AFA PhD Student Poster Session

Chair: Wei Jiang, Emory University

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A New Keynesian Preferred Habitat Model with Repo

Qian Wu, Indiana University

Abstract: This paper documents different observations in the Treasury cash and repo markets during the Global Financial Crisis (GFC) and the Covid-19 pandemic. To account for these observations, I develop a New Keynesian Preferred Habitat model with repo assets, featuring market segmentation, financial frictions, and liquidity/safety preference. I show that there was a flight-to-liquidity demand for short-term Treasuries during the GFC and a flight-from-safety supply for long-term Treasuries during Covid-19. I then use the model to study the passthrough of monetary policies to asset prices and macroeconomic variables. The model equilibrium yields three key findings. Firstly, the excess return in the Treasury cash market involves risk premia and (in)convenience premia, while the excess return in the repo market includes only (in)convenience premia. Secondly, financial frictions attenuate the passthrough of conventional policy while strengthening that of QE and QT. Lastly, the efficacy of monetary policies is contingent upon the relative importance of the repo borrowing channel compared to the cash borrowing channel. These findings contribute to a deeper understanding of the monetary policy transmission mechanisms in the post-GFC era.

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Anomalies and Links to Market: Supranational Evidence Abroad from New Market Efficiency Measures

Yanran Li, CUNY-Baruch College

Xi Dong, CUNY-Baruch College

Yan Li, Southwestern University of Finance and Economics

David Rapach, Federal Reserve Bank of Atlanta

Guofu Zhou, Washington University in St. Louis

Abstract: Cross-sectional anomalies and time-series market returns are jointly determined in equilibrium, suggesting a necessity to unify the two central literatures for more general understanding of asset pricing. Examining 44 non-U.S. countries, we find that representative cross-sectional anomalies are mostly insignificant at the country level, but become significant once aggregated to the supranational level. After aggregation, supposedly “market-neutral” long-minus-short anomaly returns predict developed-market returns, while “market-exposed” long-or-short anomaly returns predict emerging-market returns. Furthermore, characteristics – foundational to cross-sectional predictability – become useful in time-series predictability to some extent after supranational aggregation as well. We rationalize international anomaly-market links by decomposing them into novel measures of foundational market efficiency concepts, including inter-temporal, systematic importance of mispricing, relative importance of price randomness, and asymmetric mispricing correction speed. The first and the latter two factors shape the links differently across markets of different maturity. We address data-mining in testing international anomaly-market linkages by assuming anomalies and their market-return predictability are both data-mined domestically.

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Are Stablecoins the Money Market Mutual Funds of the Future?

Nico Oefele, University of Western Australia

Dirk G. Baur, University of Western Australia

Lee A. Smales, University of Western Australia

Abstract: This paper is the first to provide a comprehensive comparison of two financial instruments: stablecoins and money market mutual funds (MMFs). We observe similar reserve asset backing for fiat reserve backed (FRB) stablecoins and MMFs, similar importance of sponsor support, and the same negative association between macroeconomic indicators and peg deviations. Both instruments serve as short-term facilities for investors to park funds and their primary market microstructure is similar. However, FRB stablecoins exhibit larger dispersions from the dollar peg, significantly higher volatility, and a lack of transparency in their market infrastructure. Larger FRB stablecoins show reduced volatility compared to their smaller counterparts, with peg deviation drivers more closely resembling those of MMFs. We conclude that FRB stablecoins demonstrate remarkable similarities to MMFs and have the potential to become the MMFs of the future.

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Auditor Screening in the Presence of Social Polarization

Neil Hwang, CUNY-Graduate Center

Abstract: Polarization has been intensifying in recent years and manifested in various facets of our daily lives. What was initially a phenomenon on the ideological political spectrum (“ideological polarization”) has since become a strongly emotional one based on one’s social ties (“affective polarization”), influencing individual and group actions largely based on their group identity (“social polarization”). Intuitively, due to its adversarial nature, one would surmise that accounting audits are particularly vulnerable to social polarization, with auditors’ decisions influenced, whether consciously or unconsciously, by their clients’ group identity on the polarization spectrum. We first investigate population-level network formation mechanisms that closely model the polarization seen empirically, particularly in the United States. In doing so, we pay a particular close attention to how polarization undergoes a phase change from ideological to affective, which has significant implications for adversarial transactions such as audits. We then discuss the problem of auditor screening from the perspective of an impartial audit committee in a dynamic setting, where the pool of auditors is a sample from the population with a given level of polarization. Auditors (“agents”), just like other members of the society (“individuals”), dynamically form their social networks to minimize cognitive dissonance that arises from the mismatch between actions implied by their own ideologies and circumstances, and those of their friends, family, and other members of their social network. We find that in equilibrium, given that individuals place sufficient weight on the behaviors of their peers when optimizing their actions (the affective polarization parameter), disparate network communities emerge that partition the network and action space. As a result, the group identity, rather than experiences or ideologies, of the auditor determines their action particularly in situations without clear-cut answers. We then characterize the class of auditor selection mechanisms that are optimal for impartial audit committees. Given the CFO’s position on the polarization spectrum, the optimal auditor is one whose social network is the most homogeneously polarized on the opposite end of the spectrum.

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Balance Sheet Constraints of Prime Brokers on Hedge Fund Performance: Evidence from GSIB Surcharge

Yueting Jiang, Chinese University of Hong Kong

Yiwen Shen, Hong Kong University of Science and Technology

Abstract: Hedge funds often use leverage provided by prime brokers to enhance their investment returns. We investigate how prime brokers’ capital constraints impact the performance of connected hedge funds. At the hedge fund level, we construct a measure for prime brokers’ balance sheet constraints using the capital requirements under the Basel III framework. We document that tighter balance sheet constraints of prime brokers lead to lower future return, alpha, volatility, Sharpe ratio, and information ratio of the hedge funds. These findings are consistent with an analytical model in which prime brokers respond to balance sheet constraints by increasing leverage cost or decreasing leverage provision to hedge funds. The effects are generally stronger for smaller hedge funds and during more capital binding times. Our results reveal the real effects of bank regulation on connected financial institutions via the services of prime brokers.

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Bank Funding to Nonbank Financiers: Risk-sharing or Regulatory Arbitrage?

Chi Xu, University of Pennsylvania

Abstract: I document that 96% of banks' funding to nonbank financiers (NBFs) occurs through credit lines, while NBFs hold about 84% of corporate term loans. NBFs use bank credit lines to manage both investment shocks and liquidity needs, while banks' funding advantage makes them natural insurers for NBFs. I develop a macrofinance model to quantify the value of contingent liquidity. Banks trade off the risk-sharing benefits of “renting” NBF balance sheets through credit line extensions against the costs associated with granting higher credit limits, which influence NBFs’ drawdown decisions. Calibrated to U.S. syndicated loan data, the model shows that credit lines offer NBFs partial flexibility. By endogenously determining the credit limit, the interconnected economy proves to be more resilient during crises, experiencing smaller increases in default risk (NBFs), milder declines in asset prices (4% vs. 7%), and supporting more safe assets. Policy experiments show that regulating bank off-balance sheet credit lines also reduces NBFs' loan-bearing capacity.

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Behind Dollar Savings in Mutual Funds: Are Shifting Sands Threatening Financial Stability?

Bryan Richard Gutierrez Cortez, University of Minnesota

Abstract: I unveil the predominance of money market-like mutual funds as source of dollar savings in emerging markets and explore its consequences for financial stability. Using Peruvian data, I find that households significantly save dollars in mutual funds specialized in deposit investments, especially in foreign banks. This choice enables them to earn higher returns compared to saving in domestic banks. I associate this excess return to the ability of mutual funds to break the traditional market segmentation of dollar deposits. I identify a trade-off regarding the effects on financial stability. On one side, the financial system is less exposed to exchange rate risk as a sizable share of dollar savings is invested abroad. On the other side, mutual funds become significant term-deposit holders in domestic banks, which makes banks prone to withdrawals. After a meaningful mutual fund redemption, banks substantially financed by mutual funds increased their loan rates and sold their dollar securities.

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Betting Against Others' Beta

Xi Dong, CUNY-Baruch College

Massimo Massa, INSEAD

Zilong Niu, Southwestern University of Finance and Economics

Cathy Yuqing Yang, CUNY-Baruch College

Abstract: This study examines the asset pricing implications of foreign ownership in equity markets, focusing on the diversification demands of international investors. Using revealed preference, by decomposing fund performance into the home and world components, we find that international investors’ flows respond strongly to the world component, while not responsive to the home component, indicating a strong diversification demand. Funds that provide diversification benefits consistently exhibit lower alpha, tilting their portfolio towards stocks with a higher world and lower home beta. Among stocks with foreign ownership in the U.S. and international regions, a long-short strategy on positive world beta spreads yields significantly negative alpha. These findings underscore the influence of international investors' diversification demands on asset pricing.

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Big Data and Bigger Firms: A Labor Market Channel

Abhinav Gupta, University of North Carolina-Chapel Hill

Naman Nishesh, University of North Carolina-Chapel Hill

Elena Simintzi, University of North Carolina-Chapel Hill

Abstract: This paper studies the impact of employee output information disclosure through GitHub on labor reallocation towards large firms. GitHub, which is the world’s largest software management platform, tracks and publicly displays real-time individual contributions. In 2016, a policy change enabled GitHub users to display their contributions more accurately on their profiles. Following this update, employees with 1 standard deviation higher GitHub contributions witnessed a 5.7% increase in job transitions to large firms, predominantly at the expense of smaller companies. While productive individuals left small firms for senior roles in larger companies, the latter retained them through internal promotions. The departure of productive workers led to an overall reduction in employment growth and productivity for small firms with more productive employees prior to the shock. Our findings highlight the role of labor-related big data in amplifying the dominance of large firms in recent years.

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Branching Out: The Role of Selection in Bank Branch Entry and Economic Growth

Anthony Zdrojewski, Rice University

Abstract: I study the relationship between bank branch entry and local economic growth by exploiting variation in completion across planned branches. Areas where a branch was planned but withdrawn exhibit higher growth in light emissions, an economic proxy, compared to similar areas (selection effect). However, locations where a branch was opened do not significantly outgrow locations where a branch was planned but withdrawn (treatment effect). Using zip code level business formations or SBA-7a loan amounts as outcome variables yields similar results. Selection effects outweigh treatment effects by a factor of between six to twenty-five. These findings challenge previous studies reporting positive treatment effects of bank branches, and instead emphasize banks’ skill in selecting locations poised for growth.

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Breaking Network Barriers in the Era of Data-Driven Venture Capitalists

Melissa Crumling, Drexel University

Abstract: Financial intermediaries are increasingly using digital data and machine learning techniques to inform their investment decision process. One underexplored advantage of data-driven approaches is the use of these technologies to expand investors' investment opportunity sets. This paper examines the impact of data technologies on sourcing deal flow in the Venture Capital (VC) industry. The VC industry is critical for financing young, innovative firms, yet traditional deal sourcing methods are often limited to established networks and geographic clusters. I find that after VCs adopt data technologies, they are more likely to invest in firms outside of their typical networks, as proxied by startups located in areas with low history of VC activity. Results are robust to isolating plausibly exogenous variations in VCs' pre-exposure to data technologies, specifically artificial intelligence, suggesting a causality between data technology adoption and these effects. In addition, I find that data-driven investments in areas with historically low VC presence stimulate entrepreneurial activity, suggesting potential policy implications for fostering regional innovation.

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Campaign Rallies, Perceived Uncertainty, and Household Borrowing

Shiwei Ye, Erasmus University Rotterdam

Abstract: This paper examines how political compaign visits during the 2016 U.S. presidential election influences perceptions of economic uncertainty and subsequent household financial behaviors. Using a difference-in-differences approach, I show that Clinton's rally visits reduced perceived economic uncertainty, particularly macro uncertainty. The effects are stronger for individuals without college education, who are likely to be less informed before campaigns, for renters who lean more Democratic, and for those living in areas with an initially higher uncertainty level. Moreover, areas hosting rallies showed an increase in P2P and mortgage loan applications after Clinton's visits, with effects stronger in areas having higher initial level of economic uncertainty, aligning with life-cycle models with precautionary motives, and the increase in borrowing are not solely driven by the supply side. In contrast, Trump's rallies did not significantly influence uncertainty perceptions or borrowing decisions. These findings shed light on a novel channel through which campaign information shapes real financial decisions, with effects contingent on the candidate involved.

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Capital Structure and Employee Consumption

Miguel Oliveira, NOVA University Lisbon

Abstract: I show that firm capital structure can affect employee consumption and saving decisions using a new matched employer-employee data set from Portugal. Specifically, employees of highly leveraged firms exhibit lower marginal propensities to consume, particularly in non-essential goods and services. This effect cannot be attributed to a wage premium in these firms. I identify these effects by exploiting negative industry-wide shocks. I rationalize the findings using a Diamond-Mortensen-Pissarides matching model, where heterogeneous risk-averse employees bargain with heterogeneous employers to determine wages. Consistent with the model, low-wealth individuals are most affected due to their relatively higher unemployment costs. My results suggest that financial distress costs are partially shifted to employees.

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CEO’s Political Contribution and Rewards - Lei Chen - University of Melbourne

Lei Chen, University of Melbourne

Abstract: Existing literature on company political connections often proxies these connections solely by company PAC contributions, overlooking the CEO's political contributions. This assumes that the CEO's contributions are driven by ideology and are not expected to generate benefits. This paper challenges that perspective, seeking to unravel the economic outcomes of the CEO's political contributions. Using various measures of CEO contributions, this study finds that CEO contributions significantly enhance a firm’s procurement contracts, after controlling for other firm political connections. Additionally, these contributions are associated with better firm performance, beyond the effects of increased procurement contracts, and higher CEO compensation, beyond the effects of improved firm performance. Thus, CEO contributions serve as an important channel to build firm political connections, bringing both corporate and personal benefits.

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Climate Change and Bank Lending: Evidence from Physical and Transition Risks

Jinhong Wu, Copenhagen Business School

Abstract: This study examines how firms’ exposure to climate-related physical and transition risks affects bank credit allocation. Using novel, granular measures for both risk types, merged with matched firm-bank data from Danish registers, I find that banks reduce credit growth to firms with higher physical and transition risks. A one standard deviation increase in each type of risk results in a 1%-2% reduction in loan growth, representing about an 8%-16% deviation from the mean. These effects are most pronounced for constrained firms (e.g., small or highly leveraged) and are concentrated within banks with high exposure to risk and repeat lending relationships. Additionally, the evidence suggests that more credit is allocated to risky but “greening” firms and firms with low combined physical and transition risks. Finally, the credit supply side is likely to play a more important role in the observed effect, partly due to banks’ credit risk concerns.

