Asset Managers: Institutional Performance and Factor Exposures
Published: 4/15/2021 | DOI: 10.1111/jofi.13026
JOSEPH GERAKOS, JUHANI T. LINNAINMAA, ADAIR MORSE
ABSTRACT
Published: 4/15/2021 | DOI: 10.1111/jofi.13024
JAMES R. BROWN, MATTHEW T. GUSTAFSON, IVAN T. IVANOV
Unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank‐borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower‐friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the nonfundamental component of cash flow volatility, especially for solvent, small bank borrowers.
Fire‐Sale Spillovers and Systemic Risk
Published: 4/14/2021 | DOI: 10.1111/jofi.13010
FERNANDO DUARTE, THOMAS M. EISENBACH
We identify and track over time the factors that make the financial system vulnerable to fire sales by constructing an index of aggregate vulnerability. The index starts increasing quickly in 2004, before most other major systemic risk measures, and triples by 2008. The fire‐sale‐specific factors of delevering speed and concentration of illiquid assets account for the majority of this increase. Individual banks' contributions to aggregate vulnerability predict other firm‐specific measures of systemic risk, including SRISK and ΔCoVaR. The balance‐sheet‐based measures we propose are therefore useful early indicators of when and where vulnerabilities are building up.
What Explains Differences in Finance Research Productivity During the Pandemic?
Published: 4/13/2021 | DOI: 10.1111/jofi.13028
BRAD M. BARBER, WEI JIANG, ADAIR MORSE, MANJU PURI, HEATHER TOOKES, INGRID M. WERNER
Based on a survey of AFA members, we analyze how demographics, time allocation, production mechanisms, and institutional factors affect research production during the pandemic. Consistent with the literature, research productivity falls more for women and faculty with young children. Independently, and novel, extra time spent teaching (much more likely for women) negatively affects research productivity. Also novel, concerns about feedback, isolation, and health have large negative research effects, which disproportionately affect junior faculty and PhD students. Finally, faculty who express greater concerns about employers’ finances report larger negative research effects and more concerns about feedback, isolation, and health.
Don't Take Their Word For It: The Misclassification of Bond Mutual Funds
Published: 4/9/2021 | DOI: 10.1111/jofi.13023
HUAIZHI CHEN, LAUREN COHEN, UMIT G. GURUN
We provide evidence that bond fund managers misclassify their holdings, and that these misclassifications have a real and significant impact on investor capital flows. The problem is widespread, resulting in up to 31.4% of funds being misclassified with safer profiles, compared to their true, publicly reported holdings. “Misclassified funds” – those that hold risky bonds but claim to hold safer bonds – appear to on‐average outperform lower‐risk funds in their peer groups. Within category groups, misclassified funds receive more Morningstar stars and higher investor flows. However, when we correctly classify them based on actual risk, these funds are mediocre performers.
Sentiment Trading and Hedge Fund Returns
Published: 4/8/2021 | DOI: 10.1111/jofi.13025
YONG CHEN, BING HAN, JING PAN
In the presence of sentiment fluctuations, arbitrageurs may engage in different strategies leading to dispersed sentiment exposures. We find that hedge funds in the top decile ranked by sentiment beta outperform those in the bottom decile by 0.59% per month on a risk‐adjusted basis, with the spread being larger among skilled funds. We also find that about 10% of hedge funds have sentiment timing skill that positively correlates with fund sentiment beta and contributes to fund performance. Our findings show that skilled hedge funds can earn high returns by predicting and exploiting sentiment changes rather than betting against mispricing.
Banking on Deposits: Maturity Transformation without Interest Rate Risk
Published: 4/6/2021 | DOI: 10.1111/jofi.13013
ITAMAR DRECHSLER, ALEXI SAVOV, PHILIPP SCHNABL
We show that maturity transformation does not expose banks to interest rate risk—it hedges it. The reason is the deposit franchise, which allows banks to pay deposit rates that are low and insensitive to market interest rates. Hedging the deposit franchise requires banks to earn income that is also insensitive, that is, to lend long term at fixed rates. As predicted by this theory, we show that banks closely match the interest rate sensitivities of their interest income and expense, and that this insulates their equity from interest rate shocks. Our results explain why banks supply long‐term credit.
Rent Extraction with Securities Plus Cash
Published: 4/6/2021 | DOI: 10.1111/jofi.13018
TINGJUN LIU, DAN BERNHARDT
In our target‐initiated theory of takeovers, a target approaches potential acquirers that privately know their standalone values and merger synergies, where higher synergy acquirers tend to have larger standalone values. Despite their information disadvantage, targets can extract all surplus when synergies and standalone values are concavely related by offering payment choices that are combinations of cash and equity. Targets exploit the reluctance of high‐valuation acquirers to cede equity claims, inducing them to bid more cash. When synergies and standalone values are not concavely related, sellers can gain by combining cash with securities that are more information sensitive than equities.
