The Global Impact of Brexit Uncertainty
Published: 11/30/2023 | DOI: 10.1111/jofi.13293
TAREK A. HASSAN, STEPHAN HOLLANDER, LAURENCE VAN LENT, AHMED TAHOUN
We propose a text‐based method for measuring the cross‐border propagation of large shocks at the firm level. We apply this method to estimate the expected costs, benefits, and risks of Brexit and find widespread reverberations in listed firms in 81 countries. International (i.e., non‐U.K.) firms most exposed to Brexit uncertainty (the second moment) lost significant market value and reduced hiring and investment. International firms also overwhelmingly expected negative first‐moment impacts from the U.K.'s decision to leave the European Union (EU), particularly related to regulation, asset prices, and labor market impacts of Brexit.
Information Cascades and Threshold Implementation: Theory and an Application to Crowdfunding
Published: 11/23/2023 | DOI: 10.1111/jofi.13294
LIN WILLIAM CONG, YIZHOU XIAO
Economic interactions often involve sequential actions, observational learning, and contingent project implementation. We incorporate all‐or‐nothing thresholds in a canonical model of information cascades. Early supporters effectively delegate their decisions to a “gatekeeper,” resulting in unidirectional cascades without herding on rejections. Project proposers can consequently charge higher prices. Proposal feasibility, project selection, and information aggregation all improve, even when agents can wait. Equilibrium outcomes depend on crowd size, and project implementation and information aggregation achieve efficiency in the large‐crowd limit. Our key insights hold under thresholds in dollar amounts and alternative equilibrium selection, among other model extensions.
Published: 11/23/2023 | DOI: 10.1111/jofi.13290
ILAN KREMER, AMNON SCHREIBER, ANDRZEJ SKRZYPACZ
We examine a dynamic disclosure model in which the value of a firm follows a random walk. Every period, with some probability, the manager learns the firm's value and decides whether to disclose it. The manager maximizes the market perception of the firm's value, which is based on disclosed information. In equilibrium, the manager follows a threshold strategy with thresholds below current prices. He sometimes reveals pessimistic information that reduces the market perception of the firm's value. He does so to reduce future market uncertainty, which is valuable even under risk‐neutrality.
Intervention with Screening in Panic‐Based Runs
Published: 11/22/2023 | DOI: 10.1111/jofi.13295
LIN SHEN, JUNYUAN ZOU
Policymakers frequently use guarantees to mitigate panic‐based runs in the financial system. We analyze a binary‐action coordination game under the global games framework and propose a novel intervention program that screens investors based on their heterogeneous beliefs about the system's stability. The program only attracts investors who are at the margin of running, and their participation boosts all investors' confidence in the financial system. Compared with government guarantee programs, our proposed program is as effective at mitigating runs but features two advantages: it costs less to implement and it is robust to moral hazard.
Front‐Page News: The Effect of News Positioning on Financial Markets
Published: 11/21/2023 | DOI: 10.1111/jofi.13287
ANASTASSIA FEDYK
This paper estimates the effect of news positioning on the speed of price discovery, using exogenous variation in prominent (“front‐page”) positioning of news articles on the Bloomberg terminal. Front‐page articles see 240% higher trading volume and 176% larger absolute excess returns during the first 10 minutes after publication than equally important non‐front‐page articles. Overall, the information in front‐page articles is fully incorporated into prices within an hour of publication. The response to non‐front‐page information of similar importance eventually converges but takes more than two days to be fully reflected in prices.
Trading and Shareholder Democracy
Published: 11/21/2023 | DOI: 10.1111/jofi.13289
DORON LEVIT, NADYA MALENKO, ERNST MAUG
We study shareholder voting in a model in which trading affects the composition of the shareholder base. Trading and voting are complementary, which gives rise to self‐fulfilling expectations about proposal acceptance and multiple equilibria. Prices and shareholder welfare can move in opposite directions, so the former may be an invalid proxy for the latter. Relaxing trading frictions can reduce welfare because it allows extreme shareholders to gain more weight in voting. Delegating decision‐making to the board can help overcome collective action problems at the voting stage. We also analyze the role of index investors and social concerns of shareholders.
Liquidation Value and Loan Pricing
Published: 11/20/2023 | DOI: 10.1111/jofi.13291
FRANCESCA BARBIERO, GLENN SCHEPENS, JEAN‐DAVID SIGAUX
This paper shows that the liquidation value of collateral depends on the interdependency between borrower and collateral risk. Using transaction‐level data on short‐term repurchase agreements (repo), we show that borrowers pay a premium of 1.1 to 2.6 basis points when their default risk is positively correlated with the risk of the collateral that they pledge. Moreover, we show that borrowers internalize this premium when making their collateral choices. Loan‐level credit registry data suggest that the results extend to the corporate loan market as well.
Published: 11/16/2023 | DOI: 10.1111/jofi.13292
GREG BUCHAK
Unlike traditional firm production, gig economy workers provide their own physical capital. As a consequence, the low‐income households for whom gig economy opportunities are most valuable often borrow to participate. In the context of ride share, difference‐in‐difference analysis reveals increased vehicle purchases, borrowing, utilization, and employment around entry, but financially constrained individuals cannot participate. To assess the equilibrium importance of financing, I build and estimate a structural model of the gig economy. Access to finance proves critical for the gig economy's growth: without finance, equilibrium quantities would be 40% lower and prices 90% higher, and only higher‐income households could participate as drivers.
Auctions with Endogenous Initiation
Published: 11/2/2023 | DOI: 10.1111/jofi.13288
ALEXANDER S. GORBENKO, ANDREY MALENKO
We study initiation of takeover auctions by potential buyers and the seller. A bidder's indication of interest reveals that she is optimistic about the target. If bidders' values have a substantial common component, as in takeover battles between financial bidders, this effect disincentivizes bidders from indicating interest, and auctions are seller‐initiated. Conversely, in private‐value auctions, such as battles between strategic bidders, equilibria can feature both seller‐ and bidder‐initiated auctions, with the likelihood of the latter decreasing in commonality of values and the probability of a forced sale by the seller. We also relate initiation to bids and auction outcomes.
Neglected Risks in the Communication of Residential Mortgage‐Backed Securities Offerings
Published: 9/23/2023 | DOI: 10.1111/jofi.13278
HAROLD H. ZHANG, FENG ZHAO, XIAOFEI ZHAO
Examining the contractual disclosures during the sale of private‐label residential mortgage‐backed securities before the 2008 financial crisis, we find that textual contents in the risk‐factor section predict subsequent losses and yet were not reflected in pricing. Insurance companies, especially life insurers and insurers with low regulatory capital ratios, are more exposed to textual risks. Consistent with issuers hedging litigation risks with disclosure, we find that textual contents are associated with second‐lien underreporting and preissuance written communications. Overall, we find that investors neglected risks in the purportedly safe assets before the crisis.
Interest Rate Skewness and Biased Beliefs
Published: 9/21/2023 | DOI: 10.1111/jofi.13276
MICHAEL BAUER, MIKHAIL CHERNOV
Conditional skewness of Treasury yields is an important indicator of the risks to the macroeconomic outlook. Positive skewness signals upside risk to interest rates during periods of accommodative monetary policy and an upward‐sloping yield curve, and vice versa. Skewness has substantial predictive power for future bond excess returns, high‐frequency interest rate changes around Federal Open Market Committee announcements, and survey forecast errors for interest rates. The estimated expectational errors, or biases in beliefs, are quantitatively important for statistical bond risk premia. These findings are consistent with a heterogeneous‐beliefs model in which one of the agents is wrong about consumption growth.