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Convenience Yields in Euros: Investment Mandates and Conditional QE

Giovanni Bonfanti, Columbia University

Abstract: I show that when governments borrow in euros through entities that are not formally sovereigns (such as supranationals) they all pay a common interest rate regardless of default risk, market size, or liquidity. This rate is significantly higher than for sovereign debt and more exposed to expectations about monetary policy. I develop a model consistent with these facts by exploring the role of investment mandates that reduce the size of potential investors in supranationals relative to equally safe governments. The smaller size of potential buyers translates into lower expected liquidity during crises such that supranationals must pay a premium even during normal times. This mechanism is driven by investors with potential liquidity needs during crises such as mutual funds. Expectations about asset purchases during crises, which I call conditional QE, can significantly compress this premium even if they are not targeted.

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Corporate Agility and Monetary Policy Transmission

Sinh Thoi Mai, University of Lisbon

Gonul Colak, Hanken School of Economics

Abstract: Corporate agility –ability to respond quickly and effectively to changing business environment– is crucial for firms’ success. While important, this concept is difficult to measure and use in quantitative research. By applying machine learning techniques, we develop a reliable measure of agility, and we analyse how agile firms manage exposure to monetary policy uncertainty, which is a significant and frequently occurring form of threat. Agile firms’ stocks are exposed significantly less to this uncertainty as they proactively apply risk management techniques to reduce their exposure. This has real consequences: agile firm’s investments get affected less by monetary policy tightening episodes.

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Corporate Debt Maturity and Output Price Dynamics

Minseog Kim, University of Texas-Austin

Geunyong Park, National University of Singapore

Abstract: This paper examines firms’ optimal choices of debt maturity and their influences on pricing behaviors. To explore the link between firms’ debt maturity structures and pricing behavior, we leverage both a credit supply shock and a monetary policy shock. Using novel datasets, we present new evidence demonstrating that a heightened level of short-term debt ratio leads to sharp increases in firms’ output prices. The observed connection between short-term debt ratio and pricing behavior suggests that firms strategically sought to increase revenue to mitigate rollover risk when facing imminent debt repayment. Overall, our analysis highlights the important role played by debt maturity as a determinant influencing firms’ pricing decisions.

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Corporate Finance with Asset Demand

Hulai Zhang, Fudan University

Abstract: Investor demand for corporate bond and equity affects firms' financial and investment decisions. I develop a dynamic investment model with endogenous financing constraints in which differential bond demand and equity demand contribute to the firm's choice between bond and equity financing. Combining demand system asset pricing and dynamic investment models, I quantify the effects of asset demand on firms' leverage and real investment. Variations in asset demand generate capital misallocation; nevertheless, bond demand ameliorates capital misallocation when it does not fully coincide with equity demand. Applying this framework to study the impact of sustainable investing, I find that sustainable investing reduces leverage and increases real investment of sustainable firms.

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Data Breach Information, Hospital Financing, and Patient Outcomes

Banks Osborne, East Carolina University

Abstract: I examine the costs and real effects of medical data breaches using a stacked difference-in-differences research design. I find that data breaches increase the cost of healthcare financing and examine three mechanisms that link data breaches to increased costs. Data breaches increase issuer credit risk, and hacks, specifically, decrease hospital revenues because patients substitute breached hospital services for the services of non-breached hospitals nearby. This substitution does not hurt the patients of breached hospitals but leads to worse outcomes for patients of nearby hospitals. Interestingly, although only hacks have an impact on hospital revenues, investors do not require an incremental premium for investing in bonds of hacked issuers. Lastly, I find evidence that the pricing of breached bonds is influenced by investor attention towards breaches. Altogether, my results suggest that investors are potentially uninformed regarding the nuances of different types of breaches and how the market responds to breaches may not necessarily reflect how the events actually affect breached entities.

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Decentralized and Centralized Options Trading: A Risk Premia Perspective

Andrea Andolfatto, Bocconi University

Lorenzo Schoenleber, Collegio Carlo Alberto

Siddharth Naik, Independent Researcher

Abstract: On-Chain options refer to option contracts, that are traded directly on a Decentralized Exchange on the Ethereum blockchain. We explain the functioning of this new market form, so-called automated market making for options trading, and report a novel set of stylized facts. We provide a comprehensive analysis of On-Chain options and compare their attributes to their Off-Chain counterparts on centralized exchanges. We identify an On-Chain risk premium stemming from the positive disparity in implied volatility between On-Chain and Off-Chain options, attributing it to factors like the complex On-Chain fee structure, trading volume, and net demand pressure.

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Demand-Based Expected Returns

Alessandro Crescini, Swiss Finance Institute - Geneva

Fabio Trojani, University of Geneva

Andrea Vedolin, Boston University

Abstract: This paper proposes a theoretical framework for recovering investors’ subjective beliefs/expected returns using holdings data and option prices under the assumption of no-arbitrage. We empirically document that the statistical properties of subjective expected returns on the market differ wildly across investor type and depend crucially on their portfolio composition. While expected returns estimated from price data alone suggest that expected returns are highly volatile and countercyclical, including holdings data can imply returns that are less volatile and procyclical. Using buy and sell orders on S&P500 options, we show that the expected returns inferred from retail and institutional investor beliefs increase in bad times when they become the net suppliers of crash insurance in option markets, mirroring price-based estimates.Market makers’ expected returns decrease during bad times when they become the net buyers of crash protection when their constraints bind. Our findings are in line with the survey literature that documents large heterogeneity in measures of expected returns.

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Demonetized Q: Tobin Meets Jorgenson

Xinwei Li, INSEAD

Abstract: I show that the interest rate has a moderating effect on the relation between Tobin’s Q and investment. Specifically, including the nominal fed funds rate in the classic investment-Q regression significantly improves the model fit. Equivalently, I construct a novel measure named "demonetized Q", that is, the residual from the projection of the Tobin’s Q onto the nominal interest rate. I show that demonetized Q possesses much higher explanatory power for aggregate investment, both in level and in changes and robust across subsamples. Furthermore, I show that demonetized Q captures unique information about investment that bond’s Q from Philippon (2009) does not have. In addition, demonetized Q exhibits significantly stronger return predictability than average Q. The nominal fed funds rate could potentially capture stochastic variations in financial conditions or financial constraints that act like "investment wedges" in the sense of Chari, Kehoe, and McGrattan (2007) or "supply shocks" in the framework of Li and Liu (2023).

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Dilutive Financing

Hanjoon Ryu, Duke University

Abstract: This paper builds a dynamic model of corporate financing where financial slack arises from bargaining. When financiers with bargaining power extract rent from cash-strapped firms, firms—despite the absence of fixed transaction costs or search frictions—finance in lumps to bargain infrequently, and also typically before exhausting internal funds to strengthen outside option. Continuation value directly amplifies rent, rationalizing large cash-holdings by ‘growth’ firms. Firms with robust financing access maintain internal funding capacities that substantially exceed their investment needs, whereas firms relying on concentrated financiers may externally finance investment despite having sufficient funds yet forgo investment with even more funds.

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Disruptive Innovation and IPO Outcomes: Evidence from Machine Learning

Hoang Nguyen, University of Alabama

Anup Agrawal, University of Alabama

Abstract: We develop a new text-based measure of a firm’s engagement in disruptive innovation that does not require data on R&D or patents. We compute a disruptive innovation score (DIS) for firms doing IPOs using textual analysis of prospectuses and a semi-supervised machine learning method. DIS strongly and positively predicts firms’ pre-IPO observable innovation activities, which validates our measure. We find that DIS positively predicts IPO outcomes such as initial return, trading volume, bid-ask spread, and price revision, consistent with disruptive innovation entailing high uncertainty and information asymmetry. These results are robust to a variety of controls, a propensity score matching approach, and the exclusion of technology stocks, the technology bubble period and the financial crisis period. DIS positively predicts one-year post-IPO abnormal return, and the initial returns of high DIS IPOs do not reverse over the next year, contradicting the hype hypothesis about technology stocks. Finally, DIS predicts post-IPO firm policies (such as lower leverage, higher cash holdings, and higher innovation activities) and higher firm valuation. Overall, our findings imply that disruptive innovation is not only a risky but also valuable activity for firms, and our text-based DIS measure captures disruptive innovation activities of IPO firms beyond R&D and patenting.

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Do ESG Investors care about carbon emissions? Evidence from securitized auto loans

Christian Kontz, Stanford University

Abstract: Securitized auto loans present a clean empirical setting to study the effects of ESG investing on equilibrium asset prices and quantities. I find that the convenience yield of ESG investments increased almost threefold from 0.14% in 2017 to 0.39% p.a. in 2022. The pass-through of this convenience yield to consumer interest rates can be substantial for captive lenders, with implied changes in consumer loan demand ranging from 1.05% to 4.77%. However, I document that the market's focus on firm-level ESG scores, rather than the collateral's CO2 emissions, lowers the cost of capital for high-emission auto ABS by 6 basis points; due to a positive correlation between ESG scores and CO2 emissions. ESG mutual funds allocate more capital to auto ABS from issuers with higher ESG scores, even if those securities finance higher-emission vehicles. These findings highlight that while green premia can have a meaningful impact, they do not necessarily increase the cost of emitting CO2.

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Does Options Trading Matter for Market Volatility and Hedging Effectiveness? Evidence from the 1936 Options Trading Ban on Futures Markets in the US

Elissa Iorgulescu, University of Münster

Fiona Höllmann, University of Münster

Abstract: Commodity options provide a useful tool for farmers to hedge against adverse price movements, but they can also be used as a tool for speculation, potentially increasing market volatility. This paper examines the effects of a 1936 ban on commodity options trading on both hedging effectiveness and price volatility, using newly collected data for Chicago and London futures markets and a difference-in-differences approach that exploits the fact that commodity options were banned in US but not in the UK. We find that in the short term, the volatility of grain futures prices in Chicago increased significantly post-ban. In the long term, our findings suggest that the ban decreased volatility by a significant margin, driven by the fact that there was no repeat of the severe manipulation of wheat markets that had occurred in 1933. However, this came at the cost of a reduction in hedging effectiveness in US grain futures markets.

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Does Sustainable Investing Dull Stock Reactions to Cash Flow News?

Steffen Hitzemann, University of Houston

An Qin, Rutgers University

Andrea Tamoni, University of Notre Dame

Stanislav Sokolinski, Michigan State University

Abstract: The growing importance of sustainability criteria for investment decisions suggests that cash-flow news may become less significant in determining stock prices. We examine this proposition through earnings announcements, showing that stocks owned by sustainable investors are 45%–58% less sensitive to earnings news. This reduced sensitivity is accompanied by lower trading volume and persists post-announcement, indicating a lasting impact on price formation rather than temporary mispricing. We investigate the reasons behind the weaker earnings response and find that it cannot be explained by differences in earnings news content, market anticipation, or ownership by other investor types. Calibrating a flexible present value framework reveals that lower earnings persistence in high-sustainable-ownership stocks accounts for a large part of the effect. However, our analysis also implies a 1%–3% reduced discount rate for stocks with high sustainable ownership in order to fully align the model-implied price response with the observed data.

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Drivers and Effects of Radical vs. Incremental Innovation Purchases

Daria Davydova, Swiss Finance Institute - EPFL

Abstract: I examine whether acquirers can exploit the stock of innovative ideas of targets in a sample of public-to-public M&A deals. I distinguish between radical innovation, which involves cutting-edge technologies that are influential for a wide range of future technologies, and incremental innovation, which leverages already established innovations in new ways. Using a new hand-collected database that has market values for radical and incremental innovations, I provide two sets of findings. First, the purchased innovations positively influence the sales growth of the new entity through the adoption of new technologies. Second, acquirers relying on scope and scale tend to pursue acquisitions focused on radical innovation, whereas cash-endowed acquirers gravitate towards incremental innovations.

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Dynamic Market Choice

Xian Wu, Chinese University of Hong Kong

Abstract: In practice, we find assets traded in the transparent centralized market and opaque decentralized market. To explain the traders' choices of venues, we develop a model of dynamic learning and dynamic market choices between the centralized market and decentralized markets. With heterogeneous trader value correlations, we find that when asset sensitivity or volatility is sufficiently low, traders prefer the decentralized market; when asset sensitivity or volatility is intermediate, switching between centralized and decentralized markets can be the optimal market choice; when asset values are sensitive to volatile fundamentals, assets are traded only in the centralized market. We provide empirical evidence in support of the model predictions. We discussed the welfare implications of various market designs under endogenous market choices. We find that introducing post-trade transparency in the decentralized market improves welfare. Surprisingly, introducing pre-trade transparency in the decentralized market may decrease welfare as it increases traders' incentives to choose a decentralized market earlier and hurts future traders in the centralized market.

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Economic Linkages from the Wisdom of Crowds

Huaixin Wang, University of Macau

Weichen Zhang, Singapore Management University

Abstract: Using text data from the Reddit platform, we construct inter-firm linkages based on shared threads and shared authors within social media. We find that firms linked via social media exhibit correlated fundamentals across various characteristics. The returns of Reddit peer stocks positively predict focal stocks’ future returns, suggesting sluggish dissemination of latent information within the social media network. This lead-lag effect is also robust to controlling for other firm characteristics and alternative inter-firm connections. Our findings suggest that social media activities contain collective perceptions of connectedness between firms, thereby providing an implicit representation of the financial network.

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Empirical Asset Pricing with Probability Forecasts

Songrun He, Washington University in St. Louis

Linying Lyu, Washington University in St. Louis

Guofu Zhou, Washington University in St. Louis

Abstract: We study probability forecasts in the context of cross-sectional asset pricing with a large number of firm characteristics. Empirically, we find that a simple probability forecast model can surprisingly perform as well as a sophisticated probability forecast model, all of which deliver long-short portfolios whose Sharpe ratios are comparable to those of the widely used return forecasts. Moreover, we show that combining probability forecasts with return forecasts yields superior portfolio performance versus using each type of forecast individually, suggesting that probability forecasts provide valuable information beyond return forecasts for our understanding of the cross-section of stock returns.

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Endogenous Matching in the Private Debt Market

Paul Rintamäki, Frankfurt School of Finance and Management

Abstract: I study how the organizational structure of a firm affects capital allocation within the booming private debt industry. Focusing on business development companies (BDCs), important nonbank lenders, I document that perpetual-life BDCs lend more bilaterally to smaller and riskier borrowers while finite-life BDCs participate in larger deals with multiple lenders. I show that this two-sided endogenous matching can arise from a search-theoretic model, where the lender's perpetual-life incentivizes both counterparties to engage more in bilateral lending. With perpetual-life lenders, the borrower trades off a lower loan rollover risk for a higher coupon rate. This effect is 37 basis points when instrumenting the fund structure. Stronger lending relationships also provide borrowers more stable credit and support employment growth.

