Financial Crisis, Creditor‐Debtor Conflict, and Populism
Published: 5/20/2022 | DOI: 10.1111/jofi.13138
GYŐZŐ GYÖNGYÖSI, EMIL VERNER
We study the impact of debtor distress on support for a populist far‐right political party during a financial crisis. Our empirical approach exploits variation in exposure to foreign currency household loans during a currency crisis in Hungary. Foreign currency debt exposure leads to a large, persistent increase in support for the populist far right. We document that the far right advocated for foreign currency debtors' interests by proposing aggressive debt relief and was rewarded with support from these voters. Our findings are consistent with theories emphasizing that conflict between creditors and debtors can shape political outcomes after financial crises.
Published: 5/11/2022 | DOI: 10.1111/jofi.13137
YEN‐CHENG CHANG, PEI‐JIE HSIAO, ALEXANDER LJUNGQVIST, KEVIN TSENG
We provide plausibly identified evidence for the role of investor disagreement in asset pricing. Our natural experiment exploits the staggered implementation of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, which induces a reduction in investor disagreement. Consistent with models of investor disagreement, EDGAR inclusion helps resolve disagreement around information events, leading to stock price corrections. The reduction in disagreement following EDGAR inclusion also reduces stock price crash risk, especially among stocks with binding short‐sale constraints and high investor optimism.
Risk‐Sharing and the Term Structure of Interest Rates
Published: 5/11/2022 | DOI: 10.1111/jofi.13139
ANDRÉS SCHNEIDER
I propose a general equilibrium model with heterogeneous investors to explain the key properties of the U.S. real and nominal term structure of interest rates. I find that differences in investors' elasticities of intertemporal substitution are critical in accounting for the dynamics of nominal and real yields. The nominal term structure is driven primarily by real shocks so it can be upward sloping regardless of the correlation between nominal and real shocks.
Do Firms Respond to Gender Pay Gap Transparency?
Published: 5/3/2022 | DOI: 10.1111/jofi.13136
MORTEN BENNEDSEN, ELENA SIMINTZI, MARGARITA TSOUTSOURA, DANIEL WOLFENZON
We examine the effect of pay transparency on the gender pay gap and firm outcomes. Using a 2006 legislation change in Denmark that requires firms to provide gender‐disaggregated wage statistics, detailed employee‐employer administrative data, and difference‐in‐differences and difference‐in‐discontinuities designs, we find that the law reduces the gender pay gap, primarily by slowing wage growth for male employees. The gender pay gap declines by two percentage points, or 13% relative to the pre‐legislation mean. Despite the reduction of the overall wage bill, the wage transparency mandate does not affect firm profitability, likely because of the offsetting effect of reduced firm productivity.
Barbarians at the Store? Private Equity, Products, and Consumers
Published: 4/25/2022 | DOI: 10.1111/jofi.13134
CESARE FRACASSI, ALESSANDRO PREVITERO, ALBERT SHEEN
We investigate the effects of private equity firms on product markets using price and sales data for an extensive number of consumer products. Following a private equity deal, target firms increase retail sales of their products 50% more than matched control firms. Price increases—roughly 1% on existing products—do not drive this growth; the launch of new products and geographic expansion do. Competitors reduce their product offerings and marginally raise prices. Cross‐sectional results on target firms, private equity firms, the economic environment, and product categories suggest that private equity generates growth by easing financial constraints and providing managerial expertise.
A New Test of Risk Factor Relevance
Published: 4/25/2022 | DOI: 10.1111/jofi.13135
ALEX CHINCO, SAMUEL M. HARTZMARK, ABIGAIL B. SUSSMAN
Textbook models assume that investors try to insure against bad states of the world associated with specific risk factors when investing. This is a testable assumption and we develop a survey framework for doing so. Our framework can be applied to any risk factor. We demonstrate the approach using consumption growth, which makes our results applicable to most modern asset‐pricing models. Participants respond to changes in the mean and volatility of stock returns consistent with textbook models, but we find no evidence that they view an asset's correlation with consumption growth as relevant to investment decisions.
Is There a Risk Premium in the Stock Lending Market? Evidence from Equity Options
Published: 4/25/2022 | DOI: 10.1111/jofi.13129
DMITRIY MURAVYEV, NEIL D. PEARSON, JOSHUA M. POLLET
Recent research argues that uncertainty about future stock borrowing fees hinders short‐selling, and this risk explains the performance of short strategies. One possible mechanism is that borrowing fee risk carries a risk premium. Since the present value of the uncertain borrowing fee is reflected in options prices, the difference between option‐implied and realized fees estimates this premium. We find that the risk premium is small. Moreover, if the risk premium is substantial, it should be reflected in the returns to short‐selling stock after adjusting for stock borrowing fees. However, borrowing fee risk does not predict fee‐adjusted returns.
Factor Momentum and the Momentum Factor
Published: 4/22/2022 | DOI: 10.1111/jofi.13131
SINA EHSANI, JUHANI T. LINNAINMAA
Momentum in individual stock returns relates to momentum in factor returns. Most factors are positively autocorrelated: the average factor earns a monthly return of six basis points following a year of losses and 51 basis points following a positive year. We find that factor momentum concentrates in factors that explain more of the cross section of returns and that it is not incidental to individual stock momentum: momentum‐neutral factors display more momentum. Momentum found in high‐eigenvalue principal component factors subsumes most forms of individual stock momentum. Our results suggest that momentum is not a distinct risk factor—it times other factors.