Published: 4/6/2021 | DOI: 10.1111/jofi.13022
YUNZHI HU, FELIPE VARAS
An entrepreneur borrows from a relationship bank or the market. The bank has a higher cost of capital but produces private information over time. While the entrepreneur accumulates reputation as the lending relationship continues, asymmetric information is also developed between the bank/entrepreneur and the market. In this setting, zombie lending is inevitable: once the entrepreneur becomes sufficiently reputable, the bank will roll over loans even after learning bad news, for the prospect of future market financing. Zombie lending is mitigated when the entrepreneur faces financial constraints. Finally, the bank stops producing information too early if information production is costly.
Published: 4//2021 | DOI: 10.1111/jofi.13019
STEVEN N. KAPLAN, MORTEN SORENSEN
Using 2,603 executive assessments, we study how CEO candidates differ from candidates for other top management positions, particularly CFOs. More than half of the variation in the 30 assessed characteristics is explained by four factors that we interpret as general ability, execution (vs. interpersonal), charisma (vs. analytical), and strategic (vs. managerial). CEO candidates have more extreme factor scores that differ significantly from those of CFO candidates. Conditional on being considered, candidates with greater general ability and interpersonal skills are more likely to be hired. These and our previous results on CEO success suggest that boards overweight interpersonal skills in hiring CEOs.
Time Variation of the Equity Term Structure
Published: 3/30/2021 | DOI: 10.1111/jofi.13020
NIELS JOACHIM GORMSEN
I study the term structure of one‐period expected returns on dividend claims with different maturity. I find that the slope of the term structure is counter cyclical. The counter cyclical variation is consistent with theories of long‐run risk and habit, but these theories cannot explain the average downward slope. At the same time, the cyclical variation is inconsistent with recent models constructed to match the average downward slope. More generally, the average and cyclicality of the slope are hard to reconcile with models with a single risk factor. I introduce a model with two priced factors to solve the puzzle.
How Debit Cards Enable the Poor to Save More
Published: 3/29/2021 | DOI: 10.1111/jofi.13021
PIERRE BACHAS, PAUL GERTLER, SEAN HIGGINS, ENRIQUE SEIRA
We study an at‐scale natural experiment in which debit cards were given to cash transfer recipients who already had a bank account. Using administrative account data and household surveys, we find that beneficiaries accumulated a savings stock equal to 2% of annual income after two years with the card. The increase in formal savings represents an increase in overall savings, financed by a reduction in current consumption. There are two mechanisms. First, debit cards reduce transaction costs of accessing money. Second, they reduce monitoring costs, which led beneficiaries to check their account balances frequently and build trust in the bank.
Foreign Safe Asset Demand and the Dollar Exchange Rate
Published: 3/15/2021 | DOI: 10.1111/jofi.13003
ZHENGYANG JIANG, ARVIND KRISHNAMURTHY, HANNO LUSTIG
We develop a theory that links the U.S. dollar's valuation in FX markets to the convenience yield that foreign investors derive from holding U.S. safe assets. We show that this convenience yield can be inferred from the Treasury basis, the yield gap between U.S. government and currency‐hedged foreign government bonds. Consistent with the theory, a widening of the basis coincides with an immediate appreciation and a subsequent depreciation of the dollar. Our results lend empirical support to models that impute a special role to the United States as the world's provider of safe assets and the dollar as the world's reserve currency.
Subjective Cash Flow and Discount Rate Expectations
Published: 3/11/2021 | DOI: 10.1111/jofi.13016
RICARDO DE LA O, SEAN MYERS
Why do stock prices vary? Using survey forecasts, we find that cash flow growth expectations explain most movements in the S&P 500 price‐dividend and price‐earnings ratios, accounting for at least 93% and 63% of their variation. These expectations comove strongly with price ratios, even when price ratios do not predict future cash flow growth. In comparison, return expectations have low volatility and small comovement with price ratios. Short‐term, rather than long‐term, expectations account for most price ratio variation. We propose an asset pricing model with beliefs about earnings growth reversal that accurately replicates these cash flow growth expectations and dynamics.