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Entrepreneur Experience and Success: Causal Evidence from Immigration Wait Lines

Abhinav Gupta, University of North Carolina-Chapel Hill

Franklin Qian, University of North Carolina-Chapel Hill

Yifan Sun, University of Pennsylvania

Abstract: This paper investigates the causal impact of entrepreneurs' prior experience on startup success. Employing within-country changes in Green Card wait lines to instrument for immigrant first-time entrepreneurs' experience, we uncover that startups led by more experienced founders demonstrate superior funding, patenting, and employee growth. Specifically, each additional year of founder experience leads to a 0.7 p.p. (1 p.p.) increase in the likelihood of a startup undergoing an IPO (growing to over 1000 employees), over the subsequent decade. The larger initial team size, facilitated by the improved ability to recruit former colleagues, explains the observed startup success. Our findings imply that each extra year of experience is worth $200,000, underscoring a critical consideration for policymakers in the design of startup incubators.

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Equity Flows Induced by Monetary Policy: The Roles of Financial Intermediation and Investor Performance Sensitivity

Pranav Garg, Yale University

Matthew Famiglietti, Yale University

Abstract: We develop a theory and provide measurement of equity flows across heterogeneous financial intermediaries due to monetary policy. We build an analytical intermediary-based asset pricing model where a household delegates wealth between a bank and mutual fund. The model demonstrates that in response to contractionary monetary policy, mutual funds should experience equity outflows which are absorbed by bank balance sheets. We provide empirical evidence for this claim and show that mutual funds sell significant amounts of equity quantities after a contractionary shock. To clear asset markets, we find that banks market-make and purchase equity. We confirm that the outflows mutual funds experience are net worth declines by verifying that mutual funds do not rebalance assets across alternative asset classes in response to monetary policy. We emphasize the role of investor sensitivity to recent performance of their mutual funds as a mechanism which amplifies equity redistribution due to monetary policy. We find that performance-sensitive mutual funds experience additional outflows while such a channel does not exist for banks.

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Expansion of Deposit Insurance: Adverse Selection Following 2023 Banking Crises

David Huberdeau-Reid, University of Memphis

George Pennacchi, University of Illinois

Abstract: We examine whether banks whose uninsured deposits were subject to greater risk of loss prior to the March 2023 banking crisis used institutional mechanisms to expand their deposit insurance coverage after the crisis. Based on a sample of almost 4,600 U.S. banks, we construct bank-level measures of pre-crisis uninsured depositor risk using bank financial statements, unrealized security losses, and estimates of unrealized loan losses due to interest rate risk. We then analyze whether riskier banks sought higher post-crisis insured deposits using reciprocal deposits networks, insured deposit sweep programs, fully-insured brokered deposits, and listing service deposits. We find that riskier banks tended to employ reciprocal and sweep deposits, but not brokered or listing service deposits, at greater rates relative to their lower risk peers. Reciprocal deposits were the favored avenue of risky midsized (regional) banks while they and risky large banks also attracted more insured sweep deposits. Overall, our results are indicative of adverse selection in the post-crisis expansion of federal deposit insurance.

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Financial Health Scoring and Personal Finances

Moritz Nardini, Ludwig Maximilian University of Munich

Emanuel Renkl, Technical University of Munich

Philipp Winder, University of St. Gallen

Christian Hildebrand, University of St. Gallen

Benjamin Loos, University of New South Wales

Abstract: We investigate the effect of disclosing the financial well-being score from the Consumer Financial Protection Bureau on consumer financial behavior in an online experiment with American participants sourced through Prolific. We find that solely providing the score to participants does not influence their financial behavior as measured by risk taking or the marginal propensity to save. However, adding information on the national average significantly decreases risk taking and significantly increases the marginal propensity to save. In contrast, solely providing the score significantly decreases perceived financial security. Adding the national average mitigates this effect. Given their increasing promotion, distribution, and accessibility exploring the effects of financial well-being scores on consumer finances is highly relevant to policymakers, industry, and consumers. With our experiment we provide novel evidence on the effects of disclosing such information and add to the increasing literature on peer effects in consumer finance.

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Financial Markets with Externalities

Yang Guo, London School of Economics and Political Science

Abstract: Index funds provide investors with diversification benefits but usually hold relatively small stakes in their portfolio firms. Conversely, active funds often maintain significant shares, enabling them to influence portfolio firms and potentially generate externalities. In a model where investors trade off between diversification and concentration, I show that due to agency frictions between active fund managers and investors, the equilibrium level of externalities is lower when the likelihood of these externalities is higher. This is because active funds, in competition with index funds, must weigh the costs of generating externalities against attracting investment flows. Additionally, when investors are dispersed, active funds can act as a coordination mechanism, delivering externality levels that align with the diverse preferences of investors. This coordination can help mitigate the welfare loss associated with agency frictions.

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Firm-Level Labor-Shortage Exposure

Jarrad Harford, University of Washington

Qiyang He, University of Sydney

Buhui Qiu, University of Sydney

Abstract: We use FinBERT to extract information from earnings conference call transcripts to develop a novel and reliable measure of labor shortage exposure. We demonstrate the validity of our measure by showing that states with higher levels of labor-shortage exposure experience lower future unemployment rates but higher wage growth and local labor market tightness, while firms with higher labor-shortage exposure have greater growth in future per-employee staff expenses. Firms with labor-shortage exposures experience lower earnings call CARs, future stock returns and operating performance. Firms respond to labor shortages by substituting labor with capital and R&D investments, and by producing more production-process patents. Such measures mitigate the negative effects on future performance. Our results demonstrate a fruitful application of machine learning to finance and provide insight into labor-capital substitution in response to increasingly expensive and scarce labor.

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From Availability to Affordability: The Role of Small Dollar Mortgage in Cash vs. Mortgage Property Price Disparities

Liu Ee Chia, Pennsylvania State University

Brent Ambrose, Pennsylvania State University

Abstract: Following the Global Financial Crisis (GFC), the US housing market experienced an increase in all-cash transactions among low-cost properties, and higher cash discounts for these transactions. We highlight the attendant decline in small-dollar mortgage lending as a causal mechanism. Using the expansion of enforcement actions on mortgage fraud post-GFC as an instrument for local small credit supply, we find that a one-percentage-point decrease in small loan approvals increases cash discounts by 8.4%. The impact is larger in low-cost houses and disadvantaged communities. The results point to the cause for the observed overall decrease in relative prices for low-cost houses, highlighting the importance of small loan availability for wealth-building through homeownership among lower-income households.

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Funding Frictions and Credit Supply: Evidence from Savings and Loan Associations

Pauline Liang, Stanford University

Abstract: Deposits are the cheapest source of funding for financial intermediaries. How do funding frictions curtail credit supply in the economy? I leverage a unique setting where deposit rate ceilings reduced inflow of deposits at financial intermediaries from 1960s–1980s. Using financial report data from savings and loan associations (S&Ls) and banks, I develop a novel method to measure the binding constraints of deposit interest rate ceilings. My findings document that deposit rate ceilings induced downward shifts in credit supply in the mortgage market. A 100-basis-point increase in the binding constraint of deposit rate ceilings is associated with 10% annualized decline in mortgage growth among S&Ls. This is in contrast to commercial banks which experienced smaller contraction in mortgage lending due to access to alternative funding.

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Governing Through Votes: Shareholder Responses to Major Environmental and Social Incidents

Suxin Deng, University of New South Wales

Ronald Masulis, University of New South Wales

Kingsley Fong, University of New South Wales

Abstract: This paper investigates shareholder reactions to major environmental and social (ES) incidents by examining voting behavior in director elections. Using a comprehensive dataset of U.S. firms, we find that directors of companies experiencing significant ES incidents face an average of 9.8% more negative votes, with climate-related incidents prompting the most pronounced dissent. Female directors, who typically enjoy higher support, experience greater losses in shareholder backing following major ES incidents. Negative voting, per se, has a negligible impact on lowering the likelihood of future ES incidents, but boards that respond by adopting ES-linked executive compensation or forcing CEO turnover see a significant mitigation in the likelihood of incidents. Our findings contribute to the understanding of the governance role of shareholders in holding directors accountable for ES oversight and highlight the conditions under which shareholder activism can effectively influence corporate sustainability.

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Homeowners Responses to the New Price of Flood Insurance

Jiyoung Lee, Temple University

Abstract: As climate risks intensify, the low demand for flood insurance has been a significant public policy concern. This study examines the demand for residential flood insurance following the implementation of a reform that adjusts pricing to more accurately reflect flood risk. Using a difference-in-differences analysis, we evaluate the impact of this pricing reform on flood insurance take-up rates. On average, a 1% increase in premiums reduces insurance take-up by 19%. We find that policyholders who experienced premium changes are more responsive in their take-up than those who did not. Lack of effect on renewal rates in high-risk areas may be attributed to mandatory insurance requirements. Renewal rates in low-risk areas are more responsive to premium changes than in high-risk areas. One explanation could be that policyholders rely on outdated risk information when making renewal decisions. These insights into the price sensitivity of homeowners help better understand how to improve pricing strategies and maintain equity and accessibility in the flood insurance program, potentially encouraging higher participation.

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How Do ETFs Affect Stock Volatility?

Chen Lin, University of Mannheim

Abstract: This paper offers evidence supporting ETFs shield underlying from demand shocks. Because ETFs are designed with secondary markets, ETF trading can substitute trading in underlying, and thus absorb demand shocks that would otherwise move underlying prices. I find U.S. common stocks that would have been more heavily traded without equity ETFs display lower volatility from 2011 to 2021, consistent with ETF secondary market trading providing liquidity buffer to underlying. Further, I show this liquidity provision channel complements the demand propagation channel established in the literature by differentiating ETF trading from ETF ownership. The effects from both channels are significant even after restricting volatility changes to these exogenously driven by the NASDAQ 100 index reconstitutions.

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How Does VC Specialization Backfire in Startup Experimentation?

Xuelin Li, Columbia University

Sijie Wang, Chinese University of Hong Kong-Shenzhen

Jiajie Xu, University of Iowa

Xiang Zheng, University of Connecticut

Abstract: Prior research suggests that specialized VC funds with small portfolios benefit startup performance due to active investor engagement. Using project-level data from the life science sector, we investigate this argument through a novel channel of VC activism: the strategic decision of project prioritization. We document that despite more interactions from smaller and more focused VCs, their biotech startups are less likely to exit via IPOs. Consistent with such activism prematurely prioritizing the research pipeline, startups backed by concentrated VCs exhibit slower progress in clinical trials and tend to discontinue projects due to pipeline priority rather than other reasons. For identification, we use limited partners’ adoption of ESG objectives as instruments for affected VCs’ portfolio size and diversification. Lastly, we highlight conflicting experimentation preferences between general partners and founding teams due to investment horizon and diversification.

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Impact of Culture in Peer to Peer Lending

hongju ren, Stevens Institute of Technology

Anand Goel, Stevens Institute of Technology

Abstract: We document that culture and cultural perception both influence financial decisions. We examine the impact of clan culture, an important dimension of Chinese culture, on individual lending behavior. Using data from RenRenDai, a leading peer-to-peer lending platform in China, we find that borrowers from regions with higher clan culture are more likely to get loans funded, attract larger bids from lenders, get loans funded faster, are less likely to default, and repay a larger fraction of their loans. These effects are more pronounced when borrowers are riskier, there is greater information asymmetry, and the legal environment is weaker. These results are robust to potential endogeneity concerns and to alternative measures of clan culture. We show that clan culture acts as a substitute for formal institutional mechanisms and participants in the peer-to-peer market use information about clan culture as a proxy for economic factors. Our results suggest that cultural considerations improve efficiency of financial decisions.

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Impact of Institutional Owners on Housing Markets

Zipei Zhu, University of North Carolina-Chapel Hill

Franklin Qian, University of North Carolina-Chapel Hill

Caitlin Gorback, University of Texas-Austin

Abstract: Since the Great Recession, the rise of single-family rental companies has changed the investor ownership landscape in the U.S. Using housing transaction data, we document the rise of Long Term Rental (LTR) companies, defined as inclusive of single-family rental, rent-to-own, and real estate private equity firms, by constructing a panel of national single-family housing portfolios between 2010 and 2022. We show that LTR growth outstripped all other investor types, such as builders, iBuyers, and small investors, over the last decade. These companies geographically concentrate their holdings in select census tracts and expand their local market shares over time. To estimate LTRs’ impacts on local housing markets, we construct a novel instrument predicting LTR entry, which we name the ``suitability index." In the cross-section, this instrument leverages differential revealed preferences in product characteristics across landlord types. In the time-series, we interact these differential product preferences with a proxy for falling property management costs over time. In the first stage, more suitable locations for LTRs experience higher growth in LTR shares: a one-standard-deviation increase in the instrument implies a 23% higher annual growth in LTR share relative to the baseline mean. We use this instrument for LTR market entry to estimate the causal impact of LTR market share on local house prices. We find that a one-standard-deviation above the mean increase in LTR share growth leads to an annual additional house price growth of 2.11pp and additional rent growth of 2.19pp. Finally, we discuss how the reallocation of homeownership across small and large landlords, as well as owner-occupants and investors, contribute to these price increases.

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Inattention to the Coming Storm? Rising Seas and Sovereign Credit Risk

Atreya Dey, University of Edinburgh

Abstract: This study examines whether the sovereign credit market integrates information on coastal flooding and sea level rise (SLR) hazards. Using credit default swap spreads as measures of credit quality, I find that medium- to long-term risk for sovereigns with a significant portion of their population vulnerable to ex-ante coastal flooding increases in response to climate summit news. Additionally, I document that the market asynchronously incorporates changing vulnerabilities of regions into its risk assessment with such news. In- and out-of-sample predictability tests suggest that the market lags in integrating adverse trends in exposure under projections of SLR and population growth, indicating a lack of attention to complex climate information. Finally, I demonstrate that these projections have historically been inaccurate, leading to mispricing.

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Increased Creditor Protection and Trade Credit: Evidence from India

Khushboo Rajendra Thakkar, University of North Carolina-Chapel Hill

Abstract: Trade credit provides customers the flexibility to procure goods from their suppliers without immediate cash payment, serving as a fundamental form of short-term financing. If creditors are granted increased legal protection when a customer defaults, does the availability of trade credit increase or decrease? This is an important consideration since creditor rights can influence both the supply and demand of credit. This paper investigates this conundrum by leveraging a recent bankruptcy reform in India which increased legal protection of creditors. In a difference-in-differences setting, I find an uptick in the trade credit usage of firms closer to default. This effect is concentrated in small firms with limited growth prospects, poor working capital management and operating in industries with less reliance on inputs from other industries. However, this increase in trade credit usage among the less efficient subset of distressed firms is not accompanied by an offset in their profitability. These results underscore the importance of strong creditor rights in sustaining financially vulnerable firms, essential for economic resilience in developing economies.