Learning by Owning in a Lemons Market
Published: 4/19/2022 | DOI: 10.1111/jofi.13125
JORDAN MARTEL, KENNETH MIRKIN, BRIAN WATERS
We study market dynamics when an owner learns about the quality of her asset over time. Since this information is private, the owner sells strategically to a less informed buyer following sufficient negative information. In response, market prices feature a “U‐shape” and trading probabilities a “hump‐shape” with respect to the time to sale. As the owner initially acquires greater information, buyers suffer greater adverse selection, and prices fall accordingly. Eventually, the probability of an informed sale shrinks, and prices rebound. We provide evidence consistent with our model in markets for residential real estate, venture capital investments, and construction equipment.
Fully Closed: Individual Responses to Realized Gains and Losses
Published: 4/18/2022 | DOI: 10.1111/jofi.13122
STEFFEN MEYER, MICHAELA PAGEL
We analyze how individuals reinvest realized capital gains and losses exploiting plausibly exogenous sales due to mutual fund liquidations. Individuals reinvest 83% if a forced sale results in a gain relative to the initial investment; but reinvest only 40% in the event of a loss. This difference is statistically significant for more than six months and arises because many individuals forced to realize a loss choose not to reinvest anything and some even exit the stock market altogether. Individuals treat realized losses differently from paper losses and are discouraged from investing more and participating in the stock market.
Luck versus Skill in the Cross Section of Mutual Fund Returns: Reexamining the Evidence
Published: 4/17/2022 | DOI: 10.1111/jofi.13123
CAMPBELL R. HARVEY, YAN LIU
While Kosowski et al. (2006, Journal of Finance 61, 2551–2595) and Fama and French (2010, Journal of Finance 65, 1915–1947) both evaluate whether mutual funds outperform, their conclusions are very different. We reconcile their findings. We show that the Fama‐French method suffers from an undersampling problem that leads to a failure to reject the null hypothesis of zero alpha, even when some funds generate economically large risk‐adjusted returns. In contrast, Kosowski et al. substantially overreject the null hypothesis, even when all funds have a zero alpha. We present a novel bootstrapping approach that should be useful to future researchers choosing between the two approaches.
The Wisdom of the Robinhood Crowd
Published: 4/14/2022 | DOI: 10.1111/jofi.13128
IVO WELCH
Robinhood investors increased their holdings in the March 2020 COVID bear market, indicating an absence of collective panic and margin calls. This steadfastness was rewarded in the subsequent bull market. Despite unusual interest in some “experience” stocks (e.g., cannabis stocks), they tilted primarily toward stocks with high past share volume and dollar‐trading volume (themselves mostly big stocks). From mid‐2018 to mid‐2020, an aggregated crowd consensus portfolio (a proxy for the household‐equal‐weighted portfolio) had both good timing and good alpha.
Published: 4/14/2022 | DOI: 10.1111/jofi.13126
YUKUN LIU, BEN MATTHIES
This paper documents the existence of a persistent component in consumption growth. We take a novel approach using news coverage to capture investor concern about economic growth prospects. We provide evidence that consumption growth is highly predictable over long horizons—our measure explains between 23% and 38% of cumulative future consumption growth at the five‐year horizon and beyond. Furthermore, we show a strong connection between this predictability and asset prices. Innovations to our measure price 51 standard portfolios in the cross section and our one‐factor model outperforms many benchmark macro‐ and return‐based multifactor models.
The Limits of Model‐Based Regulation
Published: 4/12/2022 | DOI: 10.1111/jofi.13124
MARKUS BEHN, RAINER HASELMANN, VIKRANT VIG
Using loan‐level data from Germany, we investigate how the introduction of model‐based capital regulation affected banks' ability to absorb shocks. The objective of this regulation was to enhance financial stability by making capital requirements responsive to asset risk. Our evidence suggests that banks “optimized” model‐based regulation to lower their capital requirements. Banks systematically underreported risk, with underreporting more pronounced for banks with higher gains from it. Moreover, large banks benefitted from the regulation at the expense of smaller banks. Overall, our results suggest that sophisticated rules may have undesired effects if strategic misbehavior is difficult to detect.
Are Analyst Short‐Term Trade Ideas Valuable?
Published: 4/12/2022 | DOI: 10.1111/jofi.13130
JUSTIN BIRRU, SINAN GOKKAYA, XI LIU, RENÉ M. STULZ
Short‐term trade ideas are a component of analyst research highly valued by institutional investors. Using a novel and comprehensive database, we find that trade ideas have a stock price impact at least as large as recommendation and target price changes. Trade ideas based on expectations of future events are more informative than those identifying incomplete incorporation of past information in stock prices. Analysts with better access to a firm's management produce better trade ideas. Institutional investors trade in the direction of trade ideas. Investors following trade ideas can earn significant abnormal returns, consistent with analysts possessing valuable short‐term stock‐picking skills.
Resource Allocation in Bank Supervision: Trade‐Offs and Outcomes
Published: 3/29/2022 | DOI: 10.1111/jofi.13127
THOMAS M. EISENBACH, DAVID O. LUCCA, ROBERT M. TOWNSEND
We estimate a structural model of resource allocation on work hours of Federal Reserve bank supervisors to disentangle how supervisory technology, preferences, and resource constraints impact bank outcomes. We find a significant effect of supervision on bank risk and large technological scale economies with respect to bank size. Consistent with macroprudential objectives, revealed supervisory preferences disproportionately weight larger banks, especially post‐2008 when a resource reallocation to larger banks increased risk on average across all banks. Shadow cost estimates show tight resources around the financial crisis and counterfactuals indicate that binding constraints have large effects on the distribution of bank outcomes.