NZFM 2021 Programme

Day 1                                         9th December 2021 (NZST)

SESSIONS A TO E


CONFERENCE OPENING ADDRESS - 07H45 TO 08H00 (NZST)


STREAM A - 08H00 TO 10H00 (NZST)


SESSION A1: Anomalies
CHAIRPERSON: Anthony Garratt, University of Warwick


CURRENCY ANOMALIES
Söhnke M. Bartram, Centre for Economic Policy Research (CEPR), and University of Warwick
Leslie Djuranovik, Bank Indonesia
Anthony Garratt, University of Warwick
Abstract
This paper is the first to study the cross-section of currency excess return predictors. Using real-time data, quantitative currency trading strategies are profitable even after transaction costs and comprehensive risk adjustments. However, risk-adjusted profits decrease after the publication of the underlying academic research. In line with predictor profits reflecting mispricing, the decline is greater for strategies with larger in-sample profits and lower arbitrage costs. Moreover, the effect of risk adjustments on trading profits is limited, and signal ranks and alphas decay quickly. While analysts’ currency forecasts are inconsistent with currency predictors, analysts update their forecasts quickly to incorporate lagged predictor information. The results suggest that market participants learn about mispricing from academic publications while contributing to it when following analysts’ forecasts.

Presenter: Anthony Garratt, University of Warwick

Discussant: Yixin Chen, University of Rochester


THE RACE TO EXPLOIT ANOMALIES AND THE COST OF SLOW TRADING
Guy Kaplanski, Bar-Ilan University
Abstract
Studying 71 anomalies, we show how the discovery of anomaly reshapes out-of-sample returns, thereby creating a contrarian effect to the general decay in returns. As a result, the average contribution of the first-day return to the portfolio value increases from 3% before the anomaly is discovered to 12% afterwards and 30% in case of momentum anomalies. The effect exists in long-side and short-side portfolios and in the bought and sold stocks of both portfolios. The long-lasting effect indicates that arbitrage capital plays a key role in retaining market efficiency in the long run, implying a persistent mispricing component in anomalies.

Presenter: Guy Kaplanski, Bar-Ilan University

Discussant: Yong-Hyuck Kim, Michigan State University


FIRM CHARACTERISTICS AND STOCK PRICE LEVELS: A LONG-TERM DISCOUNT RATE PERSPECTIVE
Yixin Chen, University of Rochester
Ron Kaniel, University of Rochester
Abstract
We study how firm characteristics are correlated with stock price levels by measuring the long-term discount rates (defined as the internal rate of return) of anomaly portfolios over a long horizon. We develop a simple, non-parametric methodology to estimate the long-term equity discount rate from ex-post realized payouts and prices. Our estimates show that the cross-sectional patterns in the long-term discount rates can be substantially different from that of the average short-term holding period returns, and appealing to mean-reversion in anomaly premia does not reconcile the wedge between the two for a group of prominent anomalies. We argue that the long-term discount rate is a better measure of a firm's equity financing cost than the premium from a dynamically rebalanced trading strategy, and we demonstrate with a representative example that structural models that interpret the spreads in the latter as the differences in the former could generate counterfactual patterns in the long-term discount rates. Our empirical exercise uncovers numerous new stylized facts regarding firms' equity financing cost, and these findings could shed new light on the mechanisms underlying various asset pricing anomalies and advance our understanding of the determinants of stock price levels.

Presenter: Yixin Chen, University of Rochester

Discussant: Anthony Garratt, University of Warwick


DO INFORMATION ACQUISITION COSTS MATTER? THE EFFECT OF SEC EDGAR ON STOCK ANOMALIES
Yong-Hyuck Kim, Michigan State University
Abstract
I estimate the costs of information acquisition and the extent to which they explain stock anomaly returns. The SEC’s staggered implementation of EDGAR from 1993 to 1996 greatly lowered the costs of acquiring accounting information. I study how this quasi-exogenous and staggered shock affects the profitability of 126 accounting and 108 non-accounting anomalies. The EDGAR introduction lowers the average alphas for the accounting anomalies by 4.0% per year, explaining more than half of the pre-EDGAR alphas. The attenuation is stronger for the accounting anomaly portfolios that require more up-to-date accounting information and those consisting of EDGAR filer stocks with less information available in the pre-EDGAR period. By contrast, alphas for the non-accounting anomalies remain unaffected. These results imply that the information acquisition costs, which are usually neglected, can be as important as the transaction or short sale costs.

Presenter: Yong-Hyuck Kim, Michigan State University

Discussant: Guy Kaplanski, Bar-Ilan University


SESSION A2: Household Finance

CHAIRPERSON: Alexander Zentefis, Yale University


BANKING ACROSS AMERICA: DISTANCE AND BRANCH USE
Alexander Zentefis, Yale University
Abstract
We use location data from millions of mobile devices to infer three features of income and racial patterns in bank branch access and use throughout the United States. First, residents from poorer block groups are 7.2 percentage points less likely to visit a branch in a year than residents from richer block groups. Likewise, residents from block groups with higher Black population shares are 6.2 percentage points less likely to visit a branch relative to residents from block groups with higher White population shares. Survey evidence suggests that these lower visitation rates are not recouped by greater use of mobile or online banking. The drop-off in visitation by income steepens in large Metropolitan core areas. These urban cores also observe the highest segregation of branch goers by race and income. The urbanized Northeast is more segregated than the rural South. Second, residents from block groups with larger Black population shares on average live farther from their nearest branch and travel farther when visiting banks. A gravity equation model demonstrates that Black residents living farther from bank branches explain roughly 25-33% of the Black-White gap in branch use across the country and 72-86% of the gap within Metro cores. Black residents' far greater remoteness from banks in big cities explains why distance plays such a major role in affecting their branch use there. Third, a policy of postal banking that adds banking services to Post Office branches would relieve some distance costs, and we estimate it would decrease the mean distance to banks in Metro cores by 11.5%. But the policy would close only 6% of the Black-White gap in bank branch use within these areas. The modest effect is due in part to residents of Metro cores living relatively farther away from Post Office branches than they do from private banks, thus making it difficult for postal banking to overcome the distance barriers.

Presenter: Alexander Zentefis, Yale University

Discussant: Hung Xuan Do, Massey University


THE LIFE CYCLE OF A BANK ENFORCEMENT ACTION AND ITS IMPACT ON MINORITY LENDING
Byeongchan An, University of Utah
Robert Bushman, University of North Carolina
Anya Kleymenova, Federal Reserve Board
Rimmy E. Tomy, University of Chicago Booth School of Business
Abstract
This paper studies the role banking supervision plays in improving access to credit for minorities by investigating how enforcement decisions and orders (EDOs) affect the bank borrower base. Despite declines in most component portfolios, we find that bank-level residential mortgage portfolios remain relatively unchanged after an EDO. We document significant changes in the underlying demographic mix of residential mortgage borrowers: after an EDO's termination, banks significantly increase residential mortgage lending to minorities. EDO banks are also less likely to deny loans to minority borrowers, and their reasons for loan denial change. We propose several mechanisms to explain why lending to minorities might increase after an EDO and find evidence consistent with EDO banks' improvements due to the enforcement process expanding lending to minorities, as well as banks catering to regulators after EDO termination.

Presenter: Anya Kleymenova, Federal Reserve Board

Discussant:  Shuang Wu, Stevens Institute of Technology


MORTGAGE BORROWER INCOME AND CREDIT RISK
Hung Xuan Do, Massey University
Harald Scheule, University of Technology
Abstract
This paper analyses the impact of mortgagee income on mortgage credit risk. We find that level and sensitivity of default risk are greater for low borrower incomes. The observation is explained by thinner financial buffers such as discretionary income, funding ability and liquid assets and persists for positive home equity. Further, we find that an increase in the default rate of borrowers is convex across levels of income reduction. This rate increases between 0.305 to 0.757 percentage points (0.126 to 0.225 percentage points) for every 1% increase in the proportion of low-income (high-income) borrowers facing a 15%+ to 35%+ income reduction. Our findings assist banks in anticipating future losses and mitigating their impacts through strengthening their balance sheets in terms of reducing risk exposures and increasing capital buffers.

Presenter: Hung Xuan Do, Massey University

Discussant: Alexander Zentefis, Yale University


IMPACT OF ECONOMIC SHOCKS ON FINANCIAL ACCESS: EVIDENCE FROM COVID-19 PANDEMIC
Anand Goel, Stevens Institute of Technology
Shuang Wu, Stevens Institute of Technology
Abstract
This paper examines the impact of an economic shock and the subsequent government response on financial access for underserved consumers. Using foot traffic to consumer lenders as a proxy for loan demand, we find that the shelter-in-place order, new Covid-19 cases, and the government relief program (PEUC) are associated with a drop in visits to consumer lenders after controlling for online borrowing and the supply of credit. Using natural experiments of the statewide shelter-in-place order and FPUC program, we find that the lockdown suppresses financially underserved consumers' access to credit, while the supplemental paychecks (FPUC) cushion their economic blow by further reducing visits to consumer lenders. We also find that regular unemployment insurance is less effective in reducing demand for consumer credit in financially underserved areas than in metropolitan areas. The demand for consumer credit is positively correlated with the average consumption level in an area. Lastly, we find differences in the impact of the government relief programs on visits to banks and visits to consumer lenders.

Presenter: Shuang Wu, Stevens Institute of Technology

Discussant: Anya Kleymenova, Federal Reserve Board


SESSION A3: CEO Characteristics

CHAIRPERSON: Denis Sosyura, Arizona State University


REMOTELY PRODUCTIVE: THE EFFICACY OF REMOTE WORK FOR EXECUTIVES
Ran Duchin, Boston College
Denis Sosyura, Arizona State University
Abstract
We study the efficacy of remote working arrangements between CEOs and firms. Long-distance CEOs underperform according to operating performance, firm valuation, insider reviews, and announcement returns to CEO departures. These effects are stronger when the CEO lives further away and crosses multiple time zones. Using the private costs from uprooting the CEO’s spouse as an instrument for the CEO’s decision to work remotely, we verify the robustness of performance outcomes. The underperformance of long-distance CEOs is related to short-termism, loss of information, and consumption of leisure, such as recreational boats and beach homes.

Presenter: Denis Sosyura, Arizona State University

Discussant: Paul Decaire, Arizona State University


SAFETY FIRST! OVERCONFIDENT CEOS AND REDUCED WORKPLACE ACCIDENTS
Suman Banerjee, Stevens Institute of Technology
Mark Humphery-Jenner, UNSW Business School
Pawan Jain, University of Wyoming
Vikram Nanda, University of Texas-Dallas
Abstract
Prior literature posits that overconfident CEOs overinvest in R&D and capital expenditure. We hypothesize that this overinvestment might have a positive externality in form of improved workplace safety. The results are strongly supportive: firms with overconfident CEOs experience significantly fewer industrial accidents. This is most pronounced in cash and capital-constrained firms, where overconfident CEOs are more likely to continue to invest than are other firms notwithstanding the constraints. Regulations that blunted overconfident CEOs’ investments reduced the impact of overconfident CEOs on accidents. We ensure that our results are robust to alternative definitions of CEO overconfidence and different model specifications.

Presenter: Mark Humphery-Jenner, UNSW Business School

Discussant: Yanying Lyu, Tilburg University


CEO PET PROJECTS
Paul Decaire, Arizona State University
Denis Sosyura, Arizona State University
Abstract
Using hand-collected data on CEOs’ personal assets, we find that CEOs prioritize corporate investment projects that increase the value of CEOs’ private assets. Such pet projects are implemented sooner, receive more capital, and are less likely to be dropped. This investment strategy delivers large personal gains to the CEO but selects lower NPV projects for the firm and erodes its investment efficiency. Using information from CEOs’ relatives as an instrument for the location of their private assets, we argue that these effects are causal. Overall, we uncover CEOs’ private monetary motives in capital budgeting decisions.

Presenter: Paul Decaire, Arizona State University

Discussant: Denis Sosyura, Arizona State University


FIRMS’ DEMANDS ON INVENTOR EXECUTIVES AROUND IPOS
Yanying Lyu, Tilburg University
Lingbo Shen, Tilburg University
Abstract
We examine how going public affects firms’ demands on inventor executives who own both management and innovation experience. Using IPO withdrawn firms as the control group and NASDAQ returns fluctuations as the instrumental variable on IPO competition, we show that firms demand more inventor executives after successful IPOs. We conjecture that firms demand those inventor executives who own superior abilities to better overcome threats and competitions after going IPOs. Empirical evidence supports this idea. The demand is higher for firms with higher product market competition and innovation competition. In addition, the number of inventor executives is positively related to survival probability after IPOs, stock market performance, operating performance, and innovation performance. Our results provide new evidence on the effect of going public on human capital mobility from a firms’ demand perspective.

Presenter: Yanying Lyu, Tilburg University

Discussant: Mark Humphery-Jenner, UNSW Business School


SESSION A4: Fixed Income and Speculation

CHAIRPERSON: Baridhi Malakar, Georgia Institute of Technology


IMPACT OF CORPORATE SUBSIDIES ON BORROWING COSTS OF LOCAL GOVERNMENTS: EVIDENCE FROM MUNICIPAL BONDS
Baridhi Malakar, Georgia Institute of Technology
Abstract
We analyse the impact of $38 billion of corporate subsidies given by U.S. local governments on their borrowing costs. We find that winning counties experience a 13.6 bps increase in bond yield spread as compared to the losing counties. The increase in yields is higher (16 -- 21 bps) when the subsidy deal is associated with a lower jobs multiplier or when the winning county has a lower debt capacity. However, a high jobs multiplier does not seem to alleviate the debt capacity constraints of local governments. Our results highlight the potential costs of corporate subsidies for the local governments.

Presenter: Baridhi Malakar, Georgia Institute of Technology

Discussant: Panagiotis N. Politsidis, Audencia Business School and European Banking Institute


CORPORATE TAX CHANGES AND BANK LENDING
Yota Deli, University College Dublin
Manthos D. Delis, Montpellier Business School
Panagiotis N. Politsidis, Audencia Business School and European Banking Institute
Abstract
This paper examines the effect of corporate taxation on the cost of credit. We employ corporate income tax rate changes across the U.S. states as a quasi-natural experiment to examine their implications on the pricing of syndicated loans. We find that changes in the state corporate tax rates have an asymmetric effect on the cost of credit: loan spreads decrease by approximately 5.9 basis points in response to a one percent tax cut in the borrower’s state, but they are insensitive to corporate tax rises. We show that the easing effect of tax cuts comes from changes in credit demand by firms and is primarily concentrated in firms with greater reliance on debt and own funds. The transmission of corporate tax cuts to loan spreads depends on the firm’s access to alternative financing sources as firms with access to bond financing benefit to a greater extent.

Presenter: Panagiotis N. Politsidis, Audencia Business School and European Banking Institute

Discussant: Baridhi Malakar, Georgia Institute of Technology


THE CORE, THE PERIPHERY, AND THE DISASTER: CORPORATE-SOVEREIGN NEXUS IN COVID-19 TIMES
Ruggero Jappelli, SAFE Leibniz and Goethe University Frankfurt
Loriana Pelizzon, SAFE Leibniz, Goethe University Frankfurt, CEPR and Ca’ Foscari University
Alberto Plazzi, Universita’ della Svizzera Italiana and Swiss Finance Institute
Abstract
We show that the COVID-19 pandemic triggered a surge in the elasticity of non-financial corporate to sovereign credit default swaps in core EU countries, characterized by strong fiscal capacity. For peripheral countries with lower budgetary slackness, the pandemic had essentially no impact on such elasticity. This evidence is consistent with the disaster-induced repricing of government support, which we model through a rare-disaster asset pricing framework with bailout guarantees and defaultable public debt. The model implies that risk-adjusted guarantees were 2.6 times larger in the core than in the periphery, suggesting that fiscal capacity buffers provide relief to firms' financing costs.

Presenter: Ruggero Jappelli, SAFE Leibniz and Goethe University Frankfurt

Discussant: Spyros Terovitis, University of Amsterdam


HOW FINANCIAL MARKETS CREATE SUPERSTARS
Spyros Terovitis, University of Amsterdam
Vladimir Vladimirov, University of Amsterdam
Abstract
We show that uninformed speculative trading can benefit shareholders by helping targeted firms become intrinsically better. Speculators profit from inflating a firm’s stock price, as that can help the …rm attract high-quality stakeholders that might have not joined otherwise. This leads to a misallocation of talent and resources. Likely targets are intermediately transparent firms with highly uncertain prospects, operating in “normal” (i.e., neither hot nor cold) markets. Firms can discourage harmful speculation eroding their stakeholder base by being very transparent or intransparent.  Similar to speculators, investors in primary markets can benefit from inflating firms’ valuations to unicorn status to attract non-financial stakeholders.

Presenter: Spyros Terovitis, University of Amsterdam

Discussant: Ruggero Jappelli, SAFE Leibniz and Goethe University Frankfurt


STREAM B - 10H15 TO 12H15 (NZST)


SESSION B1: Innovation & Options

CHAIRPERSON: Greg Tindall, Palm Beach Atlantic University


REAL EFFECTS OF SHAREHOLDER PROPOSALS: INNOVATION IN THE CONTEXT OF CLIMATE CHANGE
Greg Tindall, Palm Beach Atlantic University
Rebel Cole, Florida Atlantic University
David Javakhadze, Florida Atlantic University
Abstract
Extant literature struggles to identify the definitive purpose for shareholder proposals, finding them to depend on their context.  Progressively, climate change has gathered interest at annual meetings where shareholders present proposals related to the subject. The literature builds expectations for the role of obsolescence, regulation, and other forms of activism to motivate innovation with respect to climate-related proposals. Our results indicate that firms respond positively to these proposals by producing more climate patents and citations.  The real effect that shareholder proposals have on innovation gains clarity in the context of climate change, contributing to the discussion of investor “voice.”

