Presidential Address: Corporate Finance and Reality
Pages: 1975-2049 | Published: 6/2022 | DOI: 10.1111/jofi.13161 | Cited by: 74
JOHN R. GRAHAM
This paper uses surveys to document CFO perspectives on corporate planning, investment, capital structure, payout, and shareholder versus stakeholder focus. Comparing policy decisions today to those 20 years ago, I find that companies employ decision rules that are conservative, sticky, and geared to time the market; rely on internal forecasts that are miscalibrated and considered reliable only two years ahead; and emphasize corporate objectives that focus increasingly on stakeholders and revenues. These practice of corporate finance themes can discipline academic models toward better explaining outcomes. Models of satisficing decision‐making or costly managerial biases align with many of the themes.
Do Firms Respond to Gender Pay Gap Transparency?
Pages: 2051-2091 | Published: 6/2022 | DOI: 10.1111/jofi.13136 | Cited by: 71
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 2 percentage points, or 13% relative to the prelegislation 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.
Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation
Pages: 2093-2141 | Published: 6/2022 | DOI: 10.1111/jofi.13159 | Cited by: 86
YIFEI WANG, TONI M. WHITED, YUFENG WU, KAIRONG XIAO
We quantify the impact of bank market power on monetary policy transmission through banks to borrowers. We estimate a dynamic banking model in which monetary policy affects imperfectly competitive banks' funding costs. Banks optimize the pass‐through of these costs to borrowers and depositors, while facing capital and reserve regulation. We find that bank market power explains much of the transmission of monetary policy to borrowers, with an effect comparable to that of bank capital regulation. When the federal funds rate falls below 0.9%, market power interacts with bank capital regulation to produce a reversal of the effect of monetary policy.
Quantifying Reduced‐Form Evidence on Collateral Constraints
Pages: 2143-2181 | Published: 6/2022 | DOI: 10.1111/jofi.13158 | Cited by: 24
SYLVAIN CATHERINE, THOMAS CHANEY, ZONGBO HUANG, DAVID SRAER, DAVID THESMAR
This paper quantifies the aggregate effects of financing constraints. We start from a standard dynamic investment model with collateral constraints. In contrast to the existing quantitative literature, our estimation does not target the mean leverage ratio to identify the scope of financing frictions. Instead, we use a reduced‐form coefficient from the recent corporate finance literature that connects exogenous debt capacity shocks to corporate investment. Relative to a frictionless benchmark, collateral constraints induce losses of 7.1% for output and 1.4% for total factor productivity (TFP) (misallocation). We show these estimated losses tend to be more robust to misspecification than estimates obtained by targeting leverage.
A New Test of Risk Factor Relevance
Pages: 2183-2238 | Published: 5/2022 | DOI: 10.1111/jofi.13135 | Cited by: 32
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.
Pages: 2239-2285 | Published: 6/2022 | DOI: 10.1111/jofi.13137 | Cited by: 46
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.
Debt Refinancing and Equity Returns
Pages: 2287-2329 | Published: 6/2022 | DOI: 10.1111/jofi.13162 | Cited by: 24
NILS FRIEWALD, FLORIAN NAGLER, CHRISTIAN WAGNER
This paper presents empirical evidence that the maturity structure of financial leverage affects the cross‐section of equity returns. We find that short‐term leverage is associated with a positive premium, whereas long‐term leverage is not. The premium for short‐term compared to long‐term leverage reflects higher exposure of equity to systematic risk. To rationalize our findings, we show that the same patterns emerge in a model of debt rollover risk with endogenous leverage and debt maturity choice. Our results suggest that analyses of leverage effects in asset prices and corporate financial applications should account for the maturity structure of debt.
Risk‐Sharing and the Term Structure of Interest Rates
Pages: 2331-2374 | Published: 6/2022 | DOI: 10.1111/jofi.13139 | Cited by: 16
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 that it can be upward sloping regardless of the correlation between nominal and real shocks.
Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect
Pages: 2375-2421 | Published: 6/2022 | DOI: 10.1111/jofi.13163 | Cited by: 30
REFET GÜRKAYNAK, HATİCE GÖKÇE KARASOY‐CAN, SANG SEOK LEE
We show that firm liability structure and associated cash flows matter for firm behavior and that financial market participants price stocks accordingly. Stock price reactions to monetary policy announcements depend on the type and maturity of debt issued by the firms and the forward guidance provided by the Fed, both at and away from the zero lower bound. Further, the marginal stock market participant knows the current liability structures of firms and does not rely on rules of thumb. The cash flow exposure at the time of monetary policy actions predicts future investment, assets, and net worth, clearly violating the Modigliani‐Miller theorem.
The Economics of Deferral and Clawback Requirements
Pages: 2423-2470 | Published: 6/2022 | DOI: 10.1111/jofi.13160 | Cited by: 9
FLORIAN HOFFMANN, ROMAN INDERST, MARCUS OPP
We analyze the effects of regulatory interference in compensation contracts, focusing on recent mandatory deferral and clawback requirements restricting incentive compensation of material risk‐takers in the financial sector. Moderate deferral requirements have a robustly positive effect on risk‐management effort only if the bank manager's outside option is sufficiently high; otherwise, their effectiveness depends on the dynamics of information arrival. Stringent deferral requirements unambiguously backfire. Our normative analysis characterizes whether and how deferral and clawback requirements should supplement capital regulation as part of the optimal policy mix.
Financial Crisis, Creditor‐Debtor Conflict, and Populism
Pages: 2471-2523 | Published: 5/2022 | DOI: 10.1111/jofi.13138 | Cited by: 20
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.
Pages: 2526-2527 | Published: 7/2022 | DOI: 10.1111/jofi.12934 | Cited by: 0