk Premia (606.92 KB)”
I analyze the behavior of risk premia in financial crises, wars, and recessions in an international panel spanning over 140 years and over 14 countries. I document that risk premia increase substantially in financial crises, but not in the other episodes. However, drops in consumption and consumption volatility are fairly similar across financial crises and recessions and are largest during wars, so standard macro asset pricing models will have trouble matching this variation. Comparing crises to “deep” recessions strengthens these findings further. I also find the equity of the financial sector forecasts returns. Taken together, the results suggest that the health of the financial sector is important for understanding why aggregate risk premia vary. I calibrate an intermediary asset pricing model and show it can match the data.
Jonathan Karpoff, University of Washington
"The Value of Foreign Bribery to Bribe Paying Firms (333.23 KB)”
We examine foreign bribery and its enforcement using data from enforcement actions initiated under the U.S. Foreign Corrupt Practices Act (FCPA) from 1978 through May 2013. We estimate that 22.9% of Compustat-listed firms with foreign sales engaged in a program of prosecutable bribery at least once during our sample period, and that the probability a bribe-paying firm will face bribery charges is 6.4%. Bribes tend to be paid for important contracts, as the average ex ante NPV of a bribe-related contract is 2.6% of the firm’s market capitalization. The costs for firms that are prosecuted for bribery depend on whether the bribery is comingled with charges of financial fraud. Firms with comingled fraud charges face large fines, investigation costs, and reputational losses, such that the ex post NPV is negative. Bribe-paying firms without comingled fraud charges face significant fines and investigation costs, but do not, on average, lose reputation in a way that impedes future operations or profitability.
Liyan Yang, Rotman School of Management, University of Toronto
“Good Disclosure, Bad Disclosure (452.97 KB)”
We study the implications of public information in a model where market prices convey information to relevant decision makers and the fluctuation of market prices is driven by multiple factors. Disclosure has a positive direct effect of providing new information and an indirect effect of changing the price informativeness. If disclosure is about a variable of which real decision makers are well informed, then the indirect effect is also positive, so that the direct effect is amplified, leading to a positive overall effect on real efficiency. If disclosure is about a variable that real decision markers care to learn much, then the indirect effect is negative and the direct effect is attenuated. Moreover, in markets which aggregate private information effectively, the negative indirect effect can dominate, so that disclosure can harm real efficiency.
Shmuel Baruch, The University of Utah
"Fleeting Orders (350.84 KB)”
We study a dynamic limit order market with a finite number of strategic liquidity suppliers who post limit orders. Their limit orders are hit by either news (i.e. informed) traders or noise traders. We show that repeatedly playing a mixed strategy equilibrium of a certain static game is a subgame perfect equilibrium with fleeting orders and flickering quotes. Furthermore, regardless of the distributions of the liquidation value and noise trade quantity, we always find a sequence of equilibria in mixed strategies such that the resulting random supply schedule converges in mean square, as the number of liquidity suppliers increases to infinity, to the deterministic competitive supply function.
Barney Hartman-Glaser, University of California, Los Angeles
"Dynamic Agency and Real Options (437.06 KB)"
We analyze how dynamic moral hazard affects corporate investment. In our model, the owners of a firm hold a real option to increase capital. They also employ a manager who controls the firm's productivity, but is subject to moral hazard. Although this conflict reduces capital productivity, both over- and under-investment can occur. When moral hazard is severe, the firm invests at a lower threshold in productivity than in the first-best because investment is a substitute for effort. When the growth option is large, the investment threshold is higher than in the first-best. We also discuss how investment affects pay-performance sensitivity.
Bill Wilhelm, University of Virginia
“Investment-Banking Relationships: 1933-2007 (1.51 MB)”
We study the evolution of investment bank relationships with issuers from 1933–2007. The degree to which issuers conditioned upon prior relationship strength when selecting an investment bank declined steadily after the 1960s. The issuer’s probability of selecting a bank with strong relationships with its competitors also declined after the 1970s. In contrast, issuers have placed an increasing emphasis upon the quantity and the quality of their investment bank’s connections with other banks. We relate the structural changes in bank-client relationships beginning in the 1970s to technological changes that altered the institutional constraints under which security issuance occurs.
Michael Roberts, Wharton School of Business, University of Pennsylvania
"How Does Government Debt Affect Corporate Financial and Investment Policies?"
Using a novel dataset of accounting and market information that spans most publicly traded nonfinancial firms over the last century, we find an economically large and robust negative relation between government debt and corporate debt and investment. A one standard deviation increase in treasury debt is associated with a one third standard deviation reduction in corporate debt issuances, a one third standard deviation increase in liquid assets, no significant change in corporate equity issuances, and a one third standard deviation reduction in corporate investment. These relations are more pronounced in larger, less risky firms whose debt is a closer substitute for treasuries. The channel through which this effect operates is financial intermediaries, whose balance sheets reveal a substitution between lending to the federal government and lending to the corporate sector. The relations between government debt and corporate policies, as well as the substitution between government and corporate lending by intermediaries, are stronger after 1970 when foreign demand increased competition for treasury securities. In concert, our results suggest that large, financially healthy corporations act as liquidity providers by supplying relatively safe securities to investors when alternatives are in short supply, and that this financial strategy influences marginal investments.