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Inequality and the Rise of Finance

Dario Laudati, Columbia University

Abstract: This paper studies the causes behind the rise of the financial sector observed in the United States from the 1980s. The growth of the financial sector is seen from the perspective of an endogenous rise of non-bank financial institutions (shadow banking sector). The shadow banking sector rises as a result of a domestic safe asset shortage. An increase in wealth inequality induces a higher amount of savings to invest in the hands of the wealthier households – the investors. Investors need to allocate their holdings between risky and safe assets. Given a constrained supply of public safe assets, real interest rates decline to accommodate the larger demand. A compression of the real interest rates reduces the costs of issuing debt for the poorer households, and represents the incentive for the shadow banking system to step in by transforming the debt of the poorer households into the private safe assets that the investors demand. The model allows for an endogenous and non-mechanical feedback loop between inequality and finance. The primitive increase in wealth inequality is obtained through non-trivial dynamics generated by an exogenous decline in the labor share. The financial sector rises in size and changes in structure as a result of secular macroeconomic forces. The paper is quantitative in spirit with a few empirical exercises which corroborate the model predictions.

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Inflation Hedging and Pricing Power

Amra Hrustanovic, University of Zurich

Alexander Wagner, University of Zurich

Abstract: Historically, the average stock has been a surprisingly poor hedge during inflationary periods. We show theoretically and empirically that the relative pricing power of firms, that is, both in relation to customers and to other stakeholders such as employees, is an important, but hitherto understudied driver of hedging properties. The negative market reaction to inflation shocks is mitigated by a half for firms with above-median pricing power. Free cash flows of firms with high pricing power are more resilient after inflation shocks. However, analysts do not incorporate this in their forecasts. Instead, the greater inflation-resilience of pricing power seems to be due to lower perceived risk. Specifically, investors apply lower discount rates to firms with greater pricing power. Overall, our findings suggest that stock market participants can benefit from hedging effects when owning high pricing power shares in inflationary periods.

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Information Partitioning, Learning, and Beliefs

Pascal Kieren, Heidelberg University

Lukas Mertes, University of Mannheim

Martin Weber, University of Mannheim

Abstract: We experimentally study how information partitioning affects learning and beliefs. Holding the informational content constant, we show that observing small pieces of information at higher frequency (narrow brackets) causes beliefs to become overly sensitive to recent signals compared to observing larger pieces of information at lower frequency (broad brackets). As a result, partitioning information in narrow or broad brackets causally affects judgements. Observing information in narrow brackets leads to less accurate beliefs and to worse recall than observing information in broad brackets. As mechanism, we provide direct evidence that partitioning information into narrower brackets shifts attention from the macro-level to the micro-level, which leads people to overweight recent signals when forming beliefs.

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Insurance Companies, Asset Managers and Economies of scale

Pietro Bini, Cornell University

Abstract: External advisers are increasingly common in the insurance sector, with BlackRock Financial Management Inc. being the most prominent, advising over 47 life insurers in the past six years. This study explores the implications of insurers relying on the same external adviser, particularly in terms of portfolio similarity among insurers. Using cosine measures, I find that insurers with the same advisors have portfolios that are three times more similar compared to those of unrelated insurers. Similar trends are observed between insurers and corporate bond mutual funds managed by the same advisors. To address concerns about endogeneity, I further analyze the SMCCF (Secondary Market Corporate Credit Facility), also managed by BlackRock during the Covid-19 crisis. I show that the SMCCF portfolio is significantly more similar to the portfolios of insurers advised by BlackRock than to those of other insurers. The findings suggest that external advisors may leverage economies of scale by purchasing similar assets for their clients. Importantly, increasingly similar portfolios among insurers and between insurers and other investors raise important concerns about growing systemic risk in the insurance industry. [work in progress]

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Intellectual Property Protection and Staying Private Longer

Adel Khusnulgatin, University of Toronto

Abstract: Why are U.S. firms staying private longer? I analyze how the legal protection of a specific type of intellectual property - trade secrets - affects a firm's decision to undergo an initial public offering (IPO). My identification strategy exploits the staggered adoption of the Uniform Trade Secret Act (UTSA) in 50 U.S. states and the Federal enactment of the Defend Trade Secret Act in 2016 (DTSA). Between 1980 and 2015, the UTSA delayed IPOs and prolonged private tenure by 9 to 13 months. This accounts for approximately 15% to 21% of the overall larger increase in the duration of firms remaining private in the U.S. during the same timeframe. The DTSA made firms to stay private for 16 months longer. The primary factor driving these findings is the enhanced appeal of trade secrets over the other types of intellectual property protection including patents. Unlike patents, trade secrets do not require disclosure of information and offer the greatest advantages when the firm is private.

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Intergenerational Effects of Debt Relief: Evidence from Bankruptcy Protection

Naser Hamdi

Ankit Kalda, Indiana University

Qianfan Wu, Indiana University

Abstract: Using bankruptcy filing information for parents matched to administrative data on their children and leniency of the randomly assigned judges as an instrument, we document the effect of parental bankruptcy protection on children's income and intergenerational mobility. We find that children whose parents receive Chapter 13 bankruptcy protection earn $1,755 (or 5.6%) higher annual income relative to those whose parents file for but do not receive protection. Our results are increasing in the duration lapsed from filing and over the life cycle of children. Parental bankruptcy protection leads to higher income by 2.8% at age 20, 8.8% at age 25 and 35.4% at age 40. Back-of-the-envelope calculations suggest that for one dollar of debt relief granted to parents through Chapter 13 protection their children earn two dollars more in adjusted present value of lifetime earnings. Children of parents who receive protection are more likely to be in the top tercile of income distribution, which is driven by an increase in intergenerational upward mobility for children whose parents receive protection rather than an increase in downward mobility for those whose parents were denied protection. These results highlight the potential role of bankruptcy protection and debt relief more broadly in helping improve intergenerational mobility for low-income distressed households. Finally, our results are most consistent with higher investment in education and skill-development as the mechanism contributing to these findings. We do not find support for neighborhood effects driving our estimates.

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Intergenerational Effects of Financial Crises. Evidence from the Panic of 1873

Harsha Dutta, Hong Kong University of Science and Technology

Abstract: I investigate the long-term impacts of financial crises on the socioeconomic outcomes of households. My research focuses on the first 'Great Depression,' which began with the Panic of 1873 in the United States. Utilizing spatial variation in the crisis's severity and linked census and administrative records from 1870 to 2000, I trace the economic outcomes of descendants based on their ancestors' exposure levels to the crisis. The findings reveal that disparities between descendants have persisted across four generations. Descendants of ancestors who had higher exposure to the crisis exhibit lower levels of education, income, and wealth. These effects are particularly pronounced for descendants of ancestors in the bottom third of the wealth distribution. Household heads in the severely affected regions shifted to lower-skilled occupations and moved to more rural locations, thus limiting opportunities for future generations.

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Interpreting Cross-Section Returns of Machine Learning Models: Firm Characteristics and Moderation Effect through LIME

Zequn Li, Stevens Institute of Technology

Xiaoxia Lou, University of Delaware

Ying Wu, Stevens Institute of Technology

Steve Yang, Stevens Institute of Technology

Abstract: Our study introduces a novel framework to interpret machine learning asset pricing models through the Local Interpretable Model-agnostic Explanations (LIME) method. This methodology illuminates how the inclusion of LIME local coefficients, representing the interaction among characteristics within ML models, modifies the relationship between a firm characteristic and stock returns. The empirical results underscore the significance of incorporating moderation effects into portfolio analysis. Our results present that certain firm characteristics exhibit varying long-short portfolio performance across LIME groups, suggesting their predictive power is specific to certain asset segments. These findings deepen our understanding of the complexities in cross-sectional stock returns, uncovering the detailed dynamics between firm characteristics and their return effects, and distinguishing our research from existing studies.

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Involuntary Disclosures through Climate Litigations: Impact on Investors and Corporate Policies

Alice Eliet-Doillet, Swiss Finance Institute - EPFL

Abstract: I study the role of involuntary disclosures in steering environmental governance. Using a sample of climate litigations filed between 2012 and 2019, I examine whether these litigations shed new light on defendant firms’ climate risks and whether this information is relevant enough to trigger investors’ reactions and impact corporate policies. I find that on average climate litigations have no significant effect on firm value or emissions, and do not lead to divestments by green institutional investors. However, cases that attract investors’ attention do lead to significant reductions in emissions for the defendant firms. In contrast, I find little evidence that climate litigations contribute to self-disciplining effects on non-targeted peer companies.

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Is the gig up? The impact of worker-status reclassification regulation on shareholder value

Amedeo De Cesari, University of Manchester

Marie Dutordoir, University of Manchester

Lingxiao Liu, University of Manchester

João Quariguasi Frota Neto, Alliance Manchester Business School

Abstract: We examine the shareholder value effects of recent US and EU worker-status reclassification regulations (WSRR) requiring companies to classify gig economy workers as regular employees. Using a policy event study methodology on a global sample of gig economy companies, we document negative average stock price reactions to announcements of WSRR events. Stock price reactions are more favorable for gig economy companies with a higher ex ante financial flexibility and better labor conditions, suggesting shareholders anticipate WSRR to affect firms’ costs and reputation. Corroborating the shareholder expectations reflected in the event study results, difference-in-differences estimations indicate gig economy companies have higher costs, a higher leverage, worse credit ratings, and improved labor conditions following WSRR. Our findings, which withstand several robustness tests, highlight the existence of substantial economic benefits for gig economy companies of relying on precarious labor and inform the policy debate on worker-status legislation.

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Judicial Selection and Production Efficiency: The Role of Campaign Finance

Mayur Choudhary, Indiana University

Abstract: This paper studies the effect of campaign finance on judicial selection and production efficiency. Using the Supreme Court's surprise verdict in the Citizens United v. FEC case in 2010, which generates exogenous variation in campaign finance laws, I document that the removal of such bans led to a 61% ($ 200,000) increase in the average electoral expenditure of judicial candidates and increased competition in State Supreme Court judge elections. The judicial bench also becomes populated with more business-friendly judges. State courts decide the majority of labor, contract, and administrative law disputes, and the State Supreme Court has the power to set legal precedents. Therefore, shifts in the judicial bench of the State Supreme Court affect the legal environment and the contracting choices of firms and labor. I document that labor productivity measured as value added per worker increased by 8 % in treated states with judicial elections. For sectors more reliant on contract enforcement, labor productivity is higher in states with judicial elections. Overall, removing constraints on electoral finance improves competition in judicial elections, the judicial bench becomes more business-friendly, and enhances production efficiency due to the alleviation of contract-enforcement frictions.

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Learning from failure: The role of disclosure on innovation

Menghan Wang, The University of Hong Kong

Abstract: This paper examines how the disclosure of failures shape innovation activities. I exploit an expansion in mandatory disclosure requirements for clinical trial results—from only trials on approved products to all applicable trials, including those on unapproved ones—as a positive shock to the availability of failure information. There is a significant increase in the number of new trials initiated, which becomes evident one year after the policy change and persists in the following years. This increase is driven by trials on existing drugs rather than novel drugs, suggesting a “fast-follow” strategy. Textual analysis of trial summaries further supports the learning effect and the importance of disclosing trial results. Consistent with the knowledge spillover channel, sponsors benefits more in medical areas where they had less internal expertise prior to the policy change. However, mandatory disclosure of failures carries proprietary costs, especially for innovative ones whose private knowledge becomes accessible to competitors. Sponsors with a higher risk of losing informational advantages are less inclined to initiate new trials under such disclosure requirements. This paper contributes to the discussion on mandatory disclosure of innovation outcomes, under the trade-off between the social benefits from knowledge spillover and the proprietary costs borne by the innovating entities.

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Limit Order Clustering and Stock Price Movements

Xiao Zhang, University of Maryland

Abstract: Stocks with prices slightly above round numbers (e.g., $6.1) tend to increase in the next period, while those slightly below (e.g., $5.9) tend to decrease. A long-short strategy based on daily closing prices yields a daily return of 24.6 basis points (or 61% per annum). This pattern is extremely robust across different stock price levels, sizes, liquidity, exchanges, sub-periods, intraday half-hour periods, and international samples. We demonstrate that an excessively large volume of limit orders, which tend to cluster at round numbers (e.g., $6.0), supports stocks with prices just above and resists those just below these round levels, resulting in differential subsequent price movements. Our findings highlight the profound impact of investors placing orders at psychologically appealing round numbers on random price movements and market efficiency.

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Local, Regional, and Global Asset Pricing?

Joshua Traut, University of St. Gallen

Abstract: Uncovering the underlying structure of global factor returns and assessing whether assets are priced on a local, regional, or global level are important tasks to understand the dynamics of asset pricing. I am the first to assess the regional extent of factor dynamics or the optimal level of aggregation by comprehensively analyzing factor dependencies in 35 countries. Following a data-driven approach I identify three-factor regions along geographical and economic lines. With regards to asset pricing, I grant novel insights that the performance of local asset pricing models is largely driven by the local market factor and that optimal models contain local, regional, and global factors, challenging current findings that local models perform best. The findings offer guidance for international asset pricing tests, deepen understanding of factor return dynamics, and provide evidence of the efficacy of global pricing models.

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Market Concentration, Capital Misallocation, and Asset Pricing

Ngoc Minh Thu Nguyen, University of Amsterdam

Abstract: Superstar firms that dominate markets due to their large size and high markups can deter efficiency in capital allocation across firms. This paper empirically studies the asset pricing implications of superstars through the channel of capital misallocation, measured by cross-sectional dispersion in the marginal product of capital (MPK). I decompose this measure into three components: misallocation among superstars, misallocation among other firms, and misallocation between these two groups, referred to as "MPK spread". Shocks to the MPK spread are negatively priced in the cross-section of stock returns. Stocks negatively exposed to these shocks outperform stocks positively exposed to these shocks by 4.8% per year. In the long run, shocks to the MPK spread negatively predict consumption growth, industrial production growth, employment growth, and stock market excess returns. In the short run, shocks to the MPK spread negatively predict the innovation growth of non-superstar firms. These findings imply that shocks to capital misallocation between superstar and non-superstar firms capture an important macroeconomic risk factor.

