Did Banks Pay Fair Returns to Taxpayers on TARP?
Pages: 2909-2941 | Published: 6/2024 | DOI: 10.1111/jofi.13367 | Cited by: 0
THOMAS FLANAGAN, AMIYATOSH PURNANANDAM
Financial institutions received investments under the Troubled Asset Relief Program in a bad state of the world but repaid them in a relatively good state. We show that the recipients paid considerably lower returns to taxpayers compared to private‐market securities with similar risk over the same investment horizon, resulting in a subsidy of over $50 billion on the preferred equity investment by the government. Ex‐post renegotiation of contract terms limited the upside gains received by taxpayers in good times and contributed to the subsidy. These findings have important implications for the design and implementation of future bailouts. Our simple methodology for calculating the subsidy can be applied to evaluate the financial costs of other bailouts.
Pages: 2943-2991 | Published: 7/2024 | DOI: 10.1111/jofi.13370 | Cited by: 0
VIRAL V. ACHARYA, RAGHURAM RAJAN
Central bank balance sheet expansion, through actions like quantitative easing, is run through commercial banks. While this increases liquid central bank reserves held on commercial bank balance sheets, demandable uninsured deposits issued to finance the reserves also increase. Subsequent shrinkage in the central bank balance sheet may entail shrinkage in bank‐held reserves without a commensurate reduction in deposit claims. Furthermore, during episodes of liquidity stress, when many claims on liquidity are called, surplus banks may hoard reserves. As a result, central bank balance sheet expansion may create less additional liquidity than typically thought, and indeed, may increase the probability and severity of episodes of liquidity stress.
Pages: 2993-3039 | Published: 8/2024 | DOI: 10.1111/jofi.13386 | Cited by: 0
YEON‐KOO CHE, CHONGWOO CHOE, KEEYOUNG RHEE
We develop a model of bailout stigma in which accepting a bailout signals a firm's balance‐sheet weakness and reduces its funding prospects. To avoid stigma, high‐quality firms withdraw from subsequent financing after receiving bailouts or refuse bailouts altogether to send a favorable signal. The former leads to a short‐lived stimulation followed by a market freeze even worse than if there were no bailout. The latter revives the funding market, albeit with delay, to the level achievable without any stigma and implements a constrained optimal outcome. A menu of multiple bailout programs compounds bailout stigma and exacerbates the market freeze.
The SOE Premium and Government Support in China's Credit Market
Pages: 3041-3103 | Published: 8/2024 | DOI: 10.1111/jofi.13380 | Cited by: 0
ZHE GENG, JUN PAN
Studying China's credit market using a structural default model that integrates credit risk, liquidity, and bailout, we document improved price discovery and a deepening divide between state‐owned enterprises (SOEs) and non‐SOEs. Amidst liquidity deterioration, the presence of government bailout helps alleviate the heightened liquidity‐driven default, making SOE bonds more valuable and widening the SOE premium. Meanwhile, the increased importance of government support makes SOEs more sensitive to bailout, while the heightened default risk increases non‐SOEs' sensitivity to credit quality. Examining the real impact, we find severe performance deteriorations of non‐SOEs relative to SOEs, reversing the long‐standing trend of non‐SOEs outperforming SOEs.
Business News and Business Cycles
Pages: 3105-3147 | Published: 8/2024 | DOI: 10.1111/jofi.13377 | Cited by: 0
LELAND BYBEE, BRYAN KELLY, ASAF MANELA, DACHENG XIU
We propose an approach to measuring the state of the economy via textual analysis of business news. From the full text of 800,000 Wall Street Journal articles for 1984 to 2017, we estimate a topic model that summarizes business news into interpretable topical themes and quantifies the proportion of news attention allocated to each theme over time. News attention closely tracks a wide range of economic activities and can forecast aggregate stock market returns. A text‐augmented vector autoregression demonstrates the large incremental role of news text in forecasting macroeconomic dynamics. We retrieve the narratives that underlie these improvements in market and business cycle forecasts.