Mark Leary, Olin Business School, Washington University in St. Louis
Co-authored with Yelena Larkin (Penn State) and Roni Michaely (Cornell)
It is almost an article of faith that managers have a preference for smooth dividends. Yet, it is not clear if this reflects investors' preferences. In this paper, we study whether investors indeed value dividend smoothing stocks differently by exploring the implications of dividend smoothing for firms' stock prices and cost of capital. Using over 80 years of data, we find no robust relationship between the smoothness of a firm's dividends and the expected return or market value of its stock. Similarly, we find no association between the path of dividend changes and firms' value. The asymmetric reaction to dividend increases and decreases is largely attributable to the first time the firm cuts its dividend. Finally, we find that retail investors are less likely to hold dividend smoothing stocks, while institutional investors, and especially mutual funds, are more likely. This evidence for a smoothing clientele offers a potential reconciliation of our findings with the prevalent use of dividend smoothing.
Robert Novy-Marx, Simon Business School, University of Rochester
-- CANCELLED --
Neng Wang, Columbia Business School
Igor Makarov, London Business School
"Arbitrage Trading with Marking-to-market and Price Impact"
The paper studies trading decisions of money managers whose profit is marked- to-market and who trade in markets with price impact. I show that in their chase after good performance record managers may accumulate excessively large arbitrage positions and therefore, push prices above their fundamental levels. This may result in very large losses for investors.
Harrison Hong, Princeton
Co-authored with Jiangmin Xu (Princeton)
Yuri Tserlukevich, Arizona State University
Utpal Bhattacharya, Kelley School of Business, Indiana University
"The Dark Side of ETFs and Index Funds" (325.4 KB)
Dean Corbae, Wisconsin School of Business, University of Wisconsin
Bryan Kelly, Booth School of Business, University of Chicago
"Firm Volatility in Granular Networks" (503.59 KB)
|10/10/13 (Thu)||Matteo Maggiori, Stern School of Business, NYU|
Vito Gala, London School of Business
"Measuring Marginal q"
Alexander Gorbenko, London School of Business
Peter DeMarzo, Stanford Business School
"Risking Other People's Money: Gambling, Limited Liability, and Optimal Incentives"
Adair Morse, Booth School of Business, University of Chicago
"Lawyers in the Executive Suite: The Value of Gatekeepers as Internal Governance"
|1/11/13||Michael Gofman, University of Wisconsin-Madison
"Efficiency and Stability of a Financial Architecture with Too Interconnected To Fail Institutions" (951.65 KB)
|3/08/13||Konstantin Milbradt, Massachusetts Institute of Technology|
|3/29/13||Vincenzo Quadrini, University of Southern California|
|4/10/13||Kai Li, University of British Columbia|
|4/12/13||Ian Martin, Stanford|
|4/19/13||Charlie Hadlock, Michigan State|
|4/26/13||Kent Daniel, Columbia University|
|5/3/13||Jeff Brown, University of Illinois|
|9/14/12||Avri Ravid, Yeshiva University
"Intellectual Property Contracts: Theory and Evidence from Screenplay Sales" (469.94 KB)
|9/21/12||Mike Weisbach, Ohio State
"Financing-Motivated Acquisitions" (576.32 KB)
|10/05/12||Hamid Mohtadi, University of Wisconsin
"DOES TRANSPARENCY REDUCE FINANCIAL VOLATILITY?" (471.42 KB)
|10/12/12||Rui Albuquerque, Boston University
"Understanding the Equity-premium and Correlation Puzzles"
|10/19/12||David Frankel, Iowa State
"Securitization and Banking Competition" (987.22 KB)
|11/16/12||Paolo Pasquariello, University of Michigan
"Financial Market Dislocations" (464.87 KB)
|11/30/12||Carola Frydman, Boston University
"Economic Effects of Runs on Early 'Shadow Banks': Trust Companies and the Impact of the Panic of 1907" (463.2 KB)
Andrey Malenko, MIT
"Optimal Design of Internal Capital Markets" (423.79 KB)
Lars Lochstoer, Columbia
Simon Gervais, Duke University
Annamaria Lusardi, Dartmouth University
"Financial Literacy Around the World" (56.96 KB)
Radha Gopalan, Washington University
Stefan Nagel, Stanford University
"Sizing Up Repo" (584.34 KB)
Ross Levine, Brown University
"Does Entrepreneurship Pay?"
|9/9/11||Paola Sapienza, Northwestern University
"Time Varying Risk Aversion" (417.42 KB)
Andrew Hertzberg, Columbia University
"Exponentia Individuals, Hyperbolic Households" (484.86 KB)
David Backus, NYU
Raman Uppal, London Business School
Arthur Korteweg, Stanford University
"Structural Models of Capital Structure: A Framework for Model Evaluation and Testing"
Sergei Davidenko, Rotman
"A Market-Based Study of the Cost of Default" (463.41 KB)
"Asset Pricing in Large Information Networks" (374.05 KB)
"Equity Yields" (472.37 KB)
"Why I do not Understand Capital Structure Research"
Viral Acharya, NYU
Ravi Bansal, Duke University
Tom Noe, University of Oxford
Gustavo Manso, MIT
"Macroeconomic Risk and Debt Overhang" (251.42 KB)
Wei Xiong, Princeton University
"Financing Speculative Booms" (365.92 KB)
Patrick Bolton, Columbia