Presenter: Greg Tindall, Palm Beach Atlantic University

Discussant: Kevin Schneider, Manchester Business School


TAKING MONEY OFF THE TABLE: SUBOPTIMAL EARLY EXERCISES, RISKY ARBITRAGE, AND AMERICAN PUT RETURNS
Kevin Aretz, Alliance Manchester Business School
Ian Garrett, Alliance Manchester Business School
Adnan Gazi, (University of Liverpool Management School
Abstract
Many studies report that American option investors often exercise their positions sub-optimally late. Yet, when that happens in the case of puts, there is an arbitrage opportunity in perfect markets, exploitable by longing the asset-and-risk-free-asset portfolio replicating the put and shorting the put. Using early exercise data, we show that the arbitrage strategy also earns a highly significant mean return with low risk in real single-stock put markets, in which exactly replicating options is impossible. In line with theory, the strategy performs particularly well on high strike-price puts in high interest-rate regimes. It further performs well on short time-to-maturity puts on low volatility stocks, consistent with evidence that investors do not correctly incorporate those characteristics into their exercise decisions. The strategy survives accounting for trading and short-selling costs, at least when executed on liquid assets.

Presenter: Kevin Aretz, Alliance Manchester Business School

Discussant: Siti Farida, University of Birmingham


A REAL OPTIONS ASSET PRICING MODEL WITH SEASONAL SALES AND INVENTORY BUILDING
Kevin Aretz, Manchester Business School
Hening Liu, Manchester Business School
Kevin Schneider, Manchester Business School
Abstract
We develop a real options model in which a firm exposed to seasonal variations in its output price is able to produce output, store it, and sell it later, separating the production and selling decisions. The model suggests that the optimal policy for a firm with low inventory costs is to spread out its production over some period up to its high price season, hold its output in inventory until that season, and sell it then. Doing so, such a firm gradually lowers its operating leverage and thus its expected return up until its high price season. Conversely, the optimal policy for a firm with high inventory costs is to produce its output closer to its high price season, inducing its expected return to be more stable over time. In accordance with our model, we show that Grullon et al.’s (2020) result that single-stock returns tend to be lower (higher) in their high (low) seasonal sales quarters is attributable to inventory building firms, suggesting that neoclassical finance theory aligns with that evidence.

Presenter: Kevin Schneider, Manchester Business School

Discussant: Greg Tindall, Palm Beach Atlantic University


M&AS AND INNOVATION: EMPIRICAL EVIDENCE FROM ACQUIRING PUBLIC VERSUS PRIVATE TARGETS
Siti Farida, University of Birmingham
Jana Fidrmuc, University of Warwick
Chendi Zhang, University of Exeter
Abstract
We examine the impact of acquiring public versus private targets on acquirers’ long-run innovation outcomes. Our analysis shows an increase in innovation outcomes post-acquisition for private target acquirers relative to matched firms and public target acquirers. Public target acquirers do not increase innovation after acquisitions. Acquiring private targets also improves innovation efficiency. These results suggest that firms are likely to acquire private targets when they search for innovation. We also find that acquiring private targets with existing patents is associated with a larger increase in exploitative innovation, but no additional effect for exploratory innovation. Finally, we show that the 5-day acquirer announcement abnormal returns are significantly higher for private target acquirers with the largest improvement in innovation. The higher expectation of improvement in innovation for private targets contributes to explaining the puzzle of announcement-return differences between public versus private target acquisitions.

Presenter: Siti Farida, University of Birmingham

Discussant: Kevin Aretz, Alliance Manchester Business School


SESSION B2: ESG 1

CHAIRPERSON: Aaron S. Yoon, Northwestern University


ANALYZING ACTIVE MANAGERS’ COMMITMENT TO ESG: EVIDENCE FROM UNITED NATIONS PRINCIPLES FOR RESPONSIBLE INVESTMENT
Soohun Kim, KAIST
Aaron S. Yoon, Northwestern University
Abstract
We analyze the active mutual fund managers’ commitment to ESG using the largest global ESG initiative in the asset management industry to date: United Nations Principles for Responsible Investment (PRI). We find that PRI signatories attract a large increase in fund flow after signing. However, at least on average, we find no improvements in their value-weighted average fund-level ESG scores and no evidence that they are buying (selling) high (low) ESG performing stocks. In addition, the stocks held in their portfolio do not exhibit improvements in ESG performance and exhibit a small increase in the number of controversies experienced. Further, signatories increase voting in favour of the management proposals on social issues while exhibiting an overall decrease in fund return. We explore whether signatories were superior performers in ESG issues prior to joining the initiative vis-à-vis non-PRI funds but find no such evidence. Finally, we take a battery of cross-sectional fund characteristics and find that only quant-funds exhibit small improvements in ESG performance through buying high ESG performing stocks. Overall, we conclude that most signatories use the PRI status to attract capital but do not exhibit meaningful follow through on ESG implementation. However, we note that we can only speak to observed channels with publicly available data and cannot do so for unobserved channels such as private engagements.

Presenter: Aaron S. Yoon, Northwestern University

Discussant: Qiping Huang, University of Dayton


POLITICAL CONNECTIONS, ENVIRONMENTAL VIOLATIONS AND PUNISHMENT: EVIDENCE FROM HEAVILY POLLUTING FIRMS IN CHINA
Jingjing Wang, University of Liverpool
Abstract
Using hand-collected data on corporate environmental violations of heavily polluting firms in China over the period of 2012-2015, I examine the relationship between political connections and the probability of environmental punishment. For identification, I exploit a regulatory reform, the enactment of Rule 18 in October 2013, which forced a large number of politically-connected independent directors to resign from their positions. Using difference‐in‐differences specifications, I find that firms with resigned official directors due to Rule 18 experience a significant increase in the likelihood of being punished for environmental-related violations as well as the severity of punishment. The effect of Rule 18 on environmental punishment is more pronounced among firms located in regions with low judiciary efficiency and high levels of corruption, and firms without state ownership.

Presenter: Jingjing Wang, University of Liverpool

Discussant: Wendi Du, Georgia Institute of Technology


DO CLIMATE RISK BELIEFS SHAPE CORPORATE SOCIAL RESPONSIBILITY?
Qiping Huang, University of Dayton
Meimei Lin, Georgia Southern University
Abstract
This paper examines whether belief differences about climate change affect firms' decision makings in Corporate Social Responsibility (CSR) commitment.  We find that firms' Environmental, Social, and Governance (ESG) scores are higher if they are located in the counties where more people believe in global climate change.  We use natural disasters as exogenous shocks to the beliefs about climate risk and continue to find a positive association between CSR and perceptions of climate risk. Besides, the correlation between CSR and climate risk beliefs is stronger when firms have more local investors.

Presenter: Qiping Huang, University of Dayton

Discussant: Aaron S. Yoon, Northwestern University


DO MANAGERS WALK THE TALK ON ENVIRONMENTAL AND SOCIAL ISSUES?
Sudheer Chava, Georgia Institute of Technology
Wendi Du, Georgia Institute of Technology
Baridhi Malakar, Georgia Institute of Technology
Abstract
We train a deep-learning-based Natural Language Processing (NLP) model on various corporate sustainability frameworks in order to construct a comprehensive Environmental and Social (E&S) dictionary that incorporates materiality. We analyse the earnings conference calls of U.S. public firms during 2007-2019 using this dictionary. We find that the discussion of environmental topics is associated with higher pollution abatement and more future green patents. Firms reduced their air pollution even after the U.S. announced its withdrawal from the Paris Agreement. Similarly, the discussion of social topics is positively associated with improved employee ratings. Overall, our results provide some evidence that firms do walk their talk on E&S issues.

Presenter: Wendi Du, Georgia Institute of Technology

Discussant: Jingjing Wang, University of Liverpool


SESSION B3: Asset Allocation

CHAIRPERSON: Federico Severino, Université Laval


ON TIME-CONSISTENT MULTI-HORIZON PORTFOLIO ALLOCATION
Simone Cerreia-Vioglio, Università Bocconi
Fulvio Ortu, Università Bocconi
Francesco Rotondi, Università degli Studi di Padova
Federico Severino, Université Laval
Abstract
We analyse the problem of constructing multiple mean-variance portfolios over increasing investment horizons in continuous-time arbitrage-free stochastic interest rate markets. The traditional one-period mean-variance optimization of Hansen and Richard (1987) requires the replication of a risky payoff for each investment horizon. When many maturities are considered, a large number of payoffs must be replicated, with an impact on transaction costs. In this paper, we orthogonally decompose the whole processes defined by asset returns to obtain a mean-variance frontier generated by the same two securities across a multiplicity of horizons. Our risk-adjusted mean-variance frontier rests on the martingale property of the returns discounted by the log-optimal portfolio and features a time-consistency property. The outcome is that the replication of a single risky payoff is required to implement such a frontier at any investment horizon. As a result, when transaction costs are taken into account, our risk-adjusted mean-variance frontier may outperform the traditional mean-variance optimal strategies in terms of Sharpe ratio. Realistic numerical examples show the improvements of our approach in medium- or long-term cashflow management, when a sequence of target returns at increasing investment horizons is considered.

Presenter: Federico Severino, Université Laval

Discussant: Sida Li, University of Illinois


DIVERSIFYING ESTIMATION ERRORS: AN EFFICIENT AVERAGING RULE FOR PORTFOLIO OPTIMIZATION
Felix Miebs, University of Applied Sciences Cologne
Abstract
We propose an averaging rule that combines established minimum-variance strategies to minimize the expected out-of-sample variance. Our rule overcomes the problem of selecting the “best” strategy ex-ante and diversifies the remaining estimation errors of the strategies included in the averaging. Extensive simulations show that the contributions of estimation errors to the out-of-sample variances are uncorrelated between the considered strategies. This implies that averaging over multiple strategies offers sizable diversification benefits. Across all datasets, we find that our rule achieves a significantly lower out-of-sample standard deviation than any competing strategy and that the Sharpe ratio is at least 25% higher than for the 1/N portfolio.

Presenter: Felix Miebs, University of Applied Sciences Cologne

Discussant: Xander Hut, Erasmus University


SHOULD PASSIVE INVESTORS ACTIVELY MANAGE THEIR TRADES?
Sida Li, University of Illinois
Abstract
Using a novel daily holding data of ETFs, I find most ETFs’ reconstitution trades are mechanical: the entire position is traded on the reconstitution day at the closing price. Since most ETFs track public indices that pre-announce their rebalances, the predictable large trade suffers from 67 bps of execution costs, three times higher than similar-sized institutional trades. Camouflaging on either what or when to trade can help save execution costs. 37% of ETFs use self-designed indices to avoid the pre-announcement of rebalancing stocks and save 30 bps. Another 7% of ETFs track public indices, but they camouflage them on their rebalance schedules and save 34 bps. Deploying less predictable rebalance strategies can help passive investors save 9.6 bps per year, which is about two-thirds of the management fees.

Presenter: Sida Li, University of Illinois

Discussant: Federico Severino, Université Laval


CLIMATE CHANGE AND LONG-HORIZON PORTFOLIO CHOICE: COMBINING THEORY AND EMPIRICS
Mathijs Cosemans, Erasmus University
Xander Hut, Erasmus University
Mathijs van Dijk, Erasmus University
Abstract
We propose a novel approach for measuring the impact of climate change on long-horizon equity risk and optimal portfolio choice. Our method combines historical data about the impact of climate change on return dynamics with prior beliefs elicited from the temperature long-run risk (LRR-T) model of Bansal, Kiku, and Ochoa (2019). Our Bayesian framework incorporates this prior information to obtain more precise estimates of long-term climate risks than existing methods that solely rely on historical data. Compared to the benchmark investor without climate change, we document that the LRR-T Bayesian investor predicts higher equity premia for all investment horizons, with per period variance increasing considerably over the horizon. This results in relatively (high) low allocations to equities in the (short) long run. Investors that optimize between portfolios that are vulnerable and non-vulnerable to climate change only diversify in the long run.

Presenter: Xander Hut, Erasmus University

Discussant: Felix Miebs, University of Applied Sciences Cologne


SESSION B4: Cryptocurrency

CHAIRPERSON: Ganesh Viswanath-Natraj, University of Warwick


DECENTRALIZED STABLECOINS AND COLLATERAL RISK
Roman Kozhan, University of Warwick
Ganesh Viswanath-Natraj, University of Warwick
Abstract
In this paper, we study the mechanisms that govern the price stability of MakerDAO’s DAI token, the first decentralized stablecoin. DAI works through a set of autonomous smart contracts, in which users deposit cryptocurrency collateral, typically Ethereum, and borrow a fraction of their positions as DAI tokens. Using data on the universe of collateralized debt positions, we show that DAI price covaries negatively with returns to risky collateral. The peg-price volatility is related to collateral risk, while the stability rate has little ability to stabilize the coin. The introduction of safe collateral types has led to an increase in peg stability.

Presenter: Ganesh Viswanath-Natraj, University of Warwick

Discussant: Gustavo Schwenkler, Santa Clara University


SEQUENTIAL LEARNING, ASSET ALLOCATION, AND BITCOIN RETURNS
James Yae, University of Houston
George Zhe Tian, University of Houston
Abstract
For optimal asset allocation, mean-variance investors must learn about the joint dynamics of new and existing asset classes, not only their profitability. Bitcoin's digital gold narrative provides a unique laboratory to test this hypothesis. We find that a decrease in investors' estimate on the correlation between Bitcoin and the US stock markets strongly predicts higher Bitcoin returns the next day. The same empirical pattern universally appears in out-of-sample predictions, global equity markets, and other cryptocurrencies. Our stylized model and empirical proxy for Bitcoin demand explain the predictability pattern in light of asset allocation practices and investors' learning on time-varying correlation.

Presenter: George Zhe Tian, University of Houston

Discussant: Vicki Wei Tang, Georgetown University


NEWS-DRIVEN PEER CO-MOVEMENT IN CRYPTO MARKETS
G. Schwenkler, Santa Clara University
H. Zheng, Boston University
Abstract
When large idiosyncratic shocks hit a cryptocurrency, some of its peer’s experience unusually large returns of the opposite sign. The co-movement is concentrated among peers that are co-mentioned with shocked cryptos in the news, and that is listed in the same exchanges as shocked cryptos. It is a form of mispricing that vanishes after several weeks, giving rise to predictable returns. We propose a profitable trading strategy that exploits this predictability and explain our results with a slow information processing mechanism. To establish our results, we develop a novel natural language processing technology that identifies crypto peers from news data. Our results highlight the news as a key driver of co-movement among peer assets.

Presenter: Gustavo Schwenkler, Santa Clara University

Discussant: Ganesh Viswanath-Natraj, University of Warwick


REGULATION, TAX, AND CRYPTOCURRENCY PRICING
Vicki Wei Tang, Georgetown University
Tony Qingquan Zhang, University of Illinois
Abstract
This paper examines whether and how jurisdictional gaps in crypto regulations explain the price differentials of the same underlying cryptocurrency across different jurisdictions. Variations in the regulatory framework and specific crypto policies, including tax treatment, anti-money laundering laws, and enforcement, have significant incremental explanatory power for the cross-jurisdiction disparity in Bitcoin prices. Utilizing staggered adoptions of specific cryptocurrency policies, we identify the influence of regulation on crypto pricing using both the difference-in-differences design and the regulatory event study methodology. The evidence highlights the importance of regulatory certainty and tax policies for the development of a digital economy and addresses the controversy surrounding the proposed crypto tax provision in the U.S. infrastructure bill.

Presenter: Vicki Wei Tang, Georgetown University

Discussant: George Zhe Tian, University of Houston


KEYNOTE 1 - 12H30 TO 13H30 (NZST)

Please register in advance for this webinar by clicking here.

KINDLEBERGER CYCLES:  METHOD IN THE MADNESS OF CROWDS
Corporate R&D has a social rate of return several times higher than its internal rate of return to innovating firms, and so is chronically underfunded from a social perspective. Kindleberger cycles of stock market manias, panics and crashes, prominent throughout financial history, also accord poorly with rationality. If episodes of mania inundating “hot” new technologies with capital sufficiently counter chronic underinvestment in innovation, economy-level selection may favour institutions and behavioural norms conducive to Kindleberger cycles despite individual agents’ losses in panics and crashes.


STREAM C - 13H45 TO 15H45 (NZST)


SESSION C1: Banking 1

CHAIRPERSON: Ama Samarasinghe, Royal Melbourne Institute of Technology


STOCK MARKET LIQUIDITY, BANK DIVERSIFICATION AND BANK STABILITY
Ama Samarasinghe, Royal Melbourne Institute of Technology
Abstract
Motivated by the liberalization of financial systems across the world, this paper is the first to explore the spillover effects of aggregate stock market liquidity on bank diversification and bank stability. Using a sample of 7131 banks operating in 39 countries for the period 1999-2014, I find that enhancement in aggregate stock market liquidity is associated with greater reliance of banks on diversified revenue and assets and also with increased bank stability. These spillover effects vary as per the level of development of the financial markets in which the banks operate and as per the level of investor protection provided to market participants. These results have important policy and practical implications and are robust to several tests.

Presenter: Ama Samarasinghe, Royal Melbourne Institute of Technology

Discussant: Stephen A. Karolyi, Office of the Controller of the Currency


INDIRECT EVERGREENING USING RELATED PARTIES: EVIDENCE FROM INDIA
Nishant Kashyap, Indian School of Business
Sriniwas Mahapatro, Indian School of Business
Prasanna Tantri, Indian School of Business
Abstract
We identify a novel way of evergreening loans where a low-quality bank lends to a related party of an insolvent borrower, and the loan recipient transfers the funds to the insolvent borrower using internal capital markets. Internal capital market transactions, incremental investments, interest rates charged, and loan delinquency rates collectively indicate evergreening. These loans are unlikely to represent arm's length transactions or rescue of troubled related firms by stronger firms to prevent group-wide spillover effects. Indirect evergreening is less likely to be detected by regulatory audits. It has significant real consequences at the firm and industry levels.