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Market Fragmentation and Price Informativeness

Filipp Prokopev, University of Michigan

Abstract: I study the effect of market fragmentation on the informativeness of prices. On the one hand, a higher degree of fragmentation may harm price informativeness because it lowers expected gains from trade and disincentivizes information production. On the other hand, it can benefit the aggregate informativeness since prices become less correlated. I develop a tractable trading model with two markets and two competing speculators who produce information about the fundamental value of a firm. The principal-agent framework of Holmstrom and Tirole (1993) allows me to stress the link between the informativeness of prices and the optimal managerial compensation

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Market vs Social norms: Evidence from ESG fund flows

Soohun Kim, Korea Advanced Institute of Science and Technology

Katie Moon, University of Colorado-Boulder

Jiyeon Seo, Korea Advanced Institute of Science and Technology

Abstract: Environmental, Social, and Governance (ESG) funds, designed to integrate nonfinancial considerations into investment strategies, can result in unintended consequences by additionally emphasizing their focus on financial performance. We employ innovative textual analysis methods on fund prospectuses to assess the degree of emphasis that funds place on ESG factors versus traditional financial returns. Our analysis uncovers a noteworthy phenomenon within ESG-focused funds: ESG fund managers' emphasis on traditional monetary metrics leads to an increase in fund flow's sensitivity to monetary performance. Paradoxically, this heightened sensitivity to monetary performance may hinder the long-term objectives of ESG investments. These findings underscore the importance of thoughtful communication strategies for ESG funds.

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Measuring the Economic Impact of AI through Forward-Looking Firm Communications

Jiacheng Liu, Purdue University

Abstract: I present a novel measure of the economic impact of AI using forward-looking man- agerial assessment contained in firm filings and earnings calls. I establish five new facts: (1) AI interest is rapidly growing among US firms, with significant cross-industry differences. (2) GPT annotations reveal that most of the firms view AI impact as moderately positive, with most of the expected economic impact on labor and investment. (3) AI is more likely to augment workers rather than displace workers. (4) AI-adopting firms are more efficient, profitable, and valued higher while having lower leverage and paying out less. (5) Non-creative knowledge tasks (e.g., Information recording) are more likely to be automated rather than augmented by AI. This paper contributes to measuring and understanding the economic interactions between AI and the business sector.

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Media Coverage and Corporate Bond Momentum

Grace Liu, City University of Hong Kong

Junbo Wang, City University of Hong Kong

Chunchi Wu, State University of New York-Buffalo

Abstract: This paper shows that media information induces momentum in corporate bonds. Using a comprehensive media coverage dataset from RavenPack News Analytics, we find that bonds with high media coverage exhibit stronger momentum than those with low media coverage. This media-based momentum concentrates on non-investment-grade (NIG) bonds. Media tone enhances the effect of news coverage, and informed trading of bonds with high media coverage leads to stronger momentum in the short run. Momentum reverses in the long run with bonds of higher media coverage experiencing more pronounced reversals. Our results provide a novel explanation for the momentum in NIG bonds.

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Memory and Beliefs in Financial Markets: A Machine Learning Approach

Zhongtian Chen, University of Wisconsin-Madison

Jiyuan Huang, University of Zurich

Abstract: This paper explores the role of memory in shaping belief formation of financial market participants. We estimate a structural machine learning model of memory-based belief formation applied to consensus earnings forecasts of sell-side stock analysts. The estimated model reveals significant recall distortions compared to a benchmark model trained to fit realized earnings revisions. Specifically, analysts over-recall distant historical episodes most of the time, when recent events are more useful for forming forecasts than those in the distant past, but under-recall them during crisis times, when history helps to interpret unusual events. We document two potential driving forces behind these distortions. First, analyst memory overweights the importance of past earnings and past forecasts. Second, analysts are more likely to selectively forget past positive events. Our model of analyst recalls strongly predicts their earnings forecast revisions and errors, as well as stock returns, which suggests that distorted recalls might contribute to mispricing of assets in financial markets.

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Mortgage Credit Regulation based on Data Quality: Evidence from Automated Underwriting

Sakif Rahman, University of Rochester

Abstract: In this paper, I study the credit market outcomes and economic consequences of restrictions placed on algorithm based loan evaluations due to inaccurate statistical risk assessments resulting from a decline in data quality. I exploit an exogenous policy change in a major automated mortgage underwriting system which eliminated such restrictions placed on a subset of loan applicants. Utilizing novel data and a differences-in-differences strategy, I find that the policy change leads to an increase in mortgage credit access without any noticeable impact on credit risk. This change accounts for 26% of the increase in approval rates, with stronger effects where there is limited human interaction in the loan application process and where lenders have greater incentives for mortgage securitization. Further evidence suggests greater benefits to racial minorities and for borrowers facing financial frictions in availing alternate mortgage products due to lender litigation. While homeownership rates rise with spillover effects through lower rent growth in the more exposed areas, exposed banks end up crowding out commercial credit. My findings highlight the significance of automated mortgage underwriting for creditworthy and credit-constrained borrowers, which has important economic implications.

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Mosaics of Predictability

Will Cong, Cornell University

Guanhao Feng, City University of Hong Kong

Jingyu He, City University of Hong Kong

Yuanzhi Wang, City University of Hong Kong

Abstract: Existing studies often regard return predictability as an attribute of predictors or models. This paper argues that return predictability is an unobserved yet inherent asset characteristic linked to expected returns, varying across stocks and over time. We propose a novel tree-based clustering method to measure heterogeneous return predictability by grouping asset-return observations with similar levels of predictability. The resulting clusters are characterized using high-dimensional firm characteristics and aggregate predictors. Our empirical analysis reveals significant patterns of heterogeneous return predictability in individual U.S. stocks. First, asset clusters with low trading volumes, high earnings-to-price ratios, and high unexpected earnings exhibit the highest predictability. Second, predictability declines sharply when the dividend yield is low, while it peaks during periods of high dividend yield and low default yield. Furthermore, we identify a new predictability anomaly: highly predictable long-only portfolios generate unexplained alphas of about 1% across various factor models over the past two decades, while a long-short portfolio based on predictability yields even higher alphas.

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Muddy Waters Research and U.S. Stock Market Reaction

Shawn Simpson, Morgan State University

Alex Tang, Morgan State University

Mohammed Alsurayhi, Morgan State University

Abstract: In this study, we investigate whether investors react to nonconventional research reports instead of traditional audit reports in the United States. Prior studies have explored market responses to various audit-related factors, such as qualified audit reports, reportable events disclosure, going concern audit reports, adoption of new IFRS Standards, and analyst coverage and recommendations. For this study, nonconventional reports refer to independent investigative reports issued by third-party research firms. Specifically, the analysis focuses on Muddy Waters Research Company, a specific third-party research firm. The data used in the study are obtained from the Securities and Exchange Commission, CRSP, Compustat, and Muddy Waters Research Company. We employ a market model event study to examine investor reactions. The results indicate a significant negative market response to the independent investigative reports issued by Muddy Waters Research Company similar to the response to conventional reports.

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Navigating Bequests: The Strategic Role of Financial Advisors in Bequest Motives

Michelle Chang, Nanyang Technological University

Abstract: Using data from DHS (Dutch Household Survey) between 2005 to 2021, we show the role which financial advisors play in driving bequest decisions. Specifically, we find that reliance on financial advisors for household financial decisions increases the likelihood of bequeathing by 1.7%. These results hold when we include insurance ownership as a proxy for reliance on insurance advisors. Additionally, we identified the 2013 collapse and bank run of SNS Bank as a shock to reliance on financial advisors and show that treated individuals that have SNS Bank checking, deposit or savings account prior to the event see a fall in their bequest intentions post event period. Last, we also use a special module survey in HRS in 2016 to confirm our results and we find that individuals who rely on financial advisors for money management advice is 18.6 percentage points more likely to make a will, and 13.68 percentage points more likely to leave an inheritance of more than $10,000.

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Negative Capital Shock, Overseas Buyers, and Housing Market

Qian Wang, Purdue University

Abstract: While local policies regarding foreign capital inflows into residential housing markets typically oscillate between promoting wealth effects and ensuring housing affordability, the majority of current literature focuses on the positive demand shocks to examine the necessity of implementing restrictions on foreign capital. In this paper, we explore the implications of a negative capital shock from China on local housing markets. By leveraging China's implementation of stricter foreign exchange purchase quota management for its citizens as an exogenous negative demand shock on foreign Chinese buyers in the US single-family homes market, our analysis reveals substantial effects on local housing assets. Not only did the volume of house transactions by foreign Chinese buyers significantly decline compared to other foreign ethnicities (Indian and Russian), but house prices also significantly dropped in neighborhoods that are popular among Chinese buyers. Furthermore, the elasticity of house supply implied by such a negative demand shock is higher than that found in existing literature, which primarily utilizes positive demand shocks to estimate the elasticity.

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One Hundred and Thirty Years of Corporate Responsibility

Joel Houston, University of Florida

Sehoon Kim, University of Florida

Boyuan Li, University of Florida

Abstract: U.S. history has been punctuated by time-varying attitudes and shifting public discourse about the externalities and responsibilities of business. Applying natural language processing (NLP) techniques that account for context evolution in historical news text, we develop a monthly time-series index dating back to the late 19th century that measures public attention to environmental and social (E&S) issues related to business (ESIX).We explore the properties of ESIX and relate it to macroeconomic fluctuations, asset prices, and corporate decisions. Public attention to social issues around business arises during times of macroeconomic and social instability, whereas attention to environmental issues is heightened during times of relative prosperity. At the firm-level, positive exposure to such public attention is associated with lower future stock returns. Heightened E&S concerns reduce the level of corporate investments and weaken the link between corporate investments and Tobin’s q in the short-run (i.e., 1-2 years out), but ultimately improve both the level and efficiency of corporate investments in the long-run (i.e., up to 10 years out). These findings indicate that markets are unable to fully price the long-term real effects of the demands for corporate responsibility.

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Opioid Crisis and Firm Downside Tail Risks: Evidence from the Options Market

Jie Cao, Hong Kong Polytechnic University

Amit Goyal, University of Lausanne

Yajing Wang, Hong Kong Polytechnic University

Xintong Zhan, Fudan University

Weiming Zhang, IE Business School

Abstract: This paper explores how the opioid crisis exposure affects firm downside tail risks implied from equity options. Using a large sample of U.S. public firms from 1999 to 2020, we find that firms headquartered in regions with higher opioid death rates face higher downside tail risks, i.e., the cost of option protection against left tail risks is higher. The effects are reversed following exogenous anti-opioid legislations, supporting a causal interpretation. Further analysis shows that the opioid crisis heightens firm risk by reducing labor productivity. The effects that occur through a labor channel are stronger for firms with higher labor intensity, lower labor supply, and lower workplace safety.

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Paid Sick Leave Mandates and Household Portfolio Choice

Yibing Wang, King's College London

Steven Ongena, University of Zurich

Duc Duy Nguyen, Durham University

Tarik Driouchi, King's College London

Abstract: Using the staggered adoption of paid sick leave (PSL) mandates across US states, we document a 20% increase in the average household stock market participation following the enactment of a PSL policy. The effects are more pronounced among households facing greater health concerns, higher employment risks, and financially vulnerable households. Several mechanisms can explain our findings. PSL mandates offer households insurance-like protection, increase their income and wealth, and improve households’ future outlook. Our findings demonstrate that PSL laws create positive economic externalities by motivating households to invest in risky assets, a key factor toward building wealth.

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Passive Investing and Market Quality

Philipp Höfler, Goethe University Frankfurt

Christian Schlag, Goethe University Frankfurt

Maik Schmeling, Goethe University Frankfurt

Abstract: We show that an increase in passive exchange-traded fund (ETF) ownership leads to stronger and more persistent return reversals in the cross-section of US equities. Removing return components unrelated to liquidity strengthens the effect on short-term reversals, suggesting that passive ETF ownership decreases liquidity. Exploiting exogenous variation from reconstitutions in the Russell indices allows us to further examine the causal impact of passive ETF ownership on stock liquidity as well as other factors of interest. We find that more passive ETF ownership causes higher bid-ask spreads, more exposure to aggregate liquidity shocks, and higher idiosyncratic volatility. We assess whether market participants also price these effects by making use of option-implied tail risk measures, which capture the jump risk in returns. Our findings confirm that stocks with more passive ETF ownership are more prone to extreme price movements in line with recent theoretical work suggesting that passive investments make demand curves for stocks substantially more inelastic. Finally, we examine potential drivers of our results by decomposing a stock’s return variation into different types of information. We show, again using index reconstitutions, that higher passive ETF ownership reduces the importance of firm-specific information, consistent with the view that passive funds crowd out active investors who trade on fundamental information. In addition, passive ETF ownership increases the importance of transitory noise which we attribute to heightened exposure to market-wide sentiment shocks and short-term noise trading.

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Political Connection, Corruption, and Demand-Driven Stock Returns

Chunxiao Lu, University of Melbourne

Abstract: I show that shifts in fund demand significantly impact stock returns. Using a reduced-form structural model and a characteristic-based demand asset pricing system, I investigate the price impact of firm-level political connections on stock returns through public fund demand, particularly after the 2012 anti-corruption campaign in China. Firstly, political connections have an insignificant direct effect on stock returns as an additional pricing factor but significantly and negatively affect stock returns through the fund demand channel, highlighting the importance of public fund demand. Meanwhile, the demand shifts in public funds significantly contribute to the decline in concurrent stock returns: public funds generally reduce holdings of stocks with higher political connections, especially those headquartered in provinces with elevated corruption indices, following the anti-corruption campaign announcement. By controlling for size and value factors that traditionally account for anomalies in Chinese stock returns, I reveal that non-fundamental demand shocks play a significant role not captured by political risk factors. This demand-based analysis introduces a novel perspective, distinct from conventional political risk literature that focuses on discount rate or cash flow-based analyses, and provides causal evidence for the decrease in stock returns during periods marked by unexpected political events.

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Political Connections and Carbon Emission Disclosures: A Cross-Country Examination

John McKenzie, Marquette University

April Knill, University of South Carolina

Omrane Guedhami, University of South Carolina-Columbia

Sadok El ghoul, University of Alberta - Saint-Jean

Abstract: Using a novel dataset containing details on 192 politically connected firms across 50 countries, we explore how political connections affect a firm’s decision to voluntarily disclose carbon emissions in an international setting. Our baseline results reveal that politically connected firms disclose significantly less of their carbon emissions, on average, compared to their unconnected peers. These results are driven by firms in countries with more corrupt governments, where connections provide more value to firms. We find that appointed politicians allow their connected firms to obfuscate their carbon emissions while elected politicians do not. Further, firms connected to politicians outside of their home country do not change their carbon emissions disclosure while firms connected to politicians in their home country significantly reduce such disclosure. Our results are consistent with connected firms receiving protection from government litigation and receiving benefits that offset the value of disclosing environmental performance, suggesting that political connections diminish such disclosure, undermining the push for universal environmental disclosure.