Trading Costs and Informational Efficiency
Published: 3/9/2021 | DOI: 10.1111/jofi.13008
EDUARDO DÁVILA, CECILIA PARLATORE
We study the effect of trading costs on information aggregation and acquisition in financial markets. For a given precision of investors' private information, an irrelevance result emerges when investors are ex ante identical: price informativeness is independent of the level of trading costs. When investors are ex ante heterogeneous, a change in trading costs can increase or decrease price informativeness, depending on the source of heterogeneity. Our results are valid under quadratic, linear, and fixed costs. Through a reduction in information acquisition, trading costs reduce price informativeness. We discuss how our results inform the policy debate on financial transaction taxes/Tobin taxes.
For Richer, for Poorer: Bankers' Liability and Bank Risk in New England, 1867 to 1880
Published: 3/9/2021 | DOI: 10.1111/jofi.13011
PETER KOUDIJS, LAURA SALISBURY, GURPAL SRAN
We study whether banks are riskier if managers have less liability. We focus on New England between 1867 and 1880 and consider the introduction of marital property laws that limited liability for newly wedded bankers. We find that banks with managers who married after a law had higher leverage, delayed loss recognition, made more risky and fraudulent loans, and lost more capital and deposits in the Long Depression of 1873 to 1878. These effects were most pronounced for bankers with the largest reduction in liability. We find no evidence that limiting liability increased firm investment at the county level.
Leveraged Funds and the Shadow Cost of Leverage Constraints
Published: 3/6/2021 | DOI: 10.1111/jofi.13012
ZHONGJIN LU, ZHONGLING QIN
Using the most comprehensive data set of leveraged funds known to the literature, we measure the market‐wide shadow cost of leverage constraints and examine its pricing implications. The shadow cost averages 0.53% per annum from 2006 to 2016, spikes upon quarter‐ends when banks face tighter capital requirements, positively predicts future betting‐against‐beta (BAB) returns, and negatively correlates with contemporaneous BAB returns. Stocks that experience lower returns when the shadow cost increases earn 0.85% more per month. Overall, our shadow cost measure fits the predictions of leverage‐constraint‐based theories better than the widely used TED spread.
The Economics of Hedge Fund Startups: Theory and Empirical Evidence
Published: 3/5/2021 | DOI: 10.1111/jofi.13009
CHARLES CAO, GRANT FARNSWORTH, HONG ZHANG
This paper examines how market frictions influence the managerial incentives and organizational structure of new hedge funds. We develop a stylized model in which new managers search for accredited investors and have stronger incentives to acquire managerial skill when encountering low investor demand. Fund families endogenously arise to mitigate frictions and weaken the performance incentives of affiliated new funds. Empirically, based on a TASS‐HFR‐BarclayHedge merged database, we find that ex ante identified cold inceptions facing low investor demand outperform existing hedge funds and hot inceptions facing high demand and that cold stand‐alone inceptions outperform all types of family‐affiliated inceptions.
Monetary Policy and Reaching for Income
Published: 2/24/2021 | DOI: 10.1111/jofi.13004
KENT DANIEL, LORENZO GARLAPPI, KAIRONG XIAO
Using data on individual portfolio holdings and on mutual fund flows, we find that low interest rates lead to significantly higher demand for income‐generating assets such as high‐dividend stocks and high‐yield bonds. We argue that this “reaching‐for‐income” phenomenon is driven by investors who follow the “living off income” rule‐of‐thumb. Our empirical analysis shows that this preference for current income affects both household portfolio choices and the prices of income‐generating assets. In addition, we explore the implications of reaching for income for capital allocation and the effectiveness of monetary policy.
Who Wears the Pants? Gender Identity Norms and Intrahousehold Financial Decision‐Making
Published: 2/18/2021 | DOI: 10.1111/jofi.13002
DA KE
Using microdata from U.S. household surveys, I document that families with a financially sophisticated husband are more likely to participate in the stock market than those with a wife of equal financial sophistication. This pattern is best explained by gender identity norms, which constrain women's influence over intrahousehold financial decision‐making. A randomized controlled experiment reveals that female identity hinders idea contribution by the wife. These findings underscore the roles of intrahousehold bargaining and traditional norms in shaping household financial decisions.
Leverage Dynamics without Commitment
Published: 1/13/2021 | DOI: 10.1111/jofi.13001
PETER M. DEMARZO, ZHIGUO HE
We characterize equilibrium leverage dynamics in a trade‐off model in which the firm can continuously adjust leverage and cannot commit to a policy ex ante. While the leverage ratchet effect leads shareholders to issue debt gradually over time, asset growth and debt maturity cause leverage to mean‐revert slowly toward a target. Investors anticipate future debt issuance and raise credit spreads, fully offsetting the tax benefits of new debt. Shareholders are therefore indifferent toward the debt maturity structure, even though their choice significantly affects credit spreads, leverage levels, the speed of adjustment, future investment, and growth.