Presenter: Sriniwas Mahapatro, Indian School of Business

Discussant: Zongyuan Li, DLMU


FIGHTING FAILURE: THE PERSISTENT REAL EFFECTS OF RESOLVING DISTRESSED BANKS
Ivan T. Ivanov, Federal Reserve Board of Governors
Stephen A. Karolyi, Office of the Controller of the Currency
Abstract
We study the real effects of resolving distressed banks using quasi-experimental variation in resolutions introduced by a threshold-based rule of the FDIC Improvement Act. Our fuzzy regression discontinuity estimates indicate that resolutions lead to reductions in employment and establishments growth of up to six percentage points. These effects are concentrated in small, less urban counties, and translate to large declines in SME lending and increases in corporate bankruptcies. These results imply that large acquiring banks restrict lending to the small business borrowers of distressed target banks. Overall, the current bank resolution policy may have costly externalities for local economic activity.

Presenter: Stephen A. Karolyi, Office of the Controller of the Currency

Discussant: Ama Samarasinghe, Royal Melbourne Institute of Technology


ARE “TOO BIG TO FAIL” BANKS JUST DIFFERENT IN SIZE? – A STUDY ON RISK-TAKING AND TAIL RISK
Zongyuan Li, DLMU
Rose Neng Lai
Abstract
This study explores whether and how bank characteristics affect general risk-taking and tail risk of Too-Big-to-Fail (TBTF) and non-TBTF banks differently. We show that TBTF banks’ investment decisions drive their risks, while sources of funding drive risks of other banks. Contradicting the general belief, we find that non-TBTF banks together generate larger contagion risk to the real economy. Regulations designed to limit tail risk, such as raising core capital, do not lower banks’ general risk-taking, especially for TBTF banks. Furthermore, after the Global Financial Crisis, tail-risk becomes more sensitive to liability-side activities only among non-TBTF banks, implying that post-crisis banking regulations further enhanced the “Too-Big-to-Fail” privilege of the largest banks.

Presenter: Zongyuan Li, DLMU

Discussant: Sriniwas Mahapatro, Indian School of Business


SESSION C2: Managerial Compensation

CHAIRPERSON: Richard Evans, University of Virginia


COMPENSATION CONSULTANTS, CEO PAY, AND THE DISAPPEARING UNION EFFECT
Vikram Nanda, University of Texas, Dallas
Takeshi Nishikawa, University of North Texas
Andrew Prevost, University of Vermont
Abstract
We document that the well-established research finding of a negative relation between union strength and the level and structure of executive compensation has disappeared in recent years. Driving this trend is the decline in union participation along with the emergence of compensation consultants. Firms with higher unionization rates tend to engage consultants, suggesting their possible strategic role in justifying higher pay. Consultant-using firms are associated with greater CEO option compensation and risk-taking incentives that are unaffected by union intensity. Unlike prior unionization literature, we identify an insignificant (significantly negative) union effect on corporate cash holdings among consultant-using (no-consultant) firms, respectively.

Presenter: Andrew Prevost, University of Vermont

Discussant: Roya Taherifar, University of Waikato


PEER VERSUS PURE BENCHMARKS IN THE COMPENSATION OF MUTUAL FUND MANAGERS
Richard Evans, University of Virginia
Juan-Pedro Gómez, IE University
Linlin Ma, Peking University
Yuehua Tang, University of Florida
Abstract
We examine the role of the peer (Lipper manager indices) vs. pure (S&P 500) benchmarks in fund manager compensation. We first model the impact of peer vs. pure benchmarks on manager incentives and then test the model’s predictions using a unique hand-collected dataset. We find that 71% of managers are compensated solely or partially based on peer benchmarks. Consistent with the model, funds with peer-benchmarked managers exhibit higher active share, abnormal performance, and advisory fees than those with pure-benchmarked managers. Analysing investment advisors’ choice between benchmark types, we find peer-benchmarking advisors have more sophisticated investors with greater performance sensitivity and are more likely to sell through the direct channel, suggestive of market segmentation.

Presenter: Richard Evans, University of Virginia

Discussant: Sangeun Ha, Hong Kong University of Science and Technology


IS PERFORMANCE AFFECTED BY THE CEO-EMPLOYEE PAY GAP? EVIDENCE FROM AUSTRALIA
Roya Taherifar, University of Waikato
Mark J. Holmes, University of Waikato
Gazi Hassan, University of Waikato
Abstract
It is argued that pay inequality between CEOs and employees impacts employee performance, although empirical studies are inconsistent about the directionality of the effect. This paper shows that seemingly contradictory predictions of sociological and economic perspectives about the impact of pay inequality are more complementary than contradictory. Using data from a sample of public companies over the period 2004-2019, we show that pay inequality attributed to individuals’ skills, company characteristics, and the labour market is positively associated with employee performance. However, this positive impact on employee performance declines at high levels of pay disparity. In addition, pay inequality based on other unknown factors has a negative impact on employee performance.

Presenter: Roya Taherifar, University of Waikato

Discussant: Andrew Prevost, University of Vermont


MOTIVATING COLLUSION
Sangeun Ha, Hong Kong University of Science and Technology
Fangyuan Ma, Peking University
Alminas Zaldokas, Hong Kong University of Science and Technology
Abstract
We examine how executive compensation can be designed to motivate product market collusion. We look at the 2013 decision to close several regional offices of the Department of Justice, which lowered antitrust enforcement for firms located near these closed offices. We argue that this made collusion more appealing to the shareholders and find that these firms increased the sensitivity of executive pay to local rivals' performance, consistent with rewarding the managers for colluding with them. The affected CEOs were also granted more equity compensation, which provides long-term incentives that could foster collusive arrangements.

Presenter: Sangeun Ha, Hong Kong University of Science and Technology

Discussant: Richard Evans, University of Virginia


SESSION C3: Machine Learning & Asset Pricing

CHAIRPERSON: Han Xiao, Pennsylvania State University


FEEDBACK, FLOW-INDUCED FIRE SALES, AND OPTION RETURNS
Han Xiao, Pennsylvania State University
Abstract
We identify a feedback loop between fire sales and equity option returns. The demand effect of fire sales induced by mutual fund extreme outflows decreases delta-hedged put option returns by 4–10% per year and increases the expensiveness by 2.5%. We address endogenous concerns using instrumental variable and difference indifferences designs. The demand effect is more substantial under equity illiquidities than volatility, distress, sustainability risks, or short-sale constraints. Option returns also have anticipation effects on predicting fire sales, where information leakage in derivatives markets exacerbates extreme outflows.

Presenter: Han Xiao, Pennsylvania State University

Discussant: Yu Xia, McGill University


REAL-TIME PREDICTABILITY OF MUTUAL FUND PERFORMANCE PREDICTORS
Yu Xia, McGill University
Abstract
Researchers have discovered abundant evidence that mutual fund performance is predictable in the cross-section ex-post. This paper studies the ex-ante predictability of 12 well-known predictors for fund performance from investors’ perspectives. Exploiting two types of fund picking strategies with either rule-based approach or machine learning methods, I find that utilizing machine learning can deliver superior real-time economic gains for investors with fund short-term performance being the primary driver underlying predictability. Moreover, using a novel approach to decomposing fund performance, I discover that investors’ flow response to predictor-implied performance exhibits strong variations across predictors.

Presenter: Yu Xia, McGill University

Discussant: Han Xio, Pennsylvania State University


ALPHAPORTFOLIO: DIRECT CONSTRUCTION THROUGH DEEP REINFORCEMENT LEARNING AND INTERPRETABLE AI
Lin William Cong, Cornell University
Ke Tang, Tsinghua University
Jingyuan Wang, Beihang University
Yang Zhang, Beihang University
Abstract
We directly optimize the objectives of portfolio management via deep reinforcement learning - an alternative to conventional supervised-learning paradigms that routinely entail first-step estimations of return distributions or risk premia. Building upon recent AI breakthroughs, we develop multi-sequence neural-network models tailored to the distinguishing features of financial data such as non-linearity and high dimensionality, while allowing training without labels and interactions with the market environment and state variables. Our AlphaPortfolio yields stellar out-of-sample performances (e.g., Sharpe ratio above two and over 13% risk-adjusted alpha with monthly re-balancing) that are robust under various market conditions economic restrictions (e.g., exclusion of small stocks and short-selling). Moreover, we project AlphaPortfolio onto simpler modelling spaces (e.g., using polynomial-feature-sensitivity) to uncover key drivers of investment performance, including their rotation and nonlinearity. More generally, we highlight the utility of deep reinforcement learning in finance and \economic distillation" for model interpretation.

Presenter: Ke Tang, Tsinghua University

Discussant: Xinyi Deng, University of Technology Sydney


STRATEGIC TRADING AND MANIPULATION: MACHINE LEARNING IN LIMIT ORDER MARKETS
Xinyi Deng, University of Technology Sydney
Xue-Zhong He, University of Technology Sydney
Abstract
This paper introduces Q-learning, a novel machine learning technique, as a learning tool to a dynamic limit order market (LOM) to examine how order book information and learning affect the strategic trading behaviour of bounded rational traders. In equilibrium, informed traders favour limit (market) orders when the magnitude of mispricing is small (large), while uninformed traders tend to “chase the trend”, i.e., submit market buys (sells) following market buys (sells) from the informed. Interestingly, anticipating a mispricing reversal when a small-in-size positive (negative) mispricing is accompanied by high depth imbalance at the best bid (ask), informed traders manipulate the market by taking the “wrong” make-take decision. Going against the preference for limit buys (sells) due to low mispricing, the informed use market buys (sells) to trigger market buys (sells) from the uninformed to enhance execution probability and profitability of later informed limit sells (buys). Consequently, the uninformed experience a profit reduction in trend-chasing market orders due to the informed’s manipulation. The findings show that informed manipulation can be learned as an equilibrium trading strategy in a dynamic LOM.

Presenter: Xinyi Deng, University of Technology Sydney

Discussant: Ke Tang, Tsinghua University


SESSION C4: Hedge Funds & Mutual Funds

CHAIRPERSON: Amanjot Singh, King’s University College at Western University


TRADE CREDITORS RESPONSE TO HEDGE FUND ACTIVISM
Amanjot Singh, King’s University College at Western University
Abstract
This study shows that trade creditors extend a negative response to hedge fund activism. Relative to control firms, target firms' accounts payable decreases by 28%, post activist intervention by hedge funds. This reduction is due to supply-side factors, highlighting suppliers' expropriation concerns. The study provides novel evidence that the repercussions of hedge fund activism extend beyond the formal debtholders, and informal debtholders such as trade creditors are not an exception. Further, target firms also offer lower trade credit to their customers after hedge fund activism. Trade receivables decreased by 12% relative to control firms. The findings suggest that activism-induced changes in operating cash flows, cash holdings and dividend payments potentially account for this reduction in trade receivables.

Presenter: Amanjot Singh, King’s University College at Western University

Discussant: David Feldman, UNSW Sydney


STOCKS THROUGH A LOOKING GLASS: CAN STYLE SEGMENT-ADJUSTED MUTUAL FUND STOCK HOLDINGS PREDICT STOCK RETURNS?
Cao Fang, University of Arkansas
Wayne Y. Leeb, University of Arkansas
Abstract
Only the stock selection (“alpha”) decisions of fund managers who trade on firm-specific information should have predictive return content. Faced with the same information, skilled fund managers make similar stock selection decisions. We introduce a new measure - stock investment quality - which uses fund quality to weight asymmetries in private information reflected in deviations of fund from peer group ownership on stocks in a style segment. We show stocks ranked high on investment quality generate significantly higher excess returns that persist through the ensuing year. The positive investment quality–future return relationship is robust to alternative fund quality proxies.

Presenter: Cao Fang, University of Arkansas

Discussant: Sumudu W. Watugala – Cornell University


ONE GLOBAL VILLAGE? COMPETITION IN THE INTERNATIONAL ACTIVE FUND MANAGEMENT INDUSTRY
David Feldman, UNSW Sydney
Konark Saxena, UNSW Sydney
Jingrui Xu, Wang Yanan Institute for Studies in Economics (WISE) and Xiamen University
Abstract
We introduce an international active fund management industry model, in which competing managers, each having heterogeneous incentives (effort productivities, costs), search for domestic versus foreign investment opportunities.   In equilibrium, incentive heterogeneity leads to a novel prediction:  increasing foreign competitiveness, which improves (worsens) domestic manager incentives, induces an increase (decrease) of both domestic performance and size. Empirically, we find that 30 global markets’ performance and size, on average, decrease with U.S.  concentration.  This evidence is consistent with our theoretical predictions but is inconsistent with extrapolation of single-country (implying homogeneous incentives) equilibria to one “global village” [e.g., Feldman, Saxena, and Xu (2020)].

Presenter: David Feldman, UNSW Sydney

Discussant: Amanjot Singh, King’s University College at Western University


LTCM REDUX? HEDGE FUND TREASURY TRADING AND FUNDING FRAGILITY DURING THE COVID-19 CRISIS
Mathias S. Kruttli, Federal Reserve Board of Governors
Phillip J. Monin, Federal Reserve Board of Governors
Lubomir Petrasek, Federal Reserve Board of Governors
Sumudu W. Watugala, Cornell University
Abstract
During the March 2020 U.S. Treasury (UST) market turmoil, the average UST trading hedge fund saw significant losses and reductions in UST exposures, despite unchanged bilateral repo volumes and haircuts. Analysing fund-creditor borrowing data reveals the more regulated dealers provided disproportionately more funding during the crisis. Despite low contemporaneous outflows, hedge funds boosted cash and reduced portfolio size and illiquidity. Following Fed intervention calming markets, fund returns recovered quickly, but their UST activity did not. Overall, reduced hedge fund UST liquidity provision was driven by fund-specific liquidity management constrained by margin pressure and expected redemptions, rather than creditor regulatory constraints.

Presenter: Sumudu W. Watugala – Cornell University

Discussant: Cao Fang, University of Arkansas


STREAM D - 16H00 TO 18H00 (NZST)


SESSION D1: Conference Calls

CHAIRPERSON: Alan Huang, University of Waterloo


WHO LISTENS TO CORPORATE CONFERENCE CALLS?  THE EFFECT OF “SOFT INFORMATION” ON INSTITUTIONAL TRADING
Alan Guoming Huang, University of Waterloo
Russ Wermers, University of Maryland
Abstract
Active investment management using fundamental techniques (as opposed to quantitative techniques) involves a comprehensive assessment of several public sources of corporate information—including “soft information” conveyed by company management. In this paper, we explore an important conduit for fundamental information flow—the presentation and discussion of soft information that occurs during corporate conference calls (e.g., earnings conference calls). These calls represent a unique platform for the dissemination of information from corporate management to investment managers, as well as providing a regular opportunity for analysts to publicly challenge management’s dialogue about a company’s profitability outlook; that is, conference calls provide a very public venue through which stock analysts simultaneously interact, in large numbers, with firm management. Using textual analysis of a comprehensive database of transcribed U.S. corporate conference calls from 2006 to 2018, we find that institutional investors significantly react to the “tone” (sentiment) of calls in their trades of stocks. Institutions trade on the tone immediately, and up to four weeks after the call, and, thereafter, continue to trade on conference call-driven analyst recommendation revisions. The trade reaction of institutions to tone is more pronounced when the marginal value of information is higher, e.g., when information is released during the question section of a conference call, when information is released during earnings calls, and when the stock exhibits a higher degree of information asymmetry. Our paper suggests that conference calls are an important channel for stock price discovery in the post-Reg-FD era.

Presenter: Alan Huang, University of Waterloo

Discussant: Thomas Shohfi, Rensselaer Polytechnic Institute


HOW DOES HEDGE FUND ACTIVISM REENGINEER CORPORATE CULTURE?
Pil-Seng Lee, The University of Texas at Dallas
Abstract
This paper investigates how hedge fund activism reshapes the corporate culture of targeted firms. By using culture measures based on the Q&A section of earnings conference calls, I find that target firms emphasize building organizational culture with better quality, more innovation, higher integrity, and growing respect after activism. I also find that these positive effects of activism on corporate culture are mainly driven by CEO turnover, especially if incumbent CEOs are replaced by outsiders, not insiders. New outside CEOs are recruited from firms with better culture and higher asset sales. Activist-appointed directors also influence corporate culture by promoting outside CEO turnover. Target firms with positive cultural change improve their firm performance. Additionally, employees of target firms perceive their firms' culture as improved after activism. Overall, this study provides evidence of the importance of corporate culture as a source of gains from hedge fund activism.

Presenter: Pil-Seng Lee, The University of Texas at Dallas

Discussant: Weiwei Zhang, James Madison University


FIXED INCOME CONFERENCE CALLS
Thomas Shohfi, Rensselaer Polytechnic Institute
Abstract
We study the determinants and informational role of firms’ fixed-income conference calls, a unique form of voluntary disclosure that deviates from traditional multi-purpose firm disclosures that serve all stakeholders. We find that fixed income calls are more likely to occur for firms that have more debt, lack credit ratings or publicly traded equity, are foreign, are experiencing losses, and are larger. In content analysis, compared with a matched sample of firm-year earnings conference calls, we find that fixed income calls discuss debt-equity conflict events such as share repurchases, to a greater degree. Managers present more financial information as part of the call and discuss more quantitative information. These calls also exhibit less short-termism and have a more negative tone. The executive team hosting these calls more likely consists of a combination of CFO, Chief Accounting Officer, and Treasurer than the more typical team of CEO and CFO found on earnings conference calls. Analysts at insurance companies, who almost exclusively invest in debt, are more likely to participate in fixed income calls. Last, we document that credit markets react to these calls, consistent with these calls providing new information to investors. Overall, these results are generally consistent with the idea that fixed income calls meet the differential informational demands of debt versus equity investors.