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Political Homophily in Supply Chain Relationships

Zhihong Chen, Hong Kong University of Science and Technology

Ting Dai, Hong Kong University of Science and Technology

Yonghao Zhai, Singapore Management University

Abstract: This study examines the influence of a firm’s political preference on its supply chain relationships. Following political theory’s prediction that common political ideologies cluster together to form political coalitions and individuals are more inclined to cooperate with those who share their political ideology, we find a firm (supplier) sharing the same political ideologies with its potential customers is more likely to build a supply chain relationship. The firm (supplier) will provide more favorable trade credit arrangements and increase relationship-specific innovations for customers who have the same political ideology. Such alignment can also ease the R&D investment burden by reducing the firm (supplier)’s R&D expenditures and the total number of new patents. Additionally, banks are observed to lower loan spreads for the borrower who is the supplier of the bank’s client and shares the same political ideology with that client. Further, we find this political affiliation effect was particularly pronounced during the influential period of the Trump administration (2015-2021). The market reacts positively when the supply chain relationship of the focal firm and its political ideology same customer becomes public information. This research highlights the importance of political ideology in supply chain relationship management, extending beyond traditional considerations of production quality and price

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Predictability of Firm-Level Stock Crash Risk

Gregory Gillis, University of Hawaii at Manoa

Abstract: Utilizing a combination of indicators for both rapid past debt and return growth at the firm-level, I explore whether this strong macroeconomic predictor of financial crisis onset can add explanatory and predictive power to stock price crash risk for an individual firm. I find that average crash occurrence strongly increases with a delay, starting two years after a firm simultaneously exhibits both traits, and remains significantly elevated with swings in economic magnitude. When using continuous measures that capture stock price distributions, negative tail skewness and down-to-up volatility show peaking crash risk two years after the overheating of credit balances that coincide with rapid return growth, which subsequently subsides towards the unconditional in the following years, lending credence to the predictability of a stock price crisis. This measure exhibits predictive power over the entire 60 years tested in this paper. Some evidence suggests this occurs due to the overpricing of stocks on the market along the self-fulfilling prophecy philosophy, where improvements in information asymmetry may contribute to the delayed increase in crash risk.

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Price Discovery in High-Frequency Equity Markets: Evidence from Retail and Institutional Trades

Jan Harren, University of Münster

Abstract: Using high-frequency trades and quotes (TAQ) data, I quantify the information content of retail and institutional trades in equity markets. I find evidence of a heterogenous price impact among retailers and institutionals. Consistent with theory, I show that information frictions, illiquidity, and information drive differences in the price impact of retail and institutional investors. A size-neutral trading strategy on institutional investors' price impact yields sizeable returns, beats the market, and is not explained by established risk factors. Furthermore, I find that episodes of coordinated trading by Robinhood investors reduce the price impact of institutional investors. This is consistent with indirect liquidity provision from retailers to institutionals via wholesalers due to internalization of retail trades.

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Production Technology, Information Acquisition and Disclosure, and Asset Prices

Minxing Zhu, University of Macau

Abstract: We develop a model in which investors trade a long-lived asset whose dividend is contingent on a firm's production and show that a more efficient real economy can lead to a less efficient financial market. With a higher real production efficiency, measured by a larger output elasticity of capital, the sensitivity of the firm's income to its capital input decision increases. Investors who are uncertain about the firm's future decision thus perceive a higher risk of the asset's resale price and trade less aggressively. Consequently, the asset's price informativeness, trading volume, liquidity, and the investors' information extraction (the asset's risk premium, return volatility, and the investors' information production) decrease (increase). We also identify a new channel through which firms' information disclosure lowers financial price informativeness. Suggestive evidence of the negative relationship between production efficiency and market efficiency is provided.

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Push to Read and Trade

Minxia Chen, INSEAD

Abstract: In the digital age, individual investors increasingly rely on mobile apps for real-time market updates. This study examines the impact of mobile push notifications on investor behavior, distinguishing the effects of the notifications from the news content itself. Utilizing a natural variation where approximately 7% of push notifications fail to reach investors due to technical issues, I create a quasi-experimental setting. My preliminary results indicate that push notifications significantly shape investor behavior, prompting both passive news consumption and active stock research. Notably, successful notification delivery enhances news reading time and stock click rates, particularly for stocks included in investors' watchlists, portfolios, or focus lists.

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Returns to scale in passive management: Evidence from ETFs

Bong Ko, University of California-Irvine

Abstract: Leveraging recursive demeaning, we find that ETF’s benchmark-adjusted return increases with lagged fund size. One standard deviation increase in fund size is associated with an increase in monthly performance by 4.5-9.6 basis points. Economies of scale are more pronounced in funds with high tracking errors. In contrast, the scale effect is weakened for higher Morningstar rating funds. Liquidity and turnover that affect scale economies in active funds are unlikely to play a role in passive funds. Returns to scale are present over time without systematic differences between normal and illiquid periods. Our results highlight the importance of size in ETFs.

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Rewiring supply chains through climate policy

Emanuela Benincasa, University of Zurich

Olimpia Carradori, Swiss Finance Institute

Miguel Ferreira, NOVA University Lisbon

Emilia Garcia-Appendini, Norges Bank

Abstract: We show that climate transition risks can have a significant effect on supply chains. We find that suppliers exposed to the California cap-and-trade program are more likely to lose customer relationships and less likely to establish new ones. These supply chain adjustments are driven by a loss of competitiveness due to the program, as the effects are more pronounced when suppliers face more competitive pressure and produce less specific inputs. This rewiring of supply chains is consistent with carbon leakage as customers exposed to the program through production networks experience increased scope 3 emissions.

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Save more or less? The impact of government health insurance change on saving behavior

Ye Lyren Lu, Imperial College London

Abstract: This research shows an overall decreasing effect on saving after the introduction of Serious Sickness Insurance (SSI) with a China survey dataset. I build a three-period model showing that SSI can influence saving via two driving forces: reducing precautionary savings for medical expenditures; increasing saving for a longer life expectancy. I employ staggered difference-in-difference estimators to show that the empirical results agree with the prediction of the model. Both the decrease in medication expenditure and longer life expectancy increase the utility of the insured. The effects are different across wealth, household registration type, and age groups. The actual most beneficial group is the wealthiest quantile, which is different from the initial goal when setting the policy.

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Scientific Talents and Firm Growth: Evidence from Scientific Breakthroughs

Jialin Qian, Georgia State University

Abstract: This paper studies the impact of corporate scientists on firm growth in the context of scientific breakthroughs. Leveraging a comprehensive publication database and a text-embedding large language processing tool, I develop a measure for corporate scientific human capital. Analysis of three major scientific breakthroughs of the 21st century reveals that firms affected by these breakthroughs and possessing a higher stock of relevant scientific human capital demonstrate superior performance following these breakthroughs. Corporate scientists create value mainly through the knowledge spillover channel. Specifically, corporate scientists engage more in patenting after scientific breakthroughs in firms affected by the breakthroughs and endowed with substantial scientific human capital. These firms also generate a greater number of impactful patents and are more likely to be early adopters of citing scientific papers in their patents compared to their peers. Additionally, these firms are more successful in attracting star scientists after breakthroughs. This study highlights the crucial role of corporate scientists in connecting basic science with industrial innovation in a modern economy that increasingly relies on intangible assets and human capital.

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Short-Termism and Carbon Emissions: Evidence from a Structural Estimation

Kai Maeckle, University of Mannheim

Abstract: I examine how corporate short-termism affects carbon emissions. Firms that just meet analysts' targets have about 5.9 to 7.2 percentage points higher carbon emissions growth than firms that just miss. To quantify the aggregate impact of short-termism on carbon emissions and firm value, I develop and estimate a quantitative model with short-term incentives for managers and endogenous carbon emissions. Short-term incentives are optimally set by the board of directors to counteract managers' private incentives. In counterfactual simulations, I find that removing short-term incentives from managers' contracts lowers firms' market value by 0.6% and aggregate carbon emissions by 2.3%, or 146 million tons. To put this figure in perspective, short-termist carbon emissions are equivalent to 87% of US aviation emissions in 2022. My results highlight a trade-off between economic value and climate change mitigation.

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Spatial Extrapolation in The Housing Market

Gen Li, University of British Columbia

Abstract: This paper introduces “spatial extrapolation,” a concept that refers to how economic expectations for one region are formed by extrapolating from the economic outcomes of another geographic area. We demonstrate this unique form of extrapolation by analyzing the purchasing behavior of out-of-town (OOT) homebuyers. Using data from approximately 3 million OOT housing transactions in the U.S. between 2002 and 2017, we find that a 50% increase in five-year hometown house prices leads OOT buyers to pay 2% more for OOT properties. The higher the hometown house price growth, the lower the realized returns and purchase discounts obtained by OOT buyers. To rule out the wealth effect, the paper designs two strategies. First, we classify renters, migrants, and second-home (SH) buyers to control the wealth increase from hometown properties. Second, we estimate geographic heterogeneity in extrapolative beliefs. We find that OOT buyers from higher extrapolation hometowns increase their purchase prices more after the hometown house price growth. Overall, our research highlights the potential spillover effects of extrapolation into other asset markets and provides evidence that extrapolative expectations have broader effects than previously recognized.

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Statistical Validation of Contagion Centrality in Financial Networks

Agathe Sd, Stevens Institute of Technology

Zachary Feinstein, Stevens Institute of Technology

Abstract: In this paper, we introduce a novel centrality measure to evaluate shock propagation on financial net- works capturing a notion of contagion and systemic risk contributions. In comparison to many popular centrality metrics (e.g., eigenvector centrality) which provide only a relative centrality between nodes, our proposed measure is in an absolute scale permitting comparisons of contagion risk over time. In addition, we provide a statistical validation method when the network is estimated from data, as is done in practice. This statistical test allows us to reliably assess the computed centrality values. We validate our methodology on simulated data and conduct empirical case studies using financial data. We find that our proposed centrality measure increases significantly during times of financial distress and is able to provide insights in to the (market implied) risk-levels of different firms and sectors.

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Stock Mispricing and Dual Holders' Loan Pricing

Yun-Soo Kim, Korea Advanced Institute of Science and Technology

Yeonggyu Yun, University of Wisconsin-Madison

Abstract: We investigate how dual holders who simultaneously hold loans and equity shares of a firm respond to stock mispricing of the firm. Using the fire-sales shock driven by mutual fund outflows as a measure of stock mispricing, we find that dual holders provide loans with lower spreads to the firms under the fire-sales shock. The result is driven by dual holders’ incentive to support the firm as long-term investors. We establish causality by exploiting mergers between financial institutions. In a firm-level analysis, we find that dual holders’ loan provisions offset the negative effects of the fire-sales shock on corporate investments.

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Synthetic Dollar Funding

Umang Khetan, University of Iowa

Abstract: US dollar funding is crucial to the functioning of the global economy. However, the sources of and frictions in the international supply of the dollar are not well understood. In this paper, I show that foreign exchange (FX) swaps emerge as alternative ("synthetic") dollar funding instruments when its wholesale supply is constrained. Global banks increase dollar borrowing via FX swaps in response to reduced flows from US money market funds, which leads to substantial deviations from covered interest parity (CIP). I construct granular instruments using money market funds’ investments in bank-issued debt and find that CIP deviations worsen when large foreign banks face negative shocks to wholesale dollar funding. This shift in aggregate demand is absorbed by non-bank users of FX derivatives in the form of higher hedging costs: I estimate the elasticity of non-bank investors' hedging demand to CIP deviations and find only a partial adjustment in quantities traded. My results indicate that frictions in the global market for the US dollar provide a demand-based explanation for the violation of no-arbitrage pricing conditions.

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Taking the Road Less Traveled? Market Misreaction and Firm Innovation Directions

Tianshu Lyu, Yale University

Zunda Winston Xu, Stanford University

Abstract: We propose that public investors react differently to patent issuance depending on its novelty, and these misreactions exert real impacts on the firms' future innovations. First, using textual analyses of patent documents to measure patent novelty, we find that investors underreact to the issuance of path-breaking innovations while overreact to the trend-following ones. Novel patent issuance predicts lower risk but positive forecast errors, consistent with a non-risk-based novelty mispricing mechanism. A bounded-rationality model, where investors cannot figure out the true novelty of a patent at issuance due to cognitive limits, explains the empirical patterns well. Second, using exogenous distraction shocks, such as sensational news, we present causal evidence that after disappointing returns, novel firms shift from creating and following up on novel innovations to copycatting. The findings highlight that investors' misreactions to patent novelty impact firms' future innovation directions by steering them away from higher-valued, groundbreaking research.

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Tax Incidence in Consumer Financial Markets: Evidence from Auto Leases

Sarah Najafzadeh khoei, University of Kentucky

Morteza Momeni, Dartmouth College

David Sovich, University of Kentucky

Abstract: Using a novel dataset on auto leases and a tax policy change by the state of Georgia, we estimate the tax pass-through rate and study its determinants. We find that (1) auto dealers (not lenders) capture a substantial portion of this tax subsidy and (2) consumers spend about 50% of their subsidy to upgrade and lease a more expensive vehicle. In contrast to prior literature on consumer credit markets, we find no evidence that demand factors including credit score and past experience affect this pass through rate. Our findings suggest that the market structure of auto lease market is the main driver of the heterogeneity in the pass-through rate

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The Economics of Patent Licensing: An Empirical Analysis of the Determinants and Consequences of Patent Licensing Transactions

Thomas Chemmanur, Boston College

Xi Chen, University of Houston

Jingxuan Zhang, University of Alberta

Abstract: In this paper, we investigate the economics of patent licensing using a large and unique sample of patent licensing transactions from the ktMINE Patent License Agreement Database. We address three key research questions for the first time in the literature: the characteristics of licensor and licensee firms driving the former firms to license patents to the latter; the patent characteristics driving a licensor's decision to retain, sell, or license certain patents; and the consequences of patent licensing transactions for licensor and licensee firms. Our findings indicate that licensors prefer licensing to downstream firms while avoiding firms with similar patent portfolios. Licensors retain patents closer in technological distance to their own portfolios and sell those farther away, while licensing out patents that are in-between the two. Licensees, on the other hand, prefer to license in patents closer to their own patent portfolios. Both our baseline analysis and a difference-in-differences analysis around the National Technology Transfer and Advancement Act of 1995 show that patent licensing transactions are efficient: they increase the Tobin’s Q of both licensors and licensees. However, the channels of equity market value creation for licensors and licensees are different: while licensors’ increases in Tobin’s Q are greater for firms that can charge higher licensing fees, exposure to new technologies is a source of value increase for licensees. We further find that licensors increase their R&D expenditures and generate more patents following licensing transactions, suggesting that they use some of their proceeds from licensing transactions to enhance their innovation productivity. Licensees, on the other hand, introduce more new products and increase their innovation efficiency subsequent to licensing transactions, suggesting that they are able to learn from using the patents they license.