The Mortgage‐Cash Premium Puzzle
Pages: 3149-3201 | Published: 7/2024 | DOI: 10.1111/jofi.13373 | Cited by: 0
MICHAEL REHER, ROSSEN VALKANOV
All‐cash homebuyers account for one‐third of U.S. home purchases between 1980 and 2017. We use multiple data sets and research designs to robustly estimate that mortgaged buyers pay an 11% premium over all‐cash buyers to compensate home sellers for mortgage transaction frictions. A dynamic, representative‐seller model implies only a 3% premium, which would suggest an 8% puzzle. Accounting for heterogeneity in selling conditions explains half of this difference, but a puzzle holds in conditions with high transaction risk. An experimental survey of U.S. homeowners replicates these patterns and suggests that belief distortions can explain the puzzle in these high‐risk states.
Unobserved Performance of Hedge Funds
Pages: 3203-3259 | Published: 7/2024 | DOI: 10.1111/jofi.13368 | Cited by: 1
VIKAS AGARWAL, STEFAN RUENZI, FLORIAN WEIGERT
We investigate hedge fund firms’ unobserved performance (UP), measured as the risk‐adjusted return difference between a firm's reported gross return and its portfolio return inferred from its disclosed long‐equity holdings. Firms with high UP outperform those with low UP by 6.36% per annum on a risk‐adjusted basis. UP is negatively associated with a firm's trading costs and positively associated with intraquarter trading in equity positions, derivatives usage, short selling, and confidential holdings. We show that limited investor attention can delay investors’ response to UP and lead to longer lived predictability of fund firm performance.
Do Women Receive Worse Financial Advice?
Pages: 3261-3307 | Published: 7/2024 | DOI: 10.1111/jofi.13366 | Cited by: 0
UTPAL BHATTACHARYA, AMIT KUMAR, SUJATA VISARIA, JING ZHAO
We arranged for trained undercover men and women to pose as potential clients and visit all 65 local financial advisory firms in Hong Kong. At financial planning firms, but not at securities firms, women were more likely than men to receive advice to buy only individual or only local securities. Female clients who signaled high confidence, high risk tolerance, or a domestic outlook were especially likely to receive this suboptimal advice. Our theoretical model explains these patterns as a result of statistical discrimination interacting with advisors’ incentives. Taste‐based discrimination is unlikely to explain the results.
FinTech Credit and Entrepreneurial Growth
Pages: 3309-3359 | Published: 8/2024 | DOI: 10.1111/jofi.13384 | Cited by: 0
HARALD HAU, YI HUANG, CHEN LIN, HONGZHE SHAN, ZIXIA SHENG, LAI WEI
Based on automated credit lines to vendors trading on Alibaba's online retail platform and a discontinuity in the credit decision algorithm, we document that a vendor's access to FinTech credit boosts its sales growth, transaction growth, and the level of customer satisfaction gauged by product, service, and consignment ratings. These effects are more pronounced for vendors characterized by greater information asymmetry about their credit risk and less collateral, which reveals the information advantage of FinTech credit over traditional credit technology.
Founder‐CEO Compensation and Selection into Venture Capital‐Backed Entrepreneurship
Pages: 3361-3405 | Published: 8/2024 | DOI: 10.1111/jofi.13383 | Cited by: 0
MICHAEL EWENS, RAMANA NANDA, CHRISTOPHER STANTON
We show theoretically that a critical determinant of the attractiveness of venture capital (VC)‐backed entrepreneurship for high‐earning potential founders is the expected time to develop a startup's initial product. This is because founder‐CEOs' cash compensation increases substantially after product development, alleviating the nondiversifiable risk that founders face at startup birth. Consistent with the model's predictions of where the supply of entrepreneurial talent is likely to be most constrained, we find that technological shocks differentially altering the expected time to product across industries can explain changes in both the rate of entry and characteristics of individuals selecting into VC‐backed entrepreneurship.
Pages: 3407-3457 | Published: 8/2024 | DOI: 10.1111/jofi.13382 | Cited by: 0
ELISE GOURIER, LUDOVIC PHALIPPOU, MARK M. WESTERFIELD
Twelve trillion dollars are allocated to private market funds that require outside investors to commit to transferring capital on demand. We show within a novel dynamic portfolio allocation model that ex‐ante commitment has large effects on investors' portfolios and welfare, and we quantify those effects. Investors are underallocated to private market funds and are willing to pay a larger premium to adjust the quantity committed than to eliminate other frictions, like timing uncertainty and limited tradability. Perhaps counterintuitively, commitment risk premiums increase with secondary market liquidity, and they do not disappear when investments are spread over many funds.