Presenter: Thomas Shohfi, Rensselaer Polytechnic Institute

Discussant: Alan Huang, University of Waterloo


THE MITIGATION OF REPUTATIONAL RISK VIA RESPONSIVE CSR: EVIDENCE FROM SECURITIES CLASS ACTION LAWSUITS
Daewoung Choi, LSU – Shreveport
Douglas O. Cook, University of Alabama
M. Tony Via, Kent State University
Weiwei Zhang, James Madison University
Abstract
We examine the strategic production of CSR as a post-shock damage control instrument (responsive CSR). We proxy for these shocks using securities lawsuits. Using hand-collected data to supplement our main CSR dataset, we find that responsive CSR is temporary and consists primarily of strategically placed news releases to blunt short-term effects from periodic negative news developments related to the litigation process. Responsive CSR is used synergistically with advertising, and it is concentrated in firms headquartered in urban or liberal-leaning states that exert high ESG demands.  We find that responsive CSR mostly represents window dressing – it does not add long-term value and is primarily motivated by board members with significant reputational concerns.

Presenter: Weiwei Zhang, James Madison University

Discussant: Pil-Seng Lee, The University of Texas at Dallas


SESSION D2: Personal Finance

CHAIRPERSON: Chen Shen, the University of North Carolina at Charlotte


THE IMPACT OF PAYDAY LENDING ON CRIMES
Chen Shen, the University of North Carolina at Charlotte
Abstract
Police departments located in states allowing payday lending report 14.34% more property crimes than the police departments located in states not allowing payday lending. I also find that the police departments located in counties bordering with states allowing payday lending report more property crimes. Those results are driven by the financial pressure induced by payday loans. Furthermore, the impact of payday lending concentrates in areas with a higher proportion of the minority population.

Presenter: Chen Shen, the University of North Carolina at Charlotte

Discussant: Shumiao Ouyang, Princeton University


UNCOVERING RETAIL TRADING IN BITCOIN: THE IMPACT OF COVID-19 STIMULUS CHEQUES
Anantha Divakaruni, University of Bergen
Peter Zimmerman, Federal Reserve Bank of Cleveland
Abstract
In April 2020, the US government sent economic impact payments (EIPs) directly to households, as part of its measures to address the COVID-19 pandemic. We characterize these stimulus checks as a wealth shock for households and examine their effect on retail trading in Bitcoin. We find a significant increase in Bitcoin buy trades for the modal EIP amount of $1,200. The rise in Bitcoin trading is highest among individuals without families and at exchanges catering to non-professional investors. We estimate that the EIP program has a significant but modest effect on the US dollar–Bitcoin trading pair, increasing trade volume by about 3.8 percent. Trades associated with the EIPs result in a slight rise in the price of Bitcoin of 7 basis points. Nonetheless, the increase in trading is small compared to the size of the stimulus check program, representing only 0.02 percent of all EIP dollars. We repeat our analysis for other countries with similar stimulus programs and find an increase in Bitcoin buy trades in these currencies. Our findings highlight how wealth shocks affect retail trading.

Presenter: Peter Zimmerman, Federal Reserve Bank of Cleveland

Discussant: Tarik Umar, Rice University


CASHLESS PAYMENT AND FINANCIAL INCLUSION
Shumiao Ouyang, Princeton University
Abstract
This paper evaluates the impact of mobile cashless payment on credit provision to the underprivileged. Using a representative sample of Alipay users that contained detailed information about their activities in consumption, credit, investment, and digital footprints, I exploit a natural experiment to identify the real effects of cashless payment adoption. In this natural experiment, the staggered placement of Alipay-bundled shared bikes across different Chinese cities brings exogenous variations to the payment flow, allowing me to address the endogeneity issues and establish a causal relationship. I find that the use of in-person payment in a month increases the likelihood of getting access to credit in the same month by 56.3%. Conditional on having credit access, a 1% increase in the in-person payment flow leads to a 0.41% increase in the credit line. Those having higher in-person payment flow also use their credit lines more. Importantly, the positive effect of in-person payment flow on credit provision mainly exists for the less educated and the older, suggesting that cashless payment particularly benefits those who are traditionally underserved.

Presenter: Shumiao Ouyang, Princeton University

Discussant: Chen Shen, the University of North Carolina at Charlotte


DEPUTIZATION
Tarik Umar, Rice University
Abstract
Deputization is a permissive policy that asks agents to help screen for dangerous activities without providing explicit incentives. To assess its efficacy, we exploit the staggered adoption of recent laws that deputized financial professionals to help fight elder financial abuse - a widespread and pernicious problem that is hard to police. We find that deputization led to a 6%-9% decrease in elder financial abuse. Investment advisers may be more effective deputies than brokers, and existing safeguards curbed the benefits of deputization.

Presenter: Tarik Umar, Rice University

Discussant: Peter Zimmerman, Federal Reserve Bank of Cleveland


SESSION D3: Mutual Funds

CHAIRPERSON: Jeong Ho (John) Kim, Emory University


CAPITAL ALLOCATION AND THE MARKET FOR MUTUAL FUNDS: INSPECTING THE MECHANISM
Jules H. van Binsbergen, University of Pennsylvania and NBER
Jeong Ho (John) Kim, Emory University
Soohun Kim, KAIST
Abstract
We exploit heterogeneity in decreasing returns to scale parameters across funds to analyse their effects on capital allocation decisions in the mutual fund market. We find strong evidence that steeper decreasing returns to scale attenuate flow sensitivity to performance, which has a large effect on equilibrium fund sizes. Our results are consistent with a rational model for active management. We argue that an important fraction of cross-sectional variation in fund sizes is due to investors rationally anticipating the effects of scale on return performance.

Presenter: Jeong Ho (John) Kim, Emory University

Discussant: Nan Xu, Nankai University


HIDING IN PLAIN SIGHT: THE GLOBAL IMPLICATIONS OF MANAGER DISCLOSURE
Richard B. Evans, University of Virginia
Pedro Matos, University of Virginia
Miguel Ferreira, Nova School of Business and Economics, CEPR
Michael Young, University of Missouri
Abstract
Given the potential for agency conflicts in delegated asset management, and the constant push for disclosure by regulators, we examine a clear potential source of agency conflicts in the mutual fund industry: anonymously managed mutual funds. Using a global sample of mutual funds, we find that 17% of funds worldwide, excluding the US, and 22% of emerging market funds do not disclose the names of their management team. Anonymously managed funds significantly underperform, have a lower active share, return gap, tracking error, and higher R2 than funds with named managers. They are more frequent in families with cooperative structures, and in bank-affiliated funds. Further examining fund performance and activity around changes in SEC disclosure regulation, as well as the performance of anonymous twin funds, we find that both performance and fund activity increases following new regulation that required disclosure of manager names. This is important, as it provides evidence that the underperformance of anonymous teams is related to the disincentive brought on by anonymous management, and not solely due to less skilled managers being kept anonymous.

Presenter: Michael Young, University of Missouri

Discussant: Thanh Dat Le, Auburn University


DO MUTUAL FUNDS WALK THE TALK? A TEXTUAL ANALYSIS OF RISK DISCLOSURE BY MUTUAL FUNDS
Jinfei Sheng, University of California Irvine
Nan Xu, Nankai University
Lu Zheng, University of California Irvine
Abstract
Do risk disclosures by mutual funds reflect funds’ actual investment risks? Using textual analysis, we examine risk disclosures in funds’ summary prospectuses to determine whether funds do accurately disclose their risks. We first document the types of risks disclosed by funds and study the relation between fund-disclosed risks and risk factors documented in academic studies. We find that most disclosed risks can be linked to meaningful and well-known academic risk factors. In our main tests, we develop fund-level measures to evaluate the informativeness of funds’ risk disclosure, including risk coverage, conciseness, and uniqueness. Our findings suggest that disclosed risks, in general, reflect a large proportion of funds’ investment risks but with substantial cross-fund heterogeneity. Interestingly, we find that funds tend to over disclose risks; half of the disclosed risks are not significant in explaining the variations in fund returns. Further tests show that less skilled funds and riskier funds tend to disclose more. However, new money flows are not related to risk coverage. Overall, this paper provides novel evidence on the informativeness of risk disclosure in the summary prospectus.

Presenter: Nan Xu, Nankai University

Discussant: Jeong Ho (John) Kim, Emory University


ACTIVE MUTUAL FUNDS: BEWARE OF SMART BETA ETFS!
Thanh Dat Le, Auburn University
Abstract
Smart beta ETFs have gained tremendous prevalence among investors in recent years. Even though the industry reports suggest that smart-beta funds have attracted investor money from active funds, we expect that not all active funds suffer from this issue. Active mutual funds that provide the unique benefits that investors cannot obtain from smart beta ETFs, such as factor timing or stock-picking within a factor theme, may not lose investors to smart-beta funds. This study provides empirical evidence that a proportion of the fast-paced growth of smart beta ETFs can be attributed to the investor migration from closet factor active mutual funds, i.e., active funds whose returns are primarily the result of a combination of passive factor tilts, to this new factor ETFs. Using a sample of US domestic equity active mutual funds and smart beta ETFs from 2000 to 2019, we find that smart beta ETFs offer higher returns and factor exposures at lower fees than closet factor funds. Therefore, investors replace closet factor funds with smart beta ETFs. The replacement impact intensifies with investor sophistication and market share of smart beta ETFs. Our findings illustrate the dynamic changes in investor preference towards investment products that bring similar or greater benefits at a lower price.

Presenter: Thanh Dat Le, Auburn University

Discussant: Michael Young, University of Missouri


SESSION D4: ESG 2

CHAIRPERSON: Adelina Barbalau, University of Alberta


THE OPTIMAL DESIGN OF GREEN SECURITIES
Adelina Barbalau, University of Alberta
Federica Zeni,Imperial College London
Abstract
We develop a model of green project financing which incorporates investors with green preferences into an otherwise standard framework of corporate financing with asymmetric information. Firms seek to finance green projects whose outcomes embed an uncertain, non-measurable component that is revealed only to the firm, and which can be manipulated. Firms can raise funds using project-based non-contingent green debt contracts, such as green bonds, that restrict the set of projects to be financed using the proceeds but make no commitment to green outcomes. Alternatively, they can use outcome-based contingent green debt contracts, such as sustainability-linked loans and bonds, which do not impose restrictions on the use of proceeds but embed contingencies that ensure commitment to outcomes. We demonstrate that the co-existence of the two green debt contracts is an equilibrium result when green outcomes are manipulable and firm types differ in their ability to manipulate. In the presence of asymmetric information about firms' type, non-contingent debt can be used as an expensive signalling device, and we find empirically that contingent green debt securities have lower credit ratings, higher yields and are issued by more emissions-intensive firms.

Presenter: Adelina Barbalau, University of Alberta

Discussant: Emilio Bisetti, HKUST


DISASTER RELIEF, INC.
Hao Liang, Singapore Management University
Cara Vansteenkiste, University of New South Wales
Abstract
We investigate the motivations and value implications of corporate philanthropy in a global sample of firms providing relief to disaster-affected communities. We use an event-study setting around sudden disasters to show that although on average, donations decrease returns, the saliency of large, attention-grabbing disasters amplifies the strategic benefits of donating. Exploiting disaster timing as an exogenous source of variation in the donation decision, we find that returns increase with disaster severity and saliency. Donations affect returns by strengthening customer awareness, sales, and stakeholder support. Overall, we show that corporate philanthropy increases shareholder value if the strategic benefits are sufficiently large.

Presenter: Cara Vansteenkiste, University of New South Wales

Discussant: Ran Chang, Shanghai Jiao Tong University


SMOKESTACKS AND THE SWAMP
Emilio Bisetti, HKUST
Stefan Lewellen, Penn State
Arkodipta Sarkar, HKUST
Xiao Zhao, HKUST
Abstract
We examine how politicians’ party affiliations causally impact the industrial pollution decisions of firms in their areas. Using a regression discontinuity design involving election outcomes in close U.S. congressional races, we show that plants pollute more when they are represented by a closely elected Republican than by a closely elected Democrat. We also find evidence of reallocation: firms shift pollution away from areas newly represented by a Democrat. Pollution-related illnesses spike around plants in areas represented by Republicans, suggesting that firms’ passthrough of ideological differences across politicians can have real consequences for local communities.

Presenter: Emilio Bisetti, HKUST

Discussant: Adelina Barbalau, University of Alberta


ESG AND THE MARKET RETURN
Ran Chang, Shanghai Jiao Tong University
Abstract
We propose an environmental, social, and governance (ESG) index. We find that it has significant power in predicting the stock market risk premium, both in- and out-of-sample, and delivers sizable economic gains for mean-variance investors in asset allocation. Although the index is extracted by using the PLS method, its predictability is robust to using alternative machine learning tools. We find further that the aggregate of environmental variables captures short-term forecasting power, while that of social or governance captures long-term. The predictive power of the ESG index stems from both cash flow and discount rate channels.

Presenter: Ran Chang, Shanghai Jiao Tong University

Discussant: Cara Vansteenkiste, University of New South Wales


STREAM E - 18H15 TO 20H15 (NZST)


SESSION E1: Mutual Funds & Media Coverage

CHAIRPERSON: Ali Sheikhbahaei, Monash University


THE POWER OF THE BUSINESS MEDIA: EVIDENCE FROM FIRM-LEVEL PRODUCTIVITY
Mariem Khalifa, Zayed University
Ali Sheikhbahaei, Monash University
Mohammed Aminu Sualihu, Zayed University
Abstract
We examine the impact of media coverage on firm-level productivity. Consistent with theoretical predictions, we find that media coverage increases firm-level productivity. Our results are robust to alternative explanations and endogeneity concerns. Using the launch of Barron’s online as an exogenous increase in media coverage, we document a causal relationship between media coverage and firm-level productivity. Further, we show that the positive effect of media coverage on firm-level productivity is stronger for firms with weaker governance mechanisms and higher levels of information asymmetry. Overall, our findings suggest that media coverage reduces managerial opportunism and thus enhances resource deployment decisions and firm value.

Presenter: Ali Sheikhbahaei, Monash University

Discussant: Wei Hu, University of Technology Sydney


THE BUSINESS MEDIA AND MUTUAL FUND RISK SHIFTING
Prince Elvis Asamoah, City University of Hong Kong
Abstract
This paper investigates the impact of the business media coverage of fund holdings on mutual fund risk-shifting in stock holdings. We capture managers’ ex-ante risk preferences, by using holdings-based risk-shifting measures. We document that the business media decreases both across-year risk-shifting and intra-year risk-shifting activities. More negative news sentiment reduces risk-shifting. The association between the business media and risk-shifting is chiefly robust among managers with high agency issue-motivated risk-shifting incentives, such as managers who have poor past performance, or face a more convex flow-performance relationship or are less experienced. The reduction effect of the media on risk-shifting is more pronounced in bearish markets where employment risk is dominant compared to a bullish market where compensation incentives are dominant. Funds with greater business media coverage also have lower total risk exposure. Conclusively, the business media serves as a vital alignment mechanism and has necessary implications for mutual fund managers and investors.

Presenter: Prince Elvis Asamoah, City University of Hong Kong

Discussant: Xin Liu, Renmin University of China


LEAVING THE (FUND) GATE AJAR: INVESTOR PROTECTION OR MARKETING PLOY?
Wei Hu, University of Technology Sydney
Peter Lam, University of Technology Sydney
Adrian D. Lee, Deakin University
Abstract
Using a sample of domestic equity funds in China, we explore mutual funds that impose discretionary inflow restrictions (gates) on investors. Consistent with scarcity marketing, we show funds that only open to small purchases attract extra capital flows and more retail investors. Contrary to the manager’s claim, we find no clear evidence that managers impose inflow gates to preserve fund performance or maintain their optimal portfolios. Rather, funds exhibit significant risk-shifting behaviour when the gate is in place. Overall, we suggest that leaving the fund gate ajar to investors is more of a marketing ploy than a genuine form of investor protection.

Presenter: Wei Hu, University of Technology Sydney

Discussant: Ali Sheikhbahaei, Monash University


DOES LIQUIDITY MANAGEMENT INDUCE FRAGILITY IN TREASURY PRICES? EVIDENCE FROM BOND MUTUAL FUNDS
Shiyang Huang, The University of Hong Kong
Wenxi Jiang, The Chinese University of Hong Kong
Xiaoxi Liu: Bank for International Settlements
Xin Liu, Renmin University of China
Abstract:
Bond mutual funds holding illiquid assets (e.g., corporate bonds) actively manage their Treasury positions to buffer redemption shocks. We argue that this liquidity management practice can transmit and concentrate non-fundamental demand shocks from fund flows onto the Treasuries the funds hold, leading to the fragility in Treasury prices. We find that Treasuries held more by bond funds tend to exhibit high return comovement during downside markets, negatively skewed returns, and frequent liquidity co-jumps, compared with Treasuries with little fund ownership. We address endogeneity concerns by exploiting the 2003 mutual fund scandal as a shock to fund ownership. Such a mechanism can help explain the COVID-19 Treasury market turmoil in March 2020.

Presenter: Xin Liu, Renmin University of China

Discussant: Prince Elvis Asamoah, City University of Hong Kong


SESSION E2: Corporate Governance

CHAIRPERSON: DuckKi Cho, Peking University HSBC Business School


SHADOW UNION IN LOCAL LABOUR MARKETS AND CAPITAL STRUCTURE
DuckKi Cho, Peking University HSBC Business School
Lyungmae Choi, City University of Hong Kong
Abstract
This paper identifies an externality of a firm’s unionization that affects the capital structure decisions of non-unionized firms within a local labour market. We find that a union victory leads non-unionized firms to increase market leverage ratios by 0.9 to 1.3 percentage points. This “shadow union” effect is more pronounced when the probability of unionization rises in a larger margin and firms face higher union rents conditional on being unionized. The threat is credible enough to shape corporate financing decisions: shadow unions raise the wages of employees and increase the likelihood of subsequent union victories in the relevant labour market.