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The Effect of U.S. Monetary Policy on Foreign Firms: Does Debt Maturity Matter?

Sebastiao Oliveira, University of Illinois

Jay Rafi, University of Illinois

Pedro Simon, University of Illinois

Abstract: We provide novel evidence that corporate debt maturity plays an important role in the transmission of U.S. monetary policy to foreign firms. Exploring the ex-ante maturity structure of long-term debt to predict firms' financial position in a given year, we show that firms with a high proportion of long-term debt maturing right after a contractionary shock experience a more pronounced decrease in investment and sales compared to other firms. We find that firms in emerging economies are much more affected by these shocks compared to those in advanced economies, and the amplification effect of U.S. monetary policy shocks is present only in emerging economies. Our findings suggest that refinancing constraints can significantly amplify the international transmission of U.S. monetary policy.

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The Impact of Air Pollution on the Cost of Issuance of Municipal Bonds

Mansoor Shekarian, Texas A&M University

Abstract: I show that pollution increases municipal bonds’ offering yields and yield spreads, indicating increased financial constraints on municipalities. I establish this by utilizing an instrument variable based on the expansion of Clear Air Act regulations, which led to a quasi-random variation in the county’s subsequent exposures to small particulate matter (PM2.5). Counties facing elevated air pollution levels tend to offer higher yields when issuing municipal bonds compared to counties with cleaner air. This yield increase is particularly pronounced for bonds that carry greater repayment obligation risk. In addition, long-term bonds are subject to higher pricing in response to air pollution risks, suggesting that the market places a premium on such risks for extended durations. Air pollution adds to the financial constraints of municipalities through the following channels: the county’s GDP growth, debt burden, and property tax.

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The Impact of Climate Policies on Financial Markets: Evidence from the EU Carbon Border Adjustment Mechanism

Mengjie Shi, Goethe University Frankfurt

Yupu Zhang, The University of Hong Kong

Christoph Meinerding, Deutsche Bundesbank

Abstract: The introduction of the EU Carbon Border Adjustment Mechanism (CBAM) has triggered statistically significant negative stock market responses for firms within the EU. Comparing EU customers that have non-EU suppliers in CBAM-affected industries with their nontreated peers in the control group, we find an extra cumulative abnormal return of up to -1.3 percentage points over our main five-day event window around December 13, 2022. Both the suppliers' locations and their industries are key determinants of the treatment effects. We also document sizeable treatment effects for supplier firms and for other event dates.

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The Impact of Social Media Influencers on the Financial Market Performance of Firms

Zhengfa Zhang, University of Leeds

Kevin Keasey, University of Leeds

Danilo V. Mascia, University of Leeds

Costas Lambrinoudakis, University of Leeds

Abstract: Despite the huge growth in the number of influencers and their use by firms, there is a lack of analysis of how social media influencers affect the financial market performance of firms. Anecdotal evidence suggests mega influencers can impact the stock prices of firms via social media. We ask whether such an effect is generalizable to all mega influencers and other financial market characteristics of firms. Using a hand-collected dataset of 16,156,419 mega influencer posts on Instagram, we find that mega influencers affect investors’ attention, volatility and trading volume but not stock returns. It takes top influencers with extreme sentiment posts to affect returns and, even here, the effect is short-lived.

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The Invisible Handshake: State Pensions and Corporate Political Contributions

Jun Tu, Singapore Management University

Jingshu Wen, University of Oxford

Fan Zhang, Bentley University

Haofei Zhang

Abstract: We investigate whether US politicians exchange favors with corporations by influencing public pension fund investments, as anecdotal evidence suggests that U.S. politicians may influence public pension fund investments to obtain more corporate campaign contributions. We find that listed firms with higher state pension ownership donate significantly more to politicians and committees from the state. Using news articles from Reuters, we find that politicians’ names tend to co-occur with both pension and campaign donations, especially those from states with high levels of corruption. Contrary to politicians’ alleged concern for pension performance and funding shortfalls, we find that political influence hurts both state pension and portfolio firm performance. These effects are stronger for states with higher corruption index values, for firms with worse corporate governance, for donations to super PACs, and after the Supreme Court loosened soft money restrictions in 2010. Exploiting state-level variation on soft money restrictions, our difference-in-differences tests show that campaign finance freedom increases the campaign donations that politicians receive from state pension portfolio firms. The results suggest a new mechanism for political rent-seeking, which may exacerbate U.S. public pension funds’ underperformance and unfunded liabilities.

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The Noise Share of the 52-Week Price-Peak Effect on Mergers and Acquisitions

Ke Bi, University of Edinburgh

Leonidas Barbopoulos, University of Edinburgh

Yue Liu, University of Edinburgh

Abstract: What is the role of different types of information in the target share price on the effect of 52-week high on takeover premia? We find that a higher fraction of noise in the target share price amplifies the reliance on the target’s 52-week high price in determining the offer price in corporate takeovers. Conversely, none of the separate private, public and market information plays a significant role in this context. Interestingly, the punishment to the bidder for paying the target relying on the target 52-week high price disappears after considering the noise in the target share price. This suggests that bidders’ reliance on the target’s 52-week high price may not always be irrational. Moreover, the increased likelihood of deal success by paying over the target 52-week high price is reduced in the presence of increased noise in the target’s share price. This indicates that target shareholders might not be that satisfied with receiving a noisy reference price. Further results confirm that the percentage of noise, indicating undervalued targets to bidders with information advantages, drives the offer price’s reliance on the target’s 52-week high. In summary, the target reference point effect does not work uniformly but depends crucially on the underlying percentage of noise in the target share price and the reliance on the target 52-week price might not always be irrational.

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The Numbers Game: Effects of Listing and Counteroffer Pricing Format in Housing Bargaining

Haaris Mateen, University of Houston

Franklin Qian, University of North Carolina-Chapel Hill

Ye Zhang, Stockholm School of Economics

Tianxiang Zheng, University College London

Abstract: Using confidential offer-level data from the US housing market, this paper analyzes the impact of various listing and counteroffer pricing strategies on the housing bilateral bargaining process. We observe that sellers tend to cluster their listing prices around “charm” numbers (e.g. 349,999) while buyers’ counteroffers mainly cluster around round numbers (i.e., 350,000). Through the repeated sales approach, we explore the benefits and costs of these pricing strategies. Compared to listings with precise prices, listings with special prices (i.e., either round prices or charm prices) tend to sell faster but at lower prices than those with more precise prices. Although this indicates “cheap talk” signaling benefits, charm prices systematically dominate round prices. Charm listing prices typically lead to a higher likelihood of sale, achieving higher sales prices, and quicker transactions compared to round listing prices. With respect to the effects of buyer counteroffer pricing strategies, our analysis reveals that round counteroffer prices frequently result in lower sales prices and faster deals, albeit at an increased risk of negotiation breakdown. Furthermore, we identify a “mimicry effect”: buyers mirroring the precision level of sellers’ charm or precise listing prices significantly lower the risk of impasse, even though it may lead to higher sales prices and longer negotiation periods. Overall, our findings offer novel insights into the strategic effectiveness of different pricing formats in the housing market bargaining process.

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The Real Cost of Benchmarking

Sebastian Hanson, Citadel LLC

Christian Kontz, Stanford University

Abstract: This paper provides causal evidence that benchmarking-induced asset price distortions have real effects on corporate investment. We exploit exogenous variation in stocks' benchmarking intensity around Russell index reconstitutions to establish causality. We find that increased exposure to benchmark-linked capital flows causes stocks' CAPM β to rise. Firm managers perceive this as an increase in their cost of capital and reduce investment. Treated firms have 7.1% less physical and 8.4% less intangible capital after six years. At the aggregate level, the asset price distortions caused by benchmarking can explain 10.7% lower capital accumulation from 2000 to 2016. Our findings highlight how benchmark-linked investing affects capital allocation in the real economy.

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The Real Effects of China’s Carbon Dioxide Emissions Trading Program

Xiangzhen Li, Tsinghua University

Jingzhe Liu, Tsinghua University

Hao Wang, Tsinghua University

Lihong Zhang, Tsinghua University

Abstract: China’s emissions trading system applies a salient two-stage emissions intensitybased compliance quota allocation scheme significantly different from the cap-and-trade systems prevalent in developed economies. It was designed to accommodate the country’s socioeconomic complexities and implemented following a learning-by-doing approach. Compliance firms increased green investment and expanded production workforce, while their climate decisions are influenced by state ownership and regional heterogeneity. State-owned enterprises (SOEs) and firms in regions with less liberal markets increased hiring, but not investment; non-SOEs and firms in more liberal markets expanded investment only. Compliance firms maintained productivity and operating efficiency; however, ordinary workers’ real wages were reduced, more prominent in SOEs.

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The Ripple Effects of China’s Global Ownership

Hong Ru, Nanyang Technological University

Yaojun Ke, Nanyang Technological University

Jennie Bai, Georgetown University

Luc Laeven, European Central Bank

Abstract: We document the rise in China's global corporate ownership across 162 countries over the past decade using detailed firm level data, and assess its real impact on target firms, its spillover effect on non-Chinese-owned firms in the same country and industry, and its spillback effect on ultimate owners’ firms in China. We find that China’s global ownership increased at a rate of 30 percent per annum to reach a global share of 1.2 percent as of 2019. After being acquired by Chinese shareholders, target firms tend to increase R&D investments by 16.4% on average, gain larger market shares, become less profitable, and hold less cash, while also becoming more integrated into China-related supply chains. In contrast, competing firms in the same country and industry exhibit reduced R&D investments and diminished market share. These effects are more pronounced when the acquiring firms are affiliated with the Chinese government and state-owned entities, consistent with a strategic emphasis on R&D by the Chinese government. We also find that government-related entities target natural resource sectors strategically. Lastly, we identify a significant spillback effect, whereby Chinese firms augment domestic R&D investment following overseas investment in R&D-intensive firms, indicative of knowledge transfers.

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The Rise and Fall of Investment: Rethinking Q theory in Equilibrium

Xinwei Li, INSEAD

Xinyu Liu, INSEAD

Abstract: The classic Q theory of investment is commonly interpreted to assert that marginal Q, synonymous to the marginal value of capital, is the sufficient statistic for investment. That is because Q-theory is purely demand-based in the sense that variations in investment are fully driven by those in the demand for investment. This paper provides an exposition of how shocks to the supply of investment drive the joint dynamics of investment and Q. In absence of shocks to the marginal cost of investment (i.e., the supply of investment), shocks to the marginal value of investment (i.e., the demand for investment) determine both equilibrium investment and Q, resulting in a conventionally expected monotonic relation along the constant upward-sloping investment supply curve. In presence of non-trivial shocks to the marginal cost of investment, however, there is no longer a one-to-one relation between investment and Q. In essence, Q is to investment as price is to quantity in any demand-supply system. This paper theoretically demonstrates that, in a general dynamic model of investment, shocks to the investment demand induce a positive comovement between investment and Q when the marginal cost of investment is monotonically increasing, while shocks to the investment supply induce a negative comovement of investment and Q when investment is sufficiently inelastic to supply shocks. The elasticity of investment to demand and supply shocks critically depends on their respective persistence. This paper shows with numerical simulations that the correlation between investment and marginal/average Q critically depends on the relative volatility of and the persistence of supply shocks. A modest level of volatility of supply shocks is able to generate low or even negative correlations between investment and Q. In summary, one should rethink from an equilibrium view the relation between investment and Q, both of which are simultaneously determined by shocks to both investment demand and supply.

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The Role of Equity Financing Constraints in the Transmission of Monetary Policy

Heitor Almeida, University of Illinois

Timothy Johnson, University of Illinois

Sebastiao Oliveira, University of Illinois

Yucheng Zhou, University of Illinois

Abstract: We show that equity financing constraints play a unique role in the amplification of monetary policy shocks. Employing a text-based metric of financial constraint that distinguishes between a company’s emphasis on equity versus debt financing, we show that equity-focused constrained firms endure more substantial declines in stock prices and implement deeper cuts in capital expenditures and R&D when faced with a contractionary monetary policy shock. Equity-focused constrained firms significantly reduce equity issuance in response to tighter monetary policy. Conversely, debt-focused constraints do not seem to play an economically significant role in magnifying the impact of monetary policy shocks. Our findings suggest that a pecking order theory describes the choice of the form of finance, with firms preferring debt finance to equity, and hence firms resorting to equity finance being more financially constrained.

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The Value of Information from Sell-side Analysts

Linying Lyu, Washington University in St. Louis

Abstract: I investigate the value of information from sell-side analysts through textual analysis of a large corpus of their written reports. To quantify the dollar value of analyst information to a strategic investor, I leverage an imperfect competition insider trading model from Back et al. (2000). The aggregate annualized expected profit from receiving tips regarding the contents of an average S&P 100 constituent stock’s forthcoming analyst reports is approximately $6.89 million. Using embeddings from state-of-the-art large language models, I demonstrate that textual information in analyst reports explains 10.19% of contemporaneous stock returns out-of-sample, a value that is both statistically and economically more significant than quantifiable analyst forecast revisions and traditional NLP approaches. A Shapley value decomposition is then performed to determine how different topics contribute to moving the market. The results show that income statement analyses from analysts account for more than half of the value of their reports.

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The Zero-Beta Rate Revisited

Rong Wang, Duke University

Abstract: The zero-beta rate is an important concept in asset pricing due to its implications for the security market line, beta anomaly, risk-free rate, etc. This paper revisits the estimation of the zero-beta rate and argues that existing methods produce high and volatile zero-beta rates arising from two channels: model misspecification and errorin-variables. Any model misspecification leads a non-uniqueness of the zero-beta rate. Measurement errors in betas increase noise in the estimation. Simulation analysis shows that both channels are quantitatively important for increasing the mean and volatility of the estimated zero-beta rate. In addition, I propose a new perspective on evaluating empirical factor models based on the theoretical result that a correctly specified model should feature a unique zero-beta rate. The new tests show that prominent factor models in the literature (e.g., Fama-French, q-factors, IPCA models) are misspecified.

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Tick size and price discovery: Futures-options evidence

Richie Ma, University of Illinois

Teresa Serra, University of Illinois

Abstract: The tick size, representing the minimum price increment in a financial market, can lead to market price inefficiencies when large. We examine the role of the tick size in price discovery between futures and options in the Chicago Mercantile Exchange corn and soybean markets. Futures contracts, which have a tick size twice as large as that of options, typically exhibit one-tick quoted spreads due to their binding tick sizes, while options allow for price-improving quotes given their less binding tick size. We find that despite thin and costly trading, options are as informative as futures. Price-improving quotes offered by options traders enhance information impounded into prices, suggesting that relaxing the binding tick size can enhance price discovery.

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Time Series Reversal: A Payment Cycle Friction

Giuliano Graziani, Bocconi University

Abstract: This paper shows that the U.S. equity market reverts the liquidity-driven trading induced by the payment cycle within a month. The aggregate reversal is robust to transaction costs and out-of-sample tests as it concentrates on liquid and high-priced stocks and during expansion periods. The findings lead to a novel interpretation of reversal: the pattern measures the liquidity not efficiently provided in the market rather than investors’ cognitive bias or compensation for market-making.

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Trading on Hearsay: The Role of Rumors and Influencers’ Investment Horizon in Shaping Asset Prices

Edward Halim, Nanyang Technological University

Yohanes Riyanto, Nanyang Technological University

Nilanjan Roy, City University of Hong Kong

Yan Wang, Nanyang Technological University

Abstract: We design an asset market experiment to explore the truth-telling incentives of a privately informed investor capable of swaying followers' investment decisions. Confirming recent theoretical results, we find that the influencer's investment horizon is a significant predictor of their propensity to spread rumors. Short-term influencers are inclined to disclose their private information truthfully, while long-term influencers often resort to rumormongering. Truthful disclosures, particularly when aligned with subsequent information arrivals, have a higher short-term price impact, which benefits the influencer. Consequently, followers tend to trust short-term influencers more, with this trust strengthening progressively over time. Conversely, long-term influencers' communications are largely ignored. Moreover, truth-telling among short-term influencers increases with the transparency of the trading mechanism.

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Transaction-cost-aware Factors

Federico Baldi Lanfranchi, Swiss Finance Institute - EPFL

Abstract: Investors actively optimize for trading costs when making portfolio decisions. Yet, prominent asset pricing factors aiming to summarize the investor opportunity set follow fixed rebalancing rules that overlook the cost of trading. I propose a class of transaction-cost-aware (TCA) factors --- explicitly optimized to explain net-of-cost returns --- that bridge this gap. TCA construction controls how aggressively factor portfolios adjust when the underlying characteristics change. Standard factors rebalance in full, irrespective of whether marginal expected returns cover trading costs incurred. My methodology finds the optimal balance between these two forces. TCA factors generate higher risk-adjusted returns net of costs than unoptimized factors based on the same characteristic. Spanning regressions of TCA factors on their unoptimized counterparts consistently deliver positive alphas. Further, models that employ TCA factors come closer to spanning the feasible efficient frontier for investors facing non-zero transaction costs. These performance gains carry over out-of-sample and are robust to cost-mitigation techniques proposed in the previous literature. Construction inefficiencies addressed by TCA factors significantly impact asset pricing inference. The benefits of TCA construction are heterogeneous and most apparent for high-turnover factors, such as momentum. Such factors appear unprofitable after costs if constructed suboptimally but regain prominence in the TCA setting. Therefore, asset pricing tests on unoptimized factors can reach incorrect conclusions on which economic characteristics matter for the cross-section of expected returns.

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Trust and Credit Divergence

Zhiheng He, Renmin University of China

Yang You, The University of Hong Kong

Abstract: High-trust countries were associated with more private-sector credit in 1985 stronger subsequent growth since then, despite the worldwide converge trend of other growth correlates. To explain such distinctive credit divergence, we model trust as the collective reputation of borrowers and study how trust shapes credit and economic growth. Our theory highlights distrust as a self-fulfilling prophecy: borrowers in a "low-trust" equilibrium opt for strategic default, driving up population-average default rates and borrowing costs, further reducing credit demand, and creating stronger economic incentives for default. Financial deregulation benefits high-trust countries more as trust enforces good behaviors in equilibrium. Empirically, distrust persistently predicts less formal lending, lower GDP growth, and 50% predictability attributed to slower credit expansion. Financial liberalization fosters higher GDP growth in high-trust countries but the opposite in low-trust countries.

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Unpackaging ESG: Evidence from 401(k) Investment

Jiaxing Tian, Chinese University of Hong Kong-Shenzhen

Jiahong Shi, London School of Economics and Political Science

Abstract: We study how investors respond to scandals related to three distinct aspects of ESG--E(nvironmental), S(ocial) and G(overnance)--in their retirement savings. Using data on 401(k) investments, we show that nearby ESG scandals correlate with increased ESG fund additions and flows, possibly through ``evoking'' their existing sustainable preferences. Investors with different characteristics respond heterogeneously to E, S and G scandals. In magnitude, old investors are twice as likely as young investors to add ESG funds to their portfolios after the shock of social scandals. In specific scandals, low-income investors care about human rights, while only young and rich investors care about environmental issues. Investors also have clear leanings on ESG funds, resulting in an overweighting of funds with higher environmental and social scores and a lack of attention to governance elements. Overall, our results suggest the need to incorporate distinct E, S, and G concerns into heterogeneous preference models.

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Value versus Values: Can Stock Liquidity Save the Planet?

Zhenkai Ran, University of Cambridge

Mao Ye, Cornell University

Abstract: The fundamental challenge to the literature of sustainable investing is the difficulty of disentangling value from values (Starks 2023). While values investors are willing to sacrifice financial returns to prioritize nonpecuniary objectives, value investors concern about whether environmental issues drive firm value, that is, improve the firm’s risk-return prospects. By leveraging an exogenous liquidity shock, the tick size pilot (TSP) program, that disproportionately affects the financial prospects of value investors vis-à-vis values investors in the treated firms, we show that value investors play a significant role in driving environmental policies. During the TSP, treatment firms show a decline in the environmental rating. Green institutional investors tend to divest in response to portfolio firms’ environmental incidents. Such divesting intensity becomes less pronounced for treatment firms during the TSP period. The TSP-induced decline in environmental ratings is larger for firms with an ex-ante greater exposure to exit threats.

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Venture Capital Response to Government-Funded Basic Science

Roham Rezaei, University of New South Wales

Yufeng Yao, University of New South Wales

Abstract: Science-based R&D can deter venture capitalists due to high technical risk. We study whether mission-oriented public funding, which supplies basic science as a public good, fosters VC investments. Our quasi-natural experiment is the BRAIN Initiative (BI), a government-funded program with the goal of mapping the human brain. Using a large language model, we first show the large spillover effects of BI in neurotech. In a difference-in-differences analysis, we find an increase in VC investments in neurotech startups accompanied by higher valuations and more successful VC exits following the BI. The channels driving these results suggest reduced technical risk: 1) increased supply of high-skilled academic labor; 2) more innovation, including breakthrough patents; 3) enhanced integration with complementary technologies, especially AI and big data, which aligns with the BI's data-driven mission. Our results suggest the supply of government-backed science and scientists can spur follow-on private investments in emerging technologies.

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Vertical Integration, Supply Chain Disruptions, and Corporate Yield Spreads

Anni Wang, University of Nevada-Reno

Yifei Li, University of Nevada-Reno

Qun Wu

Abstract: Vertical integration can reduce transaction costs and increase a firm’s control along the supply chain, thereby mitigating supply chain risk and leading to lower yield spreads. However, vertically integrated firms may suffer from asset specificity, which can create investment uncertainty and rent extraction, thus resulting in higher yield spreads. We find that firms with greater vertical integration (VI) exhibit lower bond yield spreads. Specifically, a one-standard-deviation increase in VI correlates with an 17 basis points decrease in yield spreads without control variables, and a 4 basis points decrease in yield spreads when accounting for a set of yield spread determinants. This effect is more pronounced for companies facing elevated supply chain risk, supporting the supply chain risk channel. Amid global supply chain disruptions such as the COVID-19 pandemic and the U.S.-China trade war, vertical integration takes on an even more important role in reducing credit spreads. Our findings suggest that firm-level vertical integration can effectively hedge supply chain risk, representing a novel mechanism not previously considered in bond pricing studies.

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What Drives Bank Credit Lines? Wholesale Funding and Bank Liquidity Creation

Mohit Desai, University of North Carolina-Chapel Hill

Abstract: Liquidity creation is one of the primary functions of banks, and bank credit lines or contingent commitments are the single largest source of it. In this paper, I propose a novel channel linking banks’ credit line commitments to wholesale funding. Using banks’ regulatory data, I empirically document that banks with greater wholesale funding ratios lend more using off-balance sheet commitments. Causal estimates rely on two identification strategies (1) membership dates of banks to the Federal Home Loan Bank (FHLB) system in a staggered difference-in-differences (DiD) exercise and (2) shift-share instrument design. Estimates from these exercises suggest a 1% increase in wholesale funding leads to 0.3-0.4% increase in contingent commitments. I rule out reverse causality in a standard DiD design using an exogenous regulatory change – introduction of FIN 46 – which materially impacted banks’ supply of credit line commitments. The mechanism relies on maintenance of costly liquidity buffers. I show that banks with greater wholesale funding shares keep higher liquidity buffers to avoid refinancing risks. Economic efficiencies emerge as long as negative wholesale funding shocks don’t coincide with credit line drawdowns similar to the synergy argument in Kashyap, Rajan and Stein (2002). These results run contrary to the prevailing deposit-based theories of banks’ commitment lending and have important implications for banks’ "specialness" in commitment lending, aggregate liquidity risk, and post-2008 decline in credit lines to US firms.

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When Political Connections Backfire: Social Protests, Asset Damage, and Firms' Response

Navid Neshat, Tulane University

Abstract: Analyzing over 1.1 million corporate assets, I find that assets of politically connected firms are significantly more likely to sustain damage during social protests compared to unconnected firms' similar assets located within the same municipal district. Conditional on sustaining damage, the extent of damage to connected firms is also greater. Additionally, during protests, connected firms attempt to obscure their government ties by having their connected corporate officers prevent their resumes from appearing in Google search results or edit their resumes, seemingly to downplay their past government positions. Lastly, the paper documents that connected firms, even those undamaged during protests, often sever political ties afterward, evidenced by a significant increase in the likelihood of involuntary turnover among connected corporate officers within a year, a pattern that persists even in within-firm estimations. Overall, my findings introduce a novel mechanism through which political connections incur costs, with its economic significance demonstrated by its effect on firms' decisions to dismiss connected corporate officers.

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When the Thin Bench Gets Thinner: Investment Bank Consolidation and Municipal Finance

Renping Li, Tulane University

Abstract: Do investment banks possess market power, and does their consolidation have anticompetitive effects? Using the geographically fragmented municipal bond underwriting market as a natural laboratory and a stacked difference-in-differences specification, I find that the underwriting spread rises by 5.3 basis points after within-market M&As from a sample mean of 103.0 basis points. The effects double for more significant M&As and triple in concentrated markets. While issuers become less likely to use credit ratings, bond insurance, or financial advisors, suggesting some efficiency gains to the M&As, these are insufficient to offset the rise in the underwriting spread. Effects hold when I examine M&As that are less likely to be driven by local economic dynamics and are absent in my placebo tests of cross-market M&As, commercial bank M&As, or withdrawn M&As. Using Census data, I confirm the detrimental effects of investment bank consolidation on local government financial health. My findings provide a novel perspective on bank antitrust regulations that traditionally focused on deposit-taking and lending activities.

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Where does gamma hedge drive the intraday market move?

Taeyoung Park, University of Texas-Dallas

Abstract: This study examines how option market makers’ inelastic demand for delta-neutral hedges impacts the intraday fluctuation of the underlying asset price. Their short gamma imbalance in the trading book exposes them to both gamma and theta risk, resulting in a nonlinear gamma loss and constant theta profit. When they carry a short gamma position, option replication requires delta rebalancing at any price, creating inelastic demand for the underlying asset. This study hypothesizes that the creation of inelastic demand occurs when the trading book’s PnL gets negative, and so it explores the breakeven ranges of gamma and theta PnL as inflection points that cause inelastic demand and intraday momentum for the underlying stock. Empirical findings show that breaking this threshold range has a pronounced impact on the underlying intraday momentum. Furthermore, this study broadens its test to see whether option demand from active institutions influences asset prices via MM’s gamma hedge channel. Overall, this research contributes to a deeper understanding of the underlying market’s dynamics, as well as the inelastic hedging demand for option market making via a delta-neutral hedge.

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Who Wins and Who Loses when Firms Stay Private Longer?

Leo Stanek, Vanderbilt University

Abstract: Does reducing the number of firms in public equity markets harm investors? How much has the value firms can get from going public changed in the past few decades? I develop a dynamic supply and demand model of the firm entry to and exit from public markets to relate firm benefits from being public to firm characteristics. Firms face a dynamic discrete choice problem on whether to be in public markets, with the benefits of being public a function of their characteristics, demand elasticities for their characteristics, and various regulatory and cost of capital changes. My structural analysis allows me to not only break down the causes of the transformation in US public equity markets, but also to say what the consequences of them have been for firms and investors. I find that investors would have had slightly higher excess returns but no change in their portfolio Sharpe ratio if firms behaved as they did before Sarbanes- Oxley. I further find that a private firm’s implied option value of going public has fallen by over half since the pre-Sarbanes era. The reduction is mostly caused by an increase to fixed costs of being a public company in the post-Sarbanes era.

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Why and How Do Analysts Make Multiple Forecasts in a Day?

Chuyi Zhang, The University of Hong Kong

Tse-chun Lin, The University of Hong Kong

Abstract: Recent studies find that equity research analysts face cognitive constraints, and their earnings forecasts become less accurate when they issue multiple forecasts on the same day (“forecast clustering”). Knowing such a behavior leads to lower forecast quality, it remains a puzzle why these analysts increasingly choose to cluster forecasts on the same day. We find that forecast clustering is closely related to rising workloads, the need for timely forecasts following concurrent earnings announcements, and distractions from news about other portfolio firms. Forecasts for firms important to the analysts’ careers or containing significant news are less likely to be clustered, suggesting strategic effort allocation by analysts. Our findings suggest that investors who rely most on written research by analysts should carefully assess the quality of analyst reports produced under increasing workload nowadays.

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Why Do Firms Pay More for Bank Loans? The Role of Renegotiation

Zhuolu Gao, Copenhagen Business School

Abstract: Firms borrowing from both banks and the corporate bond market pay a substantial premium on bank loans, raising questions about firms’ bargaining power and banks’ competition. In this paper, I show that a large portion of this premium compensates banks for facilitating out-of-court restructurings. I estimate the loan premium and use a 2014 U.S. court ruling, which impeded out-of-court restructurings, as a natural experiment. Following the ruling, affected firms experienced an 80–90 bps reduction in the loan premium, due to reduced restructuring opportunities and a diminished potential to avoid bankruptcy costs. These findings suggest that the renegotiation flexibility provided by banks is a key driver of the loan premium, highlighting the unique value that bank lending offers beyond the capital market.