The Portfolio‐Driven Disposition Effect
Pages: 3459-3495 | Published: 8/2024 | DOI: 10.1111/jofi.13378 | Cited by: 0
LI AN, JOSEPH ENGELBERG, MATTHEW HENRIKSSON, BAOLIAN WANG, JARED WILLIAMS
The disposition effect for a stock significantly weakens if the portfolio is at a gain, but is large when it is at a loss. We find this portfolio‐driven disposition effect (PDDE) in four independent settings: U.S. and Chinese archival data, as well as U.S. and Chinese experiments. The PDDE is robust to a variety of controls in regression specifications and is not explained by extreme returns, portfolio rebalancing, tax considerations, or investor heterogeneity. Our evidence suggests that investors form mental frames at both the stock and the portfolio levels and that these frames combine to generate the PDDE.
Firm Performance Pay as Insurance against Promotion Risk
Pages: 3497-3541 | Published: 8/2024 | DOI: 10.1111/jofi.13379 | Cited by: 0
ALVIN CHEN
The prevalence of pay based on risky firm outcomes for nonexecutive workers presents a puzzling departure from conventional contract theory, which predicts insurance provision by the firm. When workers at the same firm compete against each other for promotions, the optimal contract features pay based on firm outcomes as insurance against promotion risk. The model's predictions are consistent with many observed phenomena, such as performance‐based vesting and overvaluation of equity pay by nonexecutive workers. It also generates novel predictions linking a firm's hierarchy to its workers' pay structure.
Pages: 3543-3579 | Published: 7/2024 | DOI: 10.1111/jofi.13372 | Cited by: 1
BOONE BOWLES, ADAM V. REED, MATTHEW C. RINGGENBERG, JACOB R. THORNOCK
We examine the timing of returns around the publication of anomaly trading signals. Using a database that captures when information is first publicly released, we show that anomaly returns are concentrated in the first month after information release dates, and these returns decay soon thereafter. We also show that the academic convention of forming portfolios in June underestimates predictability because it uses stale information, which makes some anomalies appear insignificant. In contrast, we show many anomalies do predict returns if portfolios are formed immediately after information releases. Finally, we develop guidance on forming portfolios without using stale information.
Very Noisy Option Prices and Inference Regarding the Volatility Risk Premium
Pages: 3581-3621 | Published: 7/2024 | DOI: 10.1111/jofi.13365 | Cited by: 1
JEFFERSON DUARTE, CHRISTOPHER S. JONES, JUNBO L. WANG
The stylized fact that volatility is not priced in individual equity options does not withstand scrutiny. First, we show that the average return of heavily traded deep out‐of‐the‐money call options on stocks is −116 basis points per day. Second, Fama‐MacBeth estimates of the volatility risk premium in stock options are similar to those in S&P 500 Index call options. Third, the mean return of heavily traded delta‐hedged at‐the‐money calls (puts) is −23 (−30) basis points. Fourth, the variance risk premium in stock options is negative. Our analysis highlights the importance of microstructure biases and robustness in empirical work with options.
On the Magnification of Small Biases in Hiring
Pages: 3623-3673 | Published: 7/2024 | DOI: 10.1111/jofi.13374 | Cited by: 0
SHAUN WILLIAM DAVIES, EDWARD D. VAN WESEP, BRIAN WATERS
We analyze a setting in which a board must hire a chief executive officer (CEO) after exerting effort to learn about the quality of each candidate. Optimal effort is asymmetric, implying asymmetric likelihoods of each candidate being chosen. If the board has an infinitesimal bias in favor of one candidate, it allocates effort to maximize the likelihood of that candidate being chosen. Even when the board's prior is that its preferred candidate is inferior, she may still be chosen most often. A glass ceiling can also arise whereby the tendency to hire favored candidates increases as the importance of the position increases.
Pages: 3676-3677 | Published: 9/2024 | DOI: 10.1111/jofi.13154 | Cited by: 0