Presenter: DuckKi Cho, Peking University HSBC Business School

Discussant: Lin Li, Shenzhen University


IS CORPORATE GOVERNANCE PRICED IN THE OPTIONS MARKET? EVIDENCE FROM SHAREHOLDER PROPOSALS
Jimmy Chengyuan Qu, Nanyang Technological University
Abstract
By exploiting the local randomness in close-call votes on governance-related shareholder proposals, this paper finds a negative effect of passing a governance proposal on firms’ ex-ante tail risk measured by the cost of option protection against downside tail risks, which suggests that corporate governance is priced in the options market. In a local regression discontinuity (RD) analysis, firms that narrowly pass the majority threshold show a lower ex-ante tail risk measured by implied volatility smirk and model-free implied skewness than those that narrowly fail. This effect is stronger for firms with weaker corporate governance and higher information transparency and is attenuated when firms perform better. Evidence from a global RD analysis confirms the external validity of results in the local RD analysis. Overall, this paper observes a causal impact of corporate governance on the options market and sheds new light on the cross-sectional determinants of option prices.

Presenter: Jimmy Chengyuan Qu, Nanyang Technological University

Discussant: Zixiong Sun, Massey University


CEO TURNOVERS DUE TO POOR INDUSTRY PERFORMANCES: AN EXAMINATION OF THE BOARDS’ RETENTION CRITERIA
Lin Li, Shenzhen University
Peter Lam, University of Technology Sydney
Wilson H.S. Tong, Hong Kong Polytechnic University
Justin Law, Hong Kong Polytechnic University
Abstract
This study investigates how CEO turnovers relate to firm-specific (i.e., idiosyncratic) and industry peer performances from the perspective of price informativeness. For CEO turnover events that occur during recessions, idiosyncratic stock returns carry more weight for the retention decisions than industry peer returns, whereas the opposite is true during booms. Moreover, stock prices are more reflective of CEOs’ abilities during recessions than in booms. The weight assigned to idiosyncratic stock returns is subdued when stock prices are more synchronous with the industry and overall market, whereas the weight assigned to industry returns is weakened when accounting numbers are more value relevant. Price informativeness, therefore, has a significant impact on the weights assigned to the performance measures used by the boards in making CEO retention decisions. Our findings indicate that the boards’ CEO retention decisions are rationally made and rely to a large extent on the informativeness of stock prices.

Presenter: Lin Li, Shenzhen University

Discussant: DuckKi Cho, Peking University HSBC Business School


DO HIGH SKILLED MANAGERS INFLUENCE EMPLOYEE COMPENSATION? EVIDENCE FROM LABOR INVESTMENT IN CHINA
Zixiong Sun, Massey University
Hamish Anderson, Massey University
Jing Chi, Massey University
Abstract
We investigate the impact of managerial foreign experience on corporate employee compensation. We show that foreign experienced managers pay higher wages to employees. Further, efficiency wage theory and personal experience channels serve as underlying economic channels to increase employee compensation. Further analyses indicate that the government intervention differentiates the purpose and inventive for foreign experienced managers increasing labour costs between state-owned enterprises (SOEs) and private firms. The effect of managerial foreign experience on employee compensation is more pronounced in firms with excess cash holdings, or lower operating leverage. The positive relationship between managerial foreign experience and employee compensation benefits shareholders through increasing firm value. However, it also generates greater labour stickiness costs. Overall, our findings have implications for emerging markets transitioning from low-cost labour development to high-skilled-employees based models.

Presenter: Zixiong Sun, Massey University

Discussant: Jimmy Chengyuan Qu, Nanyang Technological University


SESSION E3: Innovation & Equity Returns

CHAIRPERSON: Hang Wang, UNSW


LONG LIVE HERMES! MERCURY RETROGRADE AND EQUITY PRICES
Yanling Qi, California State University
Hang Wang, UNSW
Bohui Zhang, The Chinese University of Hong Kong
Abstract
Astrology suggests that Mercury Retrograde adversely affects financial gain. We study the effect of Mercury Retrograde on equity prices. By using 48 countries’ stock market indexes, we find that stock market returns are annually 3.33% lower during Mercury Retrograde periods than in other periods. To explain this effect, we propose an investor belief channel: investors who hold an astrological belief that Mercury Retrograde can negatively affect their financial gain will stay away from the market. Such belief results in a higher risk premium required by the remaining investors for sharing more risk. We further confirm that ancient Greek culture is the source of investors’ astrological belief in Mercury Retrograde.

Presenter: Hang Wang, UNSW

Discussant: Zhe An, Monash University


RIGHT-TO-WORK LAWS AND CORPORATE INNOVATION
Justin Nguyen, Massey University
Abstract
We show that state right-to-work (RTW) laws significantly encourage corporate innovations in terms of patent grant and citation count. Consistent with the conjecture that the RTW-treated firms conduct more innovations due to their decreased financial distress risk, we find that the RTW adoption also significantly decreases treated firms’ financial distress risk ex-post, and its treatment effect on innovation outputs is stronger for treated firms that are ex-ante more likely to experience financial distress. Further analysis indicates that treated firms intensify research and development expenditures and, likely due to their improved innovations, enhance their competitiveness in product markets.

Presenter: Justin Nguyen, Massey University

Discussant: Sayla Siddiqui, Australian National University


DO PATENT TROLLS CAUSE THE HIGH-TECH FIRMS TO DELIST?
Sayla Siddiqui, Australian National University
Abstract
This paper investigates the impact of non-practising entity (NPE) patent litigation on the delisting of the firms in the U.S. stock market. Using a sample of high-tech and patent-intensive firms from the U.S. market between 2000 and 2019, we find that the frivolous patent trolling by the NPEs is positively associated with the delisting decision of the defendant firms. This result is more pronounced when the firms are small, young, under distress and experience negative sentiment in the market. We ensure the causality of this relationship by using the Anti-troll law and American Invents Act targeted to curb the threat of NPE trolls. We also find that this effect is influenced by the cost of NPE litigation and that going private can significantly mitigate the threat of NPE trolls. Our result recommends that policies aimed to ease the threat of the NPE patent trolls are important to safeguard the steadiness of the innovation-intensive companies in the U.S. stock market.

Presenter: Sayla Siddiqui, Australian National University

Discussant: Justin Nguyen, Massey University


TRADEMARKS AND THE COST OF EQUITY CAPITAL
Bin Yanga, Jinan University
Zhe An, Monash University
Xin Gao, Zhejiang University, China
Donghui Li, Shenzhen University, China
Abstract
Employing a sample of 5,858 U.S. public firms from 1993 to 2017, this study documents robust evidence that firms that hold more trademarks enjoy a lower cost of equity, even after we control for other determinants of the cost of equity and industry-by-year fixed effects. To address endogeneity issues, we employ three federal-level trademark laws affecting the extent of trademark protection—the Federal Trademark Dilution Act, Moseley v. V. Secret Catalogue, Inc., and the Trademark Dilution Revision Act—as quasi-natural experiments. Our analysis reveals that the impact of trademark registrations on the cost of equity is achieved through the information asymmetry channel, the investor recognition channel, and the disciplinary channel. These results suggest that trademarks play an important role in alleviating firms’ equity financing costs, thus clarifying the underlying mechanism through which firms benefit from holding trademarks.

Presenter: Zhe An, Monash University

Discussant:  Hang Wang, UNSW


SESSION E4: COVID-19 & Social Capital

CHAIRPERSON: Olga Dodd, Auckland University of Technology


SOCIAL CAPITAL, HUMAN CAPITAL AND BOARD APPOINTMENTS
Angela Andersen, Deloitte, New Zealand
Alexandre Garel Audencia Business School, France
Aaron Gilbert, Auckland University of Technology, New Zealand
Alireza Tourani-Rad, Auckland University of Technology, New Zealand
Abstract
In this study, we examine social capital and human capital and how they could contribute to the appointment of directors to extra board seats.  We measure director connectivity using the Social Network Analysis centrality measures (Wasserman & Faust, 1994) capturing multidimensional connections embedded in the social network. Human capital is proxied by a uniquely constructed index. We hand collect a novel dataset of New Zealand listed firms which includes 279 unique firms, over the period 2000 - 2015. We find stronger evidence that possessing greater human capital, rather than higher connectivity, results in directors receiving additional board appointments. All our results hold after conducting robustness tests and controlling for endogeneity issues.

Presenter: Angela Andersen, Deloitte, New Zealand

Discussant: My Nguyen, RMIT University


WORKING FROM HOME, MANAGERIAL SENTIMENT, AND CORPORATE LIQUIDITY MANAGEMENT UNDER COVID-19
Lilian Ng, York University
Jing Yu, University of Sydney
Linyang Yu, York University
Abstract    
COVID-19 pandemic lockdowns and mobility restrictions have forced many individuals to work from home, leading to diverse isolation-induced mental health consequences. Using the granularity of foot traffic data, we show that prolonged work from home during the COVID-19 outbreak dampens managerial sentiment. This baseline result is robust to the identification strategy exploiting the staggered implementation of stay-at-home orders across the United States. Further analyses indicate that the induced negative sentiment elevates managers’ perceived risk, driving them to ac-cumulate more cash in response to the unprecedented COVID-19 cash-flow shock. But this increase in cash destroys shareholder value.

Presenter: Jing Yu, University of Sydney

Discussant: Olga Dodd, Auckland University of Technology


NAVIGATING INVESTMENT DECISIONS WITH SOCIAL CONNECTEDNESS: IMPLICATIONS FOR VENTURE CAPITAL
Giang Nguyen, Waseda University
My Nguyen, RMIT University
Anh Viet Pham, University of Newcastle
Man Duy Pham, Monash University
Abstract
This paper studies the role of social connectedness in venture capital (VC) investment decisions. We find that VC firms are more likely to invest in portfolio companies in regions to which they are more socially connected. The effect is stronger among independent, smaller, less reputable, or early-stage–focused VC firms. More strikingly, network-induced trust appears to prevail over information asymmetry reduction as the main driver in the interplay between social connectedness and VC investment outcomes. We document that social connectedness lowers the likelihood of a successful exit, consistent with network-induced trust increasing risk-seeking behaviour while disincentivizing VC monitoring efforts.

Presenter: My Nguyen, RMIT University

Discussant: Angela Andersen, Deloitte, New Zealand


THE ROLE OF INVENTORY IN FIRM RESILIENCE TO THE COVID-19 CRISIS
Olga Dodd, Auckland University of Technology
Shushu Liao, Kühne Logistics University
Abstract
We study the role of inventory holdings in corporate resilience to the Covid-19 crisis that triggered exogenous shocks to consumer demand, commodity prices, and global supply chains. The sharp, unexpected drop in consumer demand and commodity prices increases the costs of holding inventory. On the flip side, inventory holdings provide a buffer against supply chain disruptions. Empirically, we find that U.S. firms with higher inventory levels experience a more negative stock market response to Covid-19. The negative impact of inventory is more profound for firms with greater exposure to the slump in demand and commodity prices and a higher degree of financial constraints. Nonetheless, for firms that experience supply chain disruptions during Covid-19, the benefits of holding inventory offset its storage costs. We reconfirm that inventory carries significant costs using two other demand shocks – the 9/11 terrorist attacks and the global financial crisis.

Presenter: Olga Dodd, Auckland University of Technology

Discussant: Jing Yu, University of Sydney


Day 2                                        10th December 2021 (NZST)

SESSIONS F TO J


STREAM F - 08H00 TO 10H00 (NZST)


SESSION F1: Bank Loan and Digital Information

CHAIRPERSON: Sydney Kim, University of Illinois


MONEY AND MORTGAGES, FOR RICH AND POOR ALIKE? HOW CHANGES IN THE FEDERAL FUNDS RATE DETERMINE REFINANCING, PURCHASE AND HOME IMPROVEMENT CREDIT ACROSS INCOME BEFORE, DURING AND AFTER THE GREAT FINANCIAL CRISIS
Manish Gupta, University of Nottingham
Steven Ongena,University of Zurich, Swiss Finance Institute, CEPR, and KU Leuven
Abstract
We investigate the redistributive effects of monetary conditions for three different types of mortgage loans, i.e., purchase, refinancing, and home improvement loans. We find that the sensitivity of mortgage credit to monetary conditions generally increases with household income during the sample period from 1996 to 2018. This sensitivity remains mostly robust before, during, and after the Great Financial Crisis, and is not affected by actual or expected house price growth, or securitization. In sum, our findings are not consistent with the conventionally held view of “neutrality” of monetary conditions.

Presenter: Manish Gupta, University of Nottingham

Discussant: Sydney Kim, University of Illinois


DIGITAL TEXT MESSAGE REMINDERS, ACTIONS, CHANNELS, AND MINORITIES
Maya Haran Rosen, The Hebrew University of Jerusalem
Orly Sade, The Bank of Israel
Abstract
We use a natural experiment in Israel to compare the effect of a short text message sent via mobile phones on the actions of minority groups versus the general population. Financial institutions and regulators are increasingly using digital text messages to raise awareness or encourage participation in programs and initiatives. We study the effect of these messages on individual behaviour, and the size of this effect for different segments of the population. Our unique setting and proprietary data reveal that the text message had an overall positive effect, but a significantly smaller effect on minority groups. By combining our proprietary data with a dedicated survey, we provide additional insights on potential channels (low digital literacy, low financial literacy, and low trust) that contribute to the differential effect.

Presenter: Maya Haran Rosen, The Hebrew University of Jerusalem

Discussant: Wentao Ren, Nanjing University


DOES THE DISCLOSURE OF GEOGRAPHIC LOAN DISTRIBUTION RESHAPE LOCAL BUSINESS ECONOMIES? EVIDENCE FROM THE COMMUNITY REINVESTMENT ACT
Sydney Kim, University of Illinois
Oktay Urcan, University of Illinois
Ha Young Yoon, Southern Methodist University
Abstract
Low and moderate-income (LMI)- neighbourhoods experienced a significant decline in small businesses following a disclosure reform that exempted banks from the mandatory disclosures of geographic loan distribution. The most affected areas were LMI areas with a high proportion of racial minority population. We also document that these areas experienced a decline in small business employment and wages. Using hand-collected data, we find that non-disclosing banks indeed reduced lending to LMI areas after the reform. Together, these results show that the aggregate effects of the disclosure elimination manifested in marginalized communities that the Community Reinvestment Act (CRA) specifically targets to protect. Overall, our findings highlight the effectiveness of disclosure as a policy tool in incentivizing banks’ social behaviour.

Presenter: Sydney Kim, University of Illinois

Discussant: Manish Gupta, University of Nottingham


RETAIL INVESTORS’ ACCESSIBILITY TO THE INTERNET AND FIRM-SPECIFIC INFORMATION FLOWS: EVIDENCE FROM GOOGLE’S WITHDRAWAL IN CHINA
Wentao Ren, Nanjing University
Abstract
Internet search is an important channel for retail investors to gather and process information. This paper investigates whether limiting retail investors’ accessibility to the Internet could affect the incorporation of firm-specific information in prices, measured as the stock price synchronicity. Using Google withdrawing search services from China as an exogenous shock, I employ the matching-based difference-in-differences design and find an increase in synchronicity after Google’s withdrawal, equivalent to a 4.6% growth in R2. Further analysis shows that synchronicity measure arguably captures firm-specific information rather than noise, at least, in this setting. In addition, the improved synchronicity is concentrated in subsamples where corporate disclosures are verbose and few, firms are geographically inaccessible, and the controlling shareholder’s ownership is moderate. The results are not driven by alternative explanations and are robust to alternative samples, alternative variable constructions, and the inclusion of more control variables.

Presenter: Wentao Ren, Nanjing University

Discussant: Maya Haran Rosen, The Hebrew University of Jerusalem


SESSION F2: Banking 2

CHAIRPERSON: Roberto Robatto,  University of Wisconsin-Madison


QUANTITATIVE EASING, BANK LENDING, AND COMPETITION
Andrea Orame, Bank of Italy
Rodney Ramcharan, University of Southern California
Roberto Robatto, University of Wisconsin-Madison
Abstract
We study how the European Central Bank’s quantitative easing (QE) program announced in January 2015 affected lending by Italian banks. Banks exposed to QE, especially the more illiquid ones, increased lending relatively more at both the intensive and extensive margins after QE. But we also find evidence of substitution. Branches of non-QE-exposed banks contracted lending in areas where QE-exposed banks dominate. Because of this substitution, we find no evidence of an aggregate credit expansion. Our results suggest that QE programs that target a broader swath of the banking system could more effectively expand lending.

Presenter: Roberto Robatto,  University of Wisconsin-Madison

Discussant: Yu Shan, Concordia University


ENVIRONMENTAL REPUTATION AND BANK LIQUIDITY UNDER CLIMATE CHANGE RISK
Daewoung Choi, Louisiana State University
Yong Kyu Gam, University College Dublin
Hojong Shin, California State University, Long Beach
Abstract
This study empirically investigates how a bank’s environmental reputation affects its deposits and credit provision in regions with severe climate change risks. We find that banks with higher reputational risks for environmental issues tend to experience declining deposits in the regions exposed to severe climate change risks. Banks with a poor environmental reputation also reduce mortgage origination in the same regions. Such banks diminish liquidity creation if they have high deposit shares in the regions sensitive to climate change. This paper suggests that a bank’s reputation for environment-related ESG practices can be an important source underlying bank liquidity in areas sensitive to climate change.

Presenter: Yong Kyu Gam, University College Dublin

Discussant: Yusuke Tsujimoto, University of Alberta


INTANGIBLE CUSTOMER CAPITAL AND BANK RESILIENCE
Joel F. Houston, University of Florida
Hongyu Shan, Fordham University
Yu Shan, Concordia University
Abstract
Bank stability depends critically on the ability to connect and retain customers amid negative shocks. This study proposes a novel measure of accumulated customer capital at the branch level. In a within-bank-county estimation, we exploit reputation damage as exogenous negative shocks to deposit-taking and find that branches with higher customer capital mitigate deposit outflows more effectively. These results are stronger in neighbourhoods with higher income and lower population mobility, and for branches of community banks. Overall, our work highlights the value of intangible customer capital as a novel and important factor influencing the resilience of retail banking relationships.

Presenter: Yu Shan, Concordia University

Discussant: Roberto Robatto,  University of Wisconsin-Madison


DO FIRMS CATER TO CORPORATE QE? EVIDENCE FROM THE BANK OF JAPAN’S CORPORATE BOND PURCHASES DURING THE COVID-19 PANDEMIC
Yusuke Tsujimoto, University of Alberta
Abstract
The Federal Reserve and Bank of Japan corporate bond purchase programs in response to the COVID-19 crisis have primarily targeted bonds with five years or less remaining to maturity. This paper documents evidence suggesting that firms in Japan, but not in the U.S., have catered to the maturity-specific demand shock by shifting the maturity of new bond issues. Most strikingly, in Japan, there is a large and disproportionate reduction in issuance of bonds maturing in seven years, a previously popular maturity just above the maturity eligibility criterion. I argue that Japanese results are consistent with heterogeneous firms facing a trade-off between the gain from shortening maturities to match the positive demand shock and the cost of deviating from their intrinsically optimal maturities. An analysis of simultaneous issuances of multiple-maturity bonds further supports the catering explanation. Thus, this paper documents a novel unintended effect of corporate quantitative easing (QE) and has important policy implications.

Presenter: Yusuke Tsujimoto, University of Alberta

Discussant: Yong Kyu Gam, University College Dublin


SESSION F3: Share Repurchase & Peer Effect

CHAIRPERSON: Yixin Chen, University of Rochester


A MODEL OF STOCK BUYBACKS
Alvin Chen, Stockholm School of Economics
Abstract
This paper studies buyback in a Kyle-type model with many informed parties: a manager implementing buybacks and speculators trading for themselves. Buybacks introduce two opposing forces. They compete against the speculators' trades, making informed trading less profitable. They also increase (decrease) the firm's per-share value when its shares are undervalued (overvalued), making informed trading more profitable. Less informative buybacks weaken the first force while strengthening the second. The manager's incentive to manipulate the current stock price to increase managerial compensation constrains how much information buybacks contain. The model generates novel predictions linking the structure of managerial compensation, buybacks, and trading outcomes.

Presenter: Alvin Chen, Stockholm School of Economics

Discussant:  Yuxin Wu (Cedric), Boston College


THE SPILLOVER EFFECT OF FINANCIAL RESTATEMENTS ON PEER FIRMS' STOCK REPURCHASES
Yuxin Wu (Cedric), Boston College
Abstract
This paper documents the spillover effect of firms' financial restatements on their peer firms' stock repurchases. In a difference-in-differences setting, I find a causal relationship where one firm's financial restatement increases the propensity of its peer firms in the same product market to repurchase shares by 12.9 percent. I present evidence attributing this spillover effect to peer firms of higher accounting quality separating from the pooling equilibrium with peer firms of lower accounting quality. As a result, the former group mitigates accounting-related litigation risk. Empirical results confirm that peer firms with stock repurchases have lower accruals, a lower probability of restating their own financial statements, and fewer class-action lawsuits against firm accounting practices than their counterparts without stock repurchases.

Presenter: Yuxin Wu (Cedric), Boston College

Discussant: Alvin Chen, Stockholm School of Economics


THE PEER EFFECTS IN GOVERNMENT CONTRACTING
Jason Damm, Florida Atlantic University
Zhijian (Chris) He, Marquette University
David Javakhadze, Florida Atlantic University
Abstract
We examine the extent to which peer effects explain corporate government contracting. From the observational learning perspective, managers rationally mimic the behaviour of peer firms to benefit shareholders. Using a sample of U.S. firms for the period 2002-2017, we provide the first direct empirical evidence of peer effects in the procurement of government contracts. Peer firms also influence the appeal for sweetheart provisions included in awarded contracts. Finally, peer-effects-induced government contracting matters for investment efficiency and long-term performance. Our results are robust to adjustments for possible endogeneity.

Presenter: Jason Damm, Florida Atlantic University

Discussant: Yixin Chen, University of Rochester


FAMOUS FIRMS, EARNINGS CLUSTERS, AND THE STOCK MARKET
Yixin Chen, University of Rochester
Randy Cohen, Harvard University
Kevin Wang, HAP Capital
Abstract
We show that much of the market premium for the year occurs on a handful of days, identifiable well in advance, on which several of the market's most famous, high-media-attention firms simultaneously announce earnings after the market close. Puzzlingly, the market surges occur during the 24 hours prior to the earnings announcements, from close to close. Since there is no overlap between the price increase period and the information revelation, the high returns do not appear to represent a risk premium, and our tests seem to rule out information-leakage explanations. Deepening the puzzle, the market delivers high returns only prior to post-close earnings-announcement clusters, not in advance of clusters that occur in the pre-open period. In addition to being economically large and easily tradeable, the effect is statistically significant, and the results hold consistently throughout our sample. We argue that the best explanation for our findings is that of Miller (1977) as extended by Hong and Stein (2007): when over a short “attention” period difference of opinion combines with short-sale constraints, prices will rise as optimists buy while pessimists cannot sell.

Presenter: Yixin Chen, University of Rochester

Discussant:  Jason Damm, Florida Atlantic University


SESSION F4: Banking 3

CHAIRPERSON: Alexander Kurov, West Virginia University


WHEN DOES THE FED CARE ABOUT STOCK PRICES?
Alexander Kurov, West Virginia University
Eric Olson, University of Tulsa
Gulnara R. Zaynutdinova, West Virginia University
Abstract
We propose a novel identification approach based on a predictable change in the intraday volatility of index futures to estimate the Federal Reserve’s reaction to stock returns. This identification approach relies on a weaker set of assumptions than required under-identification through heteroskedasticity based on lower frequency data. Our approach also allows the examination of changes in the reaction of monetary policy to the stock market. We document an asymmetric response of policy expectations to changes in stock prices in adverse and positive economic environments. Specifically, the results show a sharp increase in the response of monetary policy expectations to stock returns during recessions and bear markets. This finding is consistent with the existence of the so-called “Fed put.”

Presenter: Alexander Kurov, West Virginia University

Discussant: Goutham Gopalakrishna, EPFL and Swiss Finance Institute


A MACRO-FINANCE MODEL WITH REALISTIC CRISIS DYNAMICS
Goutham Gopalakrishna, EPFL and Swiss Finance Institute
Abstract
What causes deep recessions and slow recovery? I revisit this question and develop a macro-finance model that quantitatively matches the salient empirical features of financial crises such as a large drop in the output, a high-risk premium, reduced financial intermediation, and a long duration of economic distress. The model has leveraged intermediaries featuring stochastic productivity and regime-dependent exit rate that governs the transition in and out of crises. A model without these two features suffers from a trade-off between the amplification and persistence of crises. I show that my model resolves this tension and generates realistic crisis dynamics.

Presenter: Goutham Gopalakrishna, EPFL and Swiss Finance Institute

Discussant: Alexander Kurov, West Virginia University


MANAGEMENT GUIDANCE AND MONETARY POLICY TRANSMISSION IN THE EUROZONE
Mansoor Afzali, Hanken School of Economics
Gonul Colak, Hanken School of Economics
Sinh Thoi Mai, Hanken School of Economics
Pavel Savor, DePaul University
Abstract
We study whether management guidance affects how stock prices respond to monetary policy shocks in the Eurozone. Using intraday data to measure European Central Bank’s interest rate surprises, we show that issuing earnings guidance prior to the announcement attenuates the stock reaction for young firms by as much as 35 percent. This effect is stronger for firms with high information asymmetry and those that rely on external financing. The nature of the guidance —sentiment, precision, credibility, frequency, and disaggregation— all impact the relation between stock prices and monetary policy changes. Our findings are consistent with the hypothesis that monetary policy is especially important for high-information-asymmetry firms and that managerial guidance reduces the exposure to monetary shocks for such firms.

Presenter: Sinh Thoi Mai, Hanken School of Economics

Discussant: Thach Vu Hong Nguyen, University of Lincoln


HOW DO BANKS PRICE LIQUIDITY? THE ROLE OF MARKET POWER
Thach Vu Hong Nguyen, University of Lincoln
Thai Vu Hong Nguyen, RMIT University
Abstract
We empirically examine the effects of different measures of liquidity on interest margins of a sample of U.S. commercial banks from 2001 to 2018. Overall, the results reveal that liquidity ratios exert a positive influence on bank margins. Furthermore, the study investigates the role of market power in the relationship between liquidity and interest margins. It is documented that dominant banks incorporate the costs associated with investing in liquidity into the bank margins to a lesser extent than banks with less market power, suggesting that the cost of complying with regulatory liquidity standards is reduced when the competition in the banking sector is less intense. The study highlights that market competition might be important in the design and implementation of liquidity regulations.

Presenter: Thach Vu Hong Nguyen, University of Lincoln

Discussant: Sinh Thoi Mai, Hanken School of Economics


STREAM G - 10H15 TO 12H15 (NZST)


SESSION G1: Fixed Income

CHAIRPERSON: Luis Ceballos, Pennsylvania State University


INFLATION VOLATILITY RISK AND THE CROSS-SECTION OF CORPORATE BOND RETURNS
Luis Ceballos, Pennsylvania State University
Abstract
As corporate bonds are primarily denominated in nominal terms, inflation uncertainty arises as a relevant source of risk. This paper analyses the relevance of inflation volatility risk as an additional factor in predicting the cross-section of corporate bond returns. I find a negative and significant inflation volatility risk premium (IVRP) obtained from the difference between high inflation and low inflation beta portfolios. Further, common risk factors in the equity and corporate bond markets do not explain the IVRP, it responds to ex-post inflation risk and is partially explained by market risk and monetary policy shocks. Lastly, I show that the IVRP is associated with firms that incur debt maturity management to mitigate refinancing risks.

Presenter: Luis Ceballos, Pennsylvania State University

Discussant: Shuwen Yang, PBC School of Finance


COMPLEXITY AND THE DEFAULT RISK OF MORTGAGE-BACKED SECURITIES
M. Billio, Cà Foscari University of Venice
A. Dufour, University of Reading
S. Segato, University of Reading
S. Varotto, University of Reading
Abstract
We study the impact that lower complexity in bank securitisations has on mortgage quality before and during the COVID-19 pandemic. We find that mortgages issued after the announcement of the new European regulation in 2017 that aims to reduce deal complexity are characterised by up to 0.10% lower quarterly delinquency rates before the COVID-19 crisis. Similarly, during the pandemic, while results are heterogeneous across countries and borrower characteristics, we show that mortgage securitisations that meet the new `simplicity, transparency, and standardisation' (STS) criteria, have 0.21% lower delinquency rates. Overall, our findings suggest that the new European securitisation regulation has contributed to improving the credit quality of the securitisation market in Europe.

Presenter: S. Segato, University of Reading

Discussant: Xiaoxia Ye, University of Liverpool


SWITCHING PERSPECTIVE: HOW DOES FIRM-LEVEL DISTRESS RISK PRICE THE CROSS-SECTION OF CORPORATE BOND RETURNS?
Kevin Aretz, Manchester Business School
Shuwen Yang, PBC School of Finance
Abstract
We document a significantly negative relation between firm-level distress risk and the cross-section of corporate bond returns, analogous to the often-negative relation between distress risk and stock returns in the prior literature (“distress anomaly”). Our evidence casts doubt on theories attributing the distress anomaly to shareholders exploiting debtholders in distress (“shareholder advantage”). In accordance, shareholder advantage proxies do not condition the distress risk-bond return relation. Conversely, we show that real options theories with disinvestment also have the potential to explain the anomaly, with disinvestment proxies conditioning the relation between distress risk and both stock and bond returns.

Presenter: Shuwen Yang, PBC School of Finance

Discussant: Luis Ceballos, Pennsylvania State University


THE COMPONENTS OF THE CDS BID-ASK SPREADS: A REDUCED-FORM APPROACH
Jennie Bai, Georgetown University
May Hu, RMIT University
Xiaoxia Ye, University of Liverpool
Fan Yu, Claremont McKenna College.
Abstract
We develop an analytical reduced-form CDS pricing model for bid and ask quotes and apply it to the term structure data of 664 single name CDS bid-ask quotes covering the past nine years. We quantitatively decompose the bid-ask spreads into various components with economic implications. We find the recovery-related liquidity component accounts for a large portion of the bid-ask spreads and the adverse selection components predict future changes in the CDS premiums and explain the cross-sectional distribution of the CDS returns. Our analysis also reveals that the COVID-19 pandemic brings structure-breaking shocks to the CDS market making the market less competitive and efficient.

Presenter: Xiaoxia Ye, University of Liverpool

Discussant: S. Segato, University of Reading


SESSION G2: Individual Investors

CHAIRPERSON: Ali Rouhghalandari, Concordia University


DOES THE MAD MONEY SHOW CAUSE INVESTORS TO GO MADLY ATTENTIVE?
Lawrence Kryzanowski, Concordia University
Ali Rouhghalandari, Concordia University
Abstract
We study the effects of the popular Mad Money Show on the attention of investors and financial market outcomes. We find that the Show’s recommendations significantly affect investor attention, proxied by SEC EDGAR queries and posts on Stocktwits. The magnitudes of the effects depend on the direction of the recommendations (buy or sell) and the emphasis allocated to a stock on the Show. This induced investor attention subsequently affects the trading volumes and the portfolios of retail investors. While stock recommendations on the Show affect the average cumulative abnormal returns (ACAR) on the following day, the effect reverses over the following 20 days. Furthermore, the significantly positive (negative) initial ACARs for buy (sell) recommendations on the Show become significantly negative (positive) by day 20. Overall, our findings are consistent with the impact of the Media on the limited attention of investors and the short-term price pressure associated with noise traders.

Presenter: Ali Rouhghalandari, Concordia University

Discussant: Qian Yang, Michigan State University


IT DEPENDS WHO YOU ASK: CONTEXT EFFECTS IN THE PERCEPTION OF STOCK RETURNS
Constantinos Antoniou University of Warwick
Junyang Guo, University of Warwick
Neil Stewart University of Warwick
Abstract
Stock returns convey information to investors about fundamental values. But do all investors perceive a specific stock return in the same way? Using a large dataset of individual investor stock selling decisions, we show that the same return is perceived differently by different investors and that these differences are driven by the comparison of a given return to investors' own personal and idiosyncratic experiences of returns in the small set of stocks that they own. The effect is large. When a given return is classed as extreme compared to an investor's personal history of returns, the response of investors toward that return increases by a factor of 3.5. Whereas stock returns are commonly considered to be objective, our findings suggest that there is considerable subjectivity in their perception.

Presenter: Junyang Guo, University of Warwick

Discussant: Sima Jannati, University of Missouri-Columbia


FAT AND FATTER: CRASH RISK AND RETAIL TRADING
Qian Yang, Michigan State University
AbstractI estimate ex-ante crash probabilities and jackpot probabilities via novel machine learning methodologies. I introduce imbalanced learning techniques to facilitate rare events prediction. I then show that crash probabilities predict lower returns in the portfolio and cross-sectional tests. One possible reason for the negative risk-return relationship is that at least a subset of retail investors (proxied by Robinhood traders) tends to buy high crash risk stocks, rendering them overpriced, and resulting in lower returns subsequently. Using Robinhood’s introduction of commission-free options trading at the end of 2017 as a quasi-natural experiment, together with textual information from Reddit, I document causal evidence that retail participation significantly increases ex-ante stock crash risk. This effect is stronger for small firms.

Presenter: Qian Yang, Michigan State University

Discussant: Ali Rouhghalandari, Concordia University


GRIT, LOSS AVERSION, AND INVESTOR BEHAVIOR
William Bazley, University of Kansas
Sima Jannati, University of Missouri-Columbia
George M. Korniotis, University of Miami
Abstract
We examine whether grit affects individuals’ preferences and trading decisions. Grit is the sustained effort toward a goal despite setbacks. It is malleable and distinct from the Big Five personality traits. Using experiments formalized in prospect theory, we find that grit reduces loss aversion. By diminishing loss aversion, gritty investors exhibit a lower disposition effect since they are more willing to exit losing investments. Consequently, they accumulate about 7% more wealth relative to control participants. Overall, grit affects the quality of investment decisions. Ultimately, our results suggest that interventions cultivating grit could improve households’ financial outcomes.

Presenter: Sima Jannati, University of Missouri-Columbia

Discussant: Junyang Guo, University of Warwick


SESSION G3: Gender Effects

CHAIRPERSON: Sankararama Lakshmi Naaraayanan, London Business School


BOARD GENDER DIVERSITY AND FIRM RISK IN UK PRIVATE FIRMS
Mahnoor Sattar, University of Otago
Pallab Kumar Biswas, University of Otago
Helen Roberts, University of Otago
Abstract
We investigate the effect of board gender diversity on private firm risk. Using a sample of 26,045 UK private firms for the period 2005-2017, we report a negative association between board gender diversity and firm risk. Lower director busyness in gender-diverse boards is the channel that enables female directors to reduce firm risk by directing more attention to fiduciary responsibilities. Additional analysis reveals that more risky, small to medium-sized firms benefit the most from gender-diverse boards. Considering female director nationality, the firm risk is lower (higher) for boards with local (foreign) female directors as local market knowledge is more valuable for private firms. Our findings are robust to alternate risk measurements and endogeneity corrections.

Presenter: Mahnoor Sattar, University of Otago

Discussant: Thanh Thi Phuong Nguyen, Waseda University


WINDS OF CHANGE: GENDER QUOTA ON BOARDS IN THE FACE OF PATRIARCHY
S. Lakshmi Naaraayanan, London Business School
Kasper Meisner, Nielsen Copenhagen Business School
Abstract
We study the long-term effect of gender quotas in India, the first country with strong patriarchal norms to mandate female directors. Five years after the reform, female director appointments increase from less than 10% to over 20%. almost half of the firms appoint and retain female directors beyond the ambit of the quota, with board diversity and board networks as primary drivers. We also find that the gender gap in director remuneration decreases from 30% to 3%. Overall, our results suggest that introducing gender quotas in environments with strong patriarchal norms can deepen and diversify the director labour pool.

Presenter: Sankararama Lakshmi Naaraayanan, London Business School

Discussant: Thomas Shohfi, Rensselaer Polytechnic Institute


EFFECTS OF FEMALE DIRECTORS ON GENDER DIVERSITY AT LOWER ORGANIZATION LEVELS AND CSR PERFORMANCE: EVIDENCE IN JAPAN
Thanh Thi Phuong Nguyen, Waseda University
Hanh Minh Thai, Hanoi University of Science and Technology
Abstract
This paper examines the effects of board gender diversity on female representation in lower organization levels and corporate social responsibility (CSR) performance. Using panel data of more than 1,000 Japanese listed firms from 2005 to 2014, we focus on firms that introduce female directors to their male-dominant boards for the first time and find that the first-introduced female directors are positively associated with a greater number of female officers and managers. The introduction of the first female director is also associated with better CSR performance. Our results are statistically significant and suggest that board gender diversity has an effect on promoting gender diversity at the lower level and CSR performance in listed firms.

Presenter: Thanh Thi Phuong Nguyen, Waseda University

Discussant: Mahnoor Sattar, University of Otago


GENDER AND EARNINGS CONFERENCE CALLS
Thomas Shohfi, Rensselaer Polytechnic Institute
Abstract
Using a large sample of quarterly earnings conference call transcripts, we investigate gender issues in interactions between two high-profile professions—sell-side analysts and public firm executives. We find that women are generally less “visible” on conference calls. Specifically, female analysts have a fewer conference call participation opportunities. Conditional on participation, female analysts are allowed fewer opportunities to ask follow-up questions and speak less compared with male counterparts. Female analysts speak with a more positive tone, less uncertainty, less numerical content, fewer speech hesitations, and fewer back and forth conversations with firm management. Female executives have shorter discourses and receive more rounds of questions from analysts. However, female executives exhibit more certainty and hesitate less, indicating superior abilities in answering analysts’ questions. Our analysis of speech interruptions finds that female analysts are interrupted less by female, but not male, executives. Female executives receive more interruptions from both male analysts and executives and are more likely to be challenged by male subordinates. The equity market also discounts female analysts’ participation. Overall, our results are consistent with gender-based discrimination.

Presenter: Thomas Shohfi, Rensselaer Polytechnic Institute

Discussant: S. Lakshmi Naaraayanan, London Business School


SESSION G4: Disclosure and Enforcement

CHAIRPERSON: Anantha Divakaruni, University of Bergen


DISCLOSURE, FIRM GROWTH, AND THE JOBS ACT
Anantha Divakaruni, University of Bergen
Howard Jones, University of Oxford
Abstract
We study the effects of regulatory disclosure on investment and growth by comparing newly public firms before and after they lose disclosure exemptions under the Jumpstart Our Business Start-up’s (JOBS) Act. Exempt firms invest more in physical assets, innovation, and acquisitions than firms that lose exemptions but experience steeper declines in growth opportunities over time. Firms that lose exemptions exhibit better allocation of equity to investments and utilization of existing assets, which improves their Tobin’s q. Relaxing disclosure requirements seems to induce inefficiencies in managerial investment decisions and hence inhibits firms from exploiting or adding to their growth opportunities.

Presenter: Anantha Divakaruni, University of Bergen

Discussant: Joseph Kalmenovitz, Drexel University


THE ENVIRONMENTAL CONSEQUENCES OF PAY INEQUALITY
Joseph Kalmenovitz, Drexel University
Jason Chen, Drexel University
Abstract
We study how pay inequality among regulators affects the environment, using individual compensation data on attorneys at the Environmental Protection Agency (EPA). Consistent with incentive theories, high-inequality EPA offices pursue more enforcement actions with higher monetary penalties, especially against severe misconduct. Exploiting the differential exposure of facilities to the EPA's regional offices, we find that facilities in high-inequality jurisdictions reduce pollution levels, slow production, and initiate abatement activities. The results suggest that the regulator's compensation structure could create an enforcement risk that is subsequently internalized by regulated entities.

Presenter: Joseph Kalmenovitz, Drexel University

Discussant:  Anantha Divakaruni, University of Bergen


EFFICIENT ESTIMATION OF BID-ASK SPREADS FROM OPEN, HIGH, LOW, AND CLOSE PRICES
David Ardia, HEC Montr´eal
Emanuele Guidotti, University of Neuchâtel
Tim A. Kroencke, University of Neuchâtel
Abstract
We propose a novel estimation procedure of bid-ask spreads from open, high, low, and close prices. Our estimator is asymptotically unbiased and optimally combines the full set of price data to minimize the estimation variance. When quote data are not available, our estimator generally delivers the most accurate estimates of effective bid-ask spreads numerically and empirically. The estimator is derived under permissive assumptions that allow for stylized facts typically observed in real market data, is easy to implement, and can be applied to liquid and illiquid market segments, both in low and high frequency.

Presenter: Emanuele Guidotti, University of Neuchâtel

Discussant: Guanming He, Durham University


HOW DO INSIDER TRADING INCENTIVES SHAPE NONFINANCIAL DISCLOSURES? EVIDENCE FROM PRODUCT AND BUSINESS EXPANSION DISCLOSURES
Guanming He, Durham University
Abstract
Nonfinancial disclosures of product and business expansion planning occur frequently in practice and are an important vehicle by which managers convey corporate information to outsiders. However, little is known about how the opportunistic incentives of managers affect the choice of such nonfinancial disclosures. This study examines whether managers make their nonfinancial disclosures strategically for self-serving trading incentives. I find strong and robust evidence to suggest that managers manipulate the timing and selectivity of their nonfinancial disclosures in an attempt to maximize trading profits. Specifically, managers tend to disclose bad (good) news on products or business expansion before purchasing (selling) shares. I also find that such strategic behaviour is more evident when the expected price impact of the disclosures is greater and when the CEOs are more powerful. However, I do not find evidence that the strategic behaviour is weaker for firms with high institutional stock ownership. Overall, my results contribute to understanding managers’ strategic use of nonfinancial disclosures in fulfilling personal trading incentives and should be of interest to boards of directors charged with the responsibility of monitoring and restricting opportunistic managerial disclosures and insider trades.

Presenter: Guanming He, Durham University

Discussant: Emanuele Guidotti, University of Neuchâtel


KEYNOTE 2 - 12H30 TO 13H30 (NZST)

Please register in advance for this webinar by clicking here.

HIDDEN ALPHA
Using the setting of financial agents – in particular, network ties amongst mutual fund managers and firm officers – we explore the importance of hidden network connections relative to all other network ties. We find that hidden network ties are those associated with the largest and most significant abnormal returns accruing to the fund managers – on average 135 basis points per month (t=3.54) (over 16% alpha per year) across the universe of fund managers and public firms. This is relative to insignificant abnormal returns accruing on average to all of their other trades, including those to trades of “visible” ties in the fund manager-firm officer network. The hidden network premium does not appear to be driven by a familiarity or characteristic selection story, as fund managers seem to be correctly timing exactly when to hold (and when not to hold) the firms to which they have hidden network ties. Further, the more hidden the network tie is, the more valuable the information that appears to be associated with the trading across it. This hidden network connection premium is not driven by any industry, style, time-period, or firm-type, remaining strong and significant through the present day. More broadly, the findings highlight the importance of missing or hidden nodes and connections when understanding the true nature of shock propagation in complex network systems.


STREAM H - 13H45 TO 15H45 (NZST)


SESSION H1: Investor Sentiment & Attention

CHAIRPERSON: Dashan Huang, Singapore Management University


PRESIDENTIAL ECONOMIC APPROVAL RATING AND THE CROSS-SECTION OF STOCK RETURNS
Zilin Chen, Southwestern University of Finance and Economics (SWUFE)
Zhi Da, University of Notre Dame
Dashan Huang, Singapore Management University
Liyao Wang, Hong Kong Baptist University (HKBU)
Abstract
We construct a monthly Presidential Economic Approval Rating (PEAR) index from 1981 to 2019, by averaging ratings on the president’s handling of the economy across various national polls. In the cross-section, stocks with high betas to changes in the PEAR index significantly underperform those with low betas by 0.96% per month in the future, on a risk-adjusted basis. The low-PEAR-beta premium persists up to one year and is present in various sub-samples (based on industries, presidential cycles, transitions, and tenures) and even in other G7 countries. It is also robust to different risk adjustment models and controls for other related return predictors. PEAR beta dynamically reveals a firm’s perceived alignment to the incumbent president’s economic policies and investors seem to misprice such an alignment.

Presenter: Dashan Huang, Singapore Management University

Discussant: Liang Ma, University of South Carolina


DIVERGENT OPINIONS ON SOCIAL MEDIA
Kotaro Miwa, Kyushu University
Abstract
In this study, we analyse the informational value of tweets in which opinions diverge from the consensus one. We identify them using the most positive and negative intraday Twitter sentiments for each firm. We find that these divergent opinions specifically, negative ones predict stock returns without subsequent reversals. In addition, they contain incremental information on firm fundamentals identified by subsequent revisions to analysts’ earnings forecasts and target prices. Finally, we find that return predictability is attributed to the fundamental information contained in the divergent opinions on Twitter. Our analysis sheds light on the role of divergent opinions on social media.

Presenter: Kotaro Miwa, Kyushu University

Discussant: Preetesh Kantak, Indiana University


WHAT DRIVES CLOSED-END FUND DISCOUNTS? EVIDENCE FROM COVID-19
Liang Ma, University of South Carolina
Abstract
The literature often uses closed-end fund (CEF) discounts as an inverse measure of investor sentiment, while the source of CEF discounts remains under debate. Exploiting the COVID-19 outbreak as a negative exogenous shock to individual investor sentiment, I examine the causal effect of sentiment on CEF discounts. I find that CEF discounts increased after COVID-19. Using the difference-in-differences (DiD) approach, I find that CEFs with higher sentiment beta or higher retail ownership experienced a larger increase in discounts after COVID-19. The DiD results are unlikely to be driven by alternative channels such as the liquidity, expense, payout, and leverage channels.

Presenter: Liang Ma, University of South Carolina

Discussant: Dashan Huang, Singapore Management University


THE COMPOSITION OF FIRM ATTENTION AND FIRM RISK
Preetesh Kantak, Indiana University
Abstract
We examine how firm attention reflects dynamics in systematic exposure. To determine which activities, define firms’ risk profiles, we build a time-varying beta model that embeds idiosyncratic variation in operating leverage (DOL) and growth opportunities (GO). To this, we add investor learning, which leads to specific asset pricing implications around information revealing events (IREs). We test whether variations in firm attention mimic the implications of the model using a proprietary dataset that captures high-frequency employee attention to nearly 6,000 topics across 3,000,000 firms. We find that smaller firms with more GOs and higher DOL focus more on systematic versus investment-related topics. Furthermore, positive innovations to this ratio lead not only to a drop in investment but also predict negative shocks to asset prices and higher systematic risk around IREs. These findings map to model primitives, suggesting that variations in the composition of firm attention contain valuable information about variations in firm risk exposures.

Presenter: Preetesh Kantak, Indiana University

Discussant: Kotaro Miwa, Kyushu University


SESSION H2: Disclosure and Investment

CHAIRPERSON: Fotis Grigoris, Indiana University


INVESTMENT UNDER UP- AND DOWNSTREAM UNCERTAINTY?
Fotis Grigoris, Indiana University
Gill Segal, University of North Carolina
Abstract
We empirically and theoretically show that uncertainty's impact on firms’ investment decisions depends on its source in the supply chain. A real-option model with time-to-build predicts that only upstream uncertainty suppresses firms’ economic activity, since upstream uncertainty from suppliers affects firms in the shorter run, while downstream uncertainty from customers affects the longer run. Using production-network data, we provide micro-level evidence that upstream (downstream) uncertainty is negatively (positively) related to firm-level investment and valuations, as predicted theoretically. At the macro level, these two uncertainties oppositely predict aggregate consumption, output, and investment growth. Lastly, COVID-19-induced uncertainty is predominantly downstream, which need not hinder economic recovery.

Presenter: Fotis Grigoris, Indiana University

Discussant: Joy Tianjiao Tong, Western University


DO SHORT-SELLERS USE TEXTUAL INFORMATION? EVIDENCE FROM ANNUAL REPORTS
Hung Wan Kot, University of Macau
Frank Weikai Li, Singapore Management University
Morris M. Liu, University of Macau
K.C. John Wei, Hong Kong Polytechnic University
Abstract
We examine short sellers’ use of textual information in annual reports for shorting activities. We find that more uncertainty words in annual reports are associated with greater shorting volume. Short selling motivated by textual information negatively predicts stock price reaction after the filing date of 10-K reports. We further provide some evidence that textual information used by short-sellers are related to revisions of analysts’ earnings forecasts, changes in firm fundamentals, and increasing crash risk subsequently. Our results suggest that textual information in annual reports forms an important part of short sellers’ information advantage.

Presenter: Hung Wan Kot, University of Macau

Discussant: Wendi Huang, The University of Hong Kong


HEALTH CARE COSTS AND CORPORATE INVESTMENT
Joy Tianjiao Tong, Western University
Abstract
Health care costs for U.S. employers tripled in the past twenty years. Using firm-specific health expenses data, I show that firms negatively adjust capital expenditures and R&D expenses in response to changes in health care costs. The effects are greater for firms that are financially constrained, employ more high-skilled workers, or work with fewer insurers. Additional tests confirm that hiring fewer workers and reducing wages do not offset rising health costs enough to counteract this lower investment channel. My findings suggest that increased health care costs limit a firm’s ability to expand physically or through innovation.

Presenter: Joy Tianjiao Tong, Western University

Discussant: Fotis Grigoris, Indiana University


ANTI-CORRUPTION AND CORPORATE INVESTMENT: EVIDENCE FROM FINANCIAL DISCLOSURE LAWS
Wendi Huang, The University of Hong Kong
Ye Peng, The University of Hong Kong
Abstract
We exploit the adoption of global financial disclosure laws to study the effect of anti-corruption regulation on corporate investment and find that following the adoption of these laws, corporate investment rate decreases while investment efficiency improves. Our results indicate that anti-corruption laws effectively restrict firm’s excessive investment caused by government subsidies in a more corrupt environment. Our analysis sheds light on the benefits of anti-corruption laws and has important policy implications.

Presenter: Wendi Huang, The University of Hong Kong

Discussant: Ivan Indriawan, Auckland University of Technology


SESSION H3: Social Capital & Networks

CHAIRPERSON: Artem Malinin, Florida Atlantic University


STOCK PRICE INFORMATIVENESS AND CEO SOCIAL CAPITAL
Artem Malinin, Florida Atlantic University
Luis Garcia-Feijoo, Florida Atlantic University
Abstract
We investigate the association between CEOs’ social capital and stock price informativeness in a sample of US firms. We find strong evidence of a negative association, indicating that less private information is incorporated into stock prices for firms with CEOs that are more connected. Results are consistent across five different proxies for stock price informativeness and hold after accounting for endogeneity. There is evidence the negative association stems from outside investors becoming discouraged from collecting and acting on information about more connected companies. Characteristics of CEOs networks in terms of nationality and gender diversity also have a negative impact on stock price informativeness while professional and educational differences among members have a positive one instead. Overall, results suggest that private information existing in networks may result in markets that are less informationally efficient.

Presenter: Artem Malinin, Florida Atlantic University

Discussant: Xiaolin Huo, Renmin University of China


COMPETITION NETWORK, DISTRESS PROPAGATION, AND STOCK RETURNS
Winston Wei Dou, University of Pennsylvania
Shane A. Johnson, Texas A&M University
Mingming Ao Shao, San Diego State University
Wei Wu, Texas A&M University
Abstract
We build a competition network that links two industries through their common market leaders. Industries with higher centrality on the competition network have higher expected stock returns because of higher exposure to the cross-industry spillover of distress shocks. The competition intensity on the network is endogenously determined by the major players’ economic and financial distress. We examine the core mechanism — the causal effects of firms’ distress risk on their product market behaviour and the propagation of these firm-specific distress shocks through the competition network — by exploiting the occurrence of local natural disasters and enforcement actions against financial fraud to identify idiosyncratic distress shocks. Firms hit by natural disasters or enforcement actions exhibit increased distress and then compete more aggressively by cutting profit margins. In response, their industry peers also cut profit margins and then become more distressed, especially in industries with high entry barriers. Crucially, distress shocks can propagate to other industries through common market leaders operating in multiple industries. These results cannot be explained by demand commonality or other network externality.

Presenter: Mingming Ao Shao, San Diego State University

Discussant: Xinyan Yan, University of Dayton


GEOGRAPHIC PROXIMITY IN SHORT SELLING
Xiaolin Huo, Renmin University of China
Xin Liu, Renmin University of China
Vesa Pursiainen, University of St. Gallen
Abstract
Geographic proximity is associated with significantly higher returns from short-selling within London and the UK. Short trades by funds near the target headquarters are followed by larger negative abnormal returns. Proximity matters more for stocks that are smaller, more volatile, and less actively covered by sell-side analysts, and less for large trades and trades following more proximate institutions’ trades. Short trades are correlated geographically, with proximate funds more likely to short the same stocks. Geographically closer short trades predict more negative earnings surprises. Covering of short positions by more proximate institutions is followed by more positive abnormal stock returns.

Presenter: Xiaolin Huo, Renmin University of China

Discussant: Artem Malinin, Florida Atlantic University


THE CONGLOMERATE NETWORK
Kenneth R. Ahern, University of Southern California
Lei Kong, University of Alabama
Xinyan Yan, University of Dayton
Abstract
This paper proposes a network model of the economy in which conglomerate firms transmit idiosyncratic shocks from one industry to another. The strength of interindustry connections in the network is determined by two factors: 1) conglomerates’ market shares of total industry sales, and 2) the distribution of a conglomerate’s total sales across industries. From these two factors, the model generates a new measure of cross-industry concentration that extends the widely used Herfindahl index. Consistent with the model’s predictions, the empirical results show that industry growth rates comove more strongly within industry pairs that are more closely connected in the conglomerate network.

Presenter: Xinyan Yan, University of Dayton

Discussant: Mingming Ao Shao, San Diego State University


SESSION H4: Derivatives

CHAIRPERSON: Ferenc Horvath, City University of Hong Kong


ARBITRAGE-BASED RECOVERY
Ferenc Horvath, City University of Hong Kong
Abstract
We develop a novel recovery theorem based on no-arbitrage principles. Our Arbitrage-Based Recovery Theorem does not require assuming time homogeneity of either the physical probabilities, the Arrow-Debreu prices, or the stochastic discount factor; and it requires the observation of Arrow-Debreu prices only for one single maturity. We perform several different density tests and mean prediction tests using 25 years of S&P 500 options data, and we find evidence that our method can correctly recover the probability distribution of the S&P 500 index level on a monthly horizon.

Presenter: Ferenc Horvath, City University of Hong Kong

Discussant: Jianfeng Xu, City University of Hong Kong


CHARACTERIZING THE CONDITIONAL PRICING KERNEL: A NEW APPROACH
Hyung Joo Kim, University of Houston
Abstract
I propose a novel method to reliably estimate the conditional pricing kernel with the aid of conditioning variables. I find that the VIX, term spread, sentiment, and market return are conditioning variables that are informative about the kernel. The conditional pricing kernel estimate exhibits significant time variation: the more favourable future market expectations, the higher the kernel estimate in the negative future return region. During bad times, the conditional equity premium inferred from the conditional kernel estimate is entirely attributable to compensation for the left tail of the market return distribution. This observation is economically plausible and contrasts with findings for the unconditional kernel estimate. The out-of-sample return forecast based on the conditional kernel estimate outperforms the forecast based on the unconditional kernel estimate.

Presenter: Hyung Joo Kim, University of Houston

Discussant: Xiang Fang, University of Hong Kong


DISASTER RECOVERY, JUMP PROPAGATION, AND THE MULTI HORIZON UIP PATTERN
Jianfeng Xu, City University of Hong Kong
Abstract
Forward premium puzzle and the exchange rate level puzzle are two violations of interest parity. The former implies high-interest rate currency is riskier while the latter implies the opposite. We propose a consumption-based general equilibrium models with disaster recovery and jump propagation to explain the two puzzles and hence address the paradox. The model reproduces patterns of multi horizon UIP regression slopes in Engel (2016), which is the key to resolving the currency puzzles. It also matches the term structure of real yields, as well as some basic moments of exchange rate growth and interest rate.

Presenter: Jianfeng Xu, City University of Hong Kong

Discussant: Ferenc Horvath, City University of Hong Kong


GETTING TO THE CORE: INFLATION RISKS WITHIN AND ACROSS ASSET CLASSES
Xiang Fang, University of Hong Kong
Yang Liu, University of Hong Kong
Nikolai Roussanov, University of Pennsylvania and NBER
Abstract
Decomposing inflation into core and non-core components (e.g., energy) shed new light on the nature of inflation risk and risk premia. While stocks have insignificant exposure to headline inflation in the U.S., their core inflation betas are negative while energy betas are positive. Conventional inflation hedges such as currencies and commodities only hedge against energy inflation risk but not the core. These hedging properties are reflected in the prices of inflation risks: only core inflation carries a negative risk premium, and its magnitude is consistent both within and across asset classes, whereas the price of energy inflation risk is indistinguishable from zero. The relative contribution of core and energy inflation varies over time, which helps explain why the correlation between stock and bond returns appears to switch signs in the data. We develop a two-sector New Keynesian model to account for these facts.

Presenter: Xiang Fang, University of Hong Kong

Discussant: Hyung Joo Kim, University of Houston


STREAM I - 16H00 TO 18H00 (NZST)


SESSION I1: Corporate Bonds

CHAIRPERSON: Fabian Dienemann, University of New South Wales


A NEW PERSPECTIVE ON THE CORPORATE BOND LIQUIDITY FACTOR
Fabian Dienemann, University of New South Wales
Abstract
This study documents the properties of market-wide corporate bond liquidity and suggests that liquidity risk is an important determinant of returns. In market downturns, transaction costs rise for sellers and fall for buyers. The negative relation between buyer and seller liquidity motivates a new across-measure liquidity factor that incorporates an asymmetric liquidity component. Shocks to market-wide liquidity explain a large fraction of bond return variation in the time series. Primarily driven by the asymmetric component, the liquidity factor attracts a cross-sectional risk premium that is robust to controls for credit, equity, and interest rate factors as well as the illiquidity level.

Presenter: Fabian Dienemann, University of New South Wales

Discussant: Yoshio Nozawa, University of Toronto


DISAGREEMENT, LIQUIDITY, AND PRICE DRIFTS IN THE CORPORATE BOND MARKET PDF, 634.97 KB
Yoshio Nozawa, University of Toronto
Yancheng Qiu, HKUST
Yan Xiong, HKUST
Abstract
We document empirical evidence for post-earnings announcement drift in corporate bond prices using transaction data. The drift is more pronounced for bonds that trade more frequently, and also exists in the credit default swap market, rejecting the idea that illiquidity generates the drift. We explain this puzzling positive link between the drift and liquidity using a stylized model where investors agree to disagree. Empirical evidence supports the hypothesis that disagreement explains both the observed price drift and trading volume.

Presenter: Yoshio Nozawa, University of Toronto

Discussant:  Fabian Dienemann, University of New South Wales


DISSECTING BOND VOLATILITY
Jie Cao, Chinese University of Hong Kong
Tarun Chordia, Emory University
Linyu Zhou, Chinese University of Hong Kong
Abstract
This paper documents a positive cross-sectional relation between returns and lagged idiosyncratic volatility (IVOL) in the corporate bond market. The relation is stronger following periods of low funding liquidity due to a funding liquidity-driven decrease in returns and its subsequent reversal. Three exogenous shocks – (i) the Volcker Rule which restricted the participation of dealers in the corporate bond market in 2014, (ii) the Global Financial Crisis of 2008, and (iii) the COVID-19 crisis of 2020, are used to establish causality between funding liquidity and the positive IVOL-return relation.

Presenter: Linyu Zhou, Chinese University of Hong Kong

Discussant:  Stefano Pegoraro, University of Notre Dame


ISSUANCE AND VALUATION OF CORPORATE BONDS WITH QUANTITATIVE EASING
Stefano Pegoraro, University of Notre Dame
Mattia Montagna, European Central Bank
AbstractAfter the announcement of the European Central Bank’s corporate quantitative easing program, non-financial corporations timed the bond market by shifting their issuance toward bonds eligible for the program. However, issuers of eligible bonds did not increase total issuance compared to other issuers; nor did they experience different economic outcomes. Instead, the announcement produced substantial spillover effects on risk premia. Credit risk premia declined, both in the corporate bond market and in the default swap market, whereas the valuation of eligible bonds did not change relative to comparable ineligible bonds. Firms took advantage of reduced risk premia by issuing riskier bond types. Using a novel and comprehensive dataset of corporate bonds in the euro area, we document how firms substituted across bond characteristics, and we find evidence of their intention to time the market. Our model indicates corporate market timing is instrumental in allowing quantitative easing to produce spillover effects.

Presenter: Stefano Pegoraro, University of Notre Dame

Discussant:  Linyu Zhou, Chinese University of Hong Kong


SESSION I2: Taxes

CHAIRPERSON: Brent Glover, Carnegie Mellon University


CORPORATE TAX AVOIDANCE, FIRM SIZE AND CAPITAL MISALLOCATION?
Brent Glover, Carnegie Mellon University
Oliver Levine, University of Wisconsin
Abstract
We develop an industry equilibrium model to study how corporate tax avoidance affects firm policies and industry outcomes. In the model, tax avoidance and investment are complementary inputs, leading the largest firms to engage in the most avoidance and face the lowest effective tax rates, consistent with the data. We find that tax avoidance significantly increases both the average firm size and industry concentration while reducing entry and the number of firms in equilibrium. Tax avoidance also generates capital misallocation, lowering productive efficiency. Larger firms’ benefit disproportionately from tax avoidance, and consumers gain from a lower product price. We use the model to quantify the costs and benefits of tax avoidance to firms, taxpayers, and consumers, and evaluate the equilibrium effects of changes to the statutory tax rate and costs of avoidance.

Presenter: Brent Glover, Carnegie Mellon University

Discussant:  Ke Shi, Central University of Finance and Economics


RELATIVE PERFORMANCE EVALUATION AND CORPORATE TAX AVOIDANCE
Kai Wu, Central University of Finance and Economics
Ke Shi, Central University of Finance and Economics
Abstract
We show that firms adopting relative performance (RPE) evaluation exhibit a higher extent of tax avoidance and managerial performance incentives. The result shows that the RPE-tax avoidance relation mainly manifests in firms with good internal governance and weak external monitoring. We also find that RPE affects tax avoidance through CEO’s risk-taking and dismissal threat. In addition, we document that firms adopting RPE are associated with lower agency costs and higher information disclosure quality. Overall, our findings suggest that RPE adoption increases tax savings and alleviates agency conflicts.

Presenter: Ke Shi, Central University of Finance and Economics

Discussant: Brent Glover, Carnegie Mellon University


TAX INCENTIVES, SMALL BUSINESSES, AND PHYSICAL CAPITAL REALLOCATION
Riddha Basu, George Washington University
Doyeon Kim, Northwestern University
Manpreet Singh, Georgia Tech
Abstract
Using data on a broad range of $298.6 billion worth of equipment purchases spread over 3.32 million equipment transactions by 688,000 small businesses during 1998-2019, we provide the first evidence on the capital reallocation effect of temporary federal tax incentives. We find that accelerated depreciation encourages the utilization of new capital goods. The tax subsidy on new equipment increases the supply of old equipment in the secondary market and lowers the price of the old equipment. The reduced cost of old equipment thus eases the capital constraints for some small businesses and encourages business entry. Our empirical results highlight how investment in new capital goods motivated by tax incentives fosters reallocation of old capital goods to small businesses.

Presenter: Riddha Basu, George Washington University

Discussant:  Shenje Hshieh, City University of Hong Kong


THE LABOR EFFECTS OF R&D TAX INCENTIVES: EVIDENCE FROM VC-BACKED STARTUPS
Jun Chen, Renmin University
Shenje Hshieh, City University of Hong Kong
Abstract
We examine whether VC-backed startups respond to R&D tax incentives by attempting to scale R&D activities through employment. We exploit a provision of the PATH Act of 2015, which allows qualified small businesses to offset payroll taxes with R&D tax credits and show that marginally eligible startups increase their demand for R&D workers more than marginally ineligible startups after the PATH Act’s enactment in 2015. Marginally eligible startups not only ramp up recruiting of workers of higher quality but also subsequently file more patents with new inventors. Our findings reveal that tax incentives can stimulate startup R&D activities through skilled labour recruitment.

Presenter: Shenje Hshieh, City University of Hong Kong

Discussant: Riddha Basu, George Washington University


SESSION I3: Liquidity and Economic Cycle

CHAIRPERSON: Lingyan Yang, Arizona State University


15 SECONDS TO ALPHA: HIGHER FREQUENCY RISK PRICING FOR COMMERCIAL REAL ESTATE SECURITIES
Andreas D. Christopoulos, Yeshiva University
Joshua G. Barratt, Barratt Consulting
Abstract
In this paper, we estimate risk decompositions at intraday frequency for commercial real estate securities in 1560 intervals of fifteen seconds for 240 days during the Covid pandemic. In cross-sectional analyses, we discover stark patterns of price formation of risk. We articulate eighteen long-short trading strategies in the frequently traded and related, REIT sector to exploit these aberrations. 84% of our risk signalled automated trading strategies produced significant alphas, with 75% of those generating strong positive abnormal returns. This is the first paper in the literature to estimate risk decompositions for commercial real estate securities at intraday frequencies.

Presenter: Andreas D. Christopoulos, Yeshiva University

Discussant: Adrian Fernandez-Perez, Auckland University of Technology


IS CAPITAL REALLOCATION REALLY PROCYCLICAL?
Lingyan Yang, Arizona State University
Abstract
Aggregate reallocation is procyclical. This empirical observation is puzzling given the documented fact that the benefits of reallocation are countercyclical. I show that this procyclicality is entirely driven by the reallocation of bundled capital (e.g. business divisions), which is highly correlated with market valuation and bears no consistent relation to measures of productivity dispersion. Reallocation of unbundled capital (e.g. specific equipment), on the contrary, is countercyclical and highly correlated with dispersion in productivity growth, both within the industry and across industries. To rationalize these facts, I propose a heterogeneous agent model of investment featuring two distinct used-capital markets and a sentiment component. In equilibrium, unbundled capital is reallocated for productivity gains only, whereas bundled capital is also reallocated for real, or perceived synergies in the equity market. While equity overvaluation negatively affects total factor productivity (TFP) by encouraging excessive trading of capital, its adverse impact is largely offset by increased liquidity in the unbundled capital market.

Presenter: Lingyan Yang, Arizona State University

Discussant: Shahram Amini, University of Denver


THE TRADE-OFF BETWEEN DISCRETE PRICING AND DISCRETE QUANTITIES: EVIDENCE FROM U.S.-LISTED FIRMS
Sida Li, University of Illinois
Mao Ye, University of Illinois
Abstract
Economists usually assume that price and quantity are continuous variables, while most market designs, in reality, impose discrete tick and lot sizes.  We study a firm’s trade-off between this two discreteness in U.S.  stock exchanges, which mandate a one-cent minimum tick size and a 100-share minimum lot size. A uniform tick size favours high prices because the bid-ask spread cannot be lower than one cent. A uniform lot size favours low prices because low prices reduce adverse selection costs for market makers when they have to display at least 100 shares. We predict that a firm achieves its optimal price when its bid-ask spread is two ticks wide when the marginal contribution from discrete prices equals that from discrete lots. Empirically, we find that stock splits improve liquidity when they move the bid-ask spread towards two ticks; otherwise, they reduce liquidity. Liquidity improvements contribute 95 bps to the average total return on a split announcement of 272 bps. Optimal pricing can increase the median U.S. stock value by 69 bps and total U.S. market capitalization by $54.9 billion.

Presenter: Mao Ye, University of Illinois

Discussant: Andreas D. Christopoulos, Yeshiva University


CREATIVE DESTRUCTION AND THE BRIGHT SIDE OF ECONOMIC DOWNTURNS
Shahram Amini, University of Denver
Andrew MacKinlay, Virginia Tech
James Weston, Rice University
Abstract
We argue that business cycles drive productive economic churn. During recessions, firms with abnormally high investment scale back while firms with low investment scale-up leading to a cyclical improvement in investment efficiency. On average, firms cut abnormal investments during recessions by 14% ($276M). Valuation ratios converge, with reductions in unexpected investment showing value improvement. Results are stronger with lower entrenchment and more active shareholders, pointing to shareholder monitoring as a channel. Overall, the efficiency of new investment improves in recessions and declines in expansions, consistent with creative destruction on the intensive margin.

Presenter: Shahram Amini, University of Denver

Discussant: Lingyan Yang, Arizona State University


SESSION I4: Mergers & Acquisitions

CHAIRPERSON: Danni Tu, Iowa State University


THE REAL EFFECTS OF REFERENCE-DEPENDENT PREFERENCES: EVIDENCE FROM MERGERS AND ACQUISITIONS
Tingting Liu, Iowa State University
Danni Tu, Iowa State University
Abstract
We investigate whether and how reference-dependent preferences affect acquisitions. We find that managers pursue risky and low-quality acquisitions when investors are in the loss domain. Bidder announcement returns are higher when investors are deep in the gain or loss domain. High returns to deals with investors in the loss(gain) domain are followed by reversals (upward drifts). Investor reference-dependent preferences appear to not only cause stock mispricing around mergers but also have a real effect in shaping managers’ acquisition decisions due to catering to investors’ risk appetite. Moreover, changes in analysts’ forecasts around mergers, but not announcement returns, predict post-merger performances.

Presenter: Danni Tu, Iowa State University

Discussant: M. Vahid Irani, University of South Carolina


BEHAVIORAL ASPECTS OF MERGER DECISIONS: THE EFFECT OF AVERAGE PURCHASE PRICE AND OTHER REFERENCE PRICES
Beni Lauterbach, Bar-Ilan University
Yevgeny Mugerman, Bar-Ilan University
Joshua Shemesh, Monash University
Abstract
We develop a novel measure of target shareholders’ average purchase price (TAPP). In a sample of all U.S. public firm merger offers from 1990 to 2019, we find that: (1) the offer premium is positively correlated with the ratio of TAPP to the target’s pre-offer stock price; (2) TAPP dominates several other purchase-price estimators as an explanatory variable; (3) the TAPP effect is additive and about equal in its magnitude to that of the pre-offer 52-week-high price; (4) reference prices affect merger offers primarily through adjusting the offer premium; and (5) the reference-prices-induced increase in premium hurts acquirer shareholders. Our results portray TAPP as a promising shareholder purchase-price indicator.

Presenter: Joshua Shemesh, Monash University

Discussant:  Xiaotian Liu, City University of Hong Kong


THE REAL MERGER GAINS: CORRECTING FOR PARTIAL ANTICIPATION
M. Vahid Irani, University of South Carolina
Abstract
Assuming mergers are unpredictable, previous studies find they create no value for acquirers, while targets gain a hefty bid premium. This paper proposes a new approach to account for partial anticipation, which allows the parameters of the asset pricing model to change in response to anticipation signals. I find that pre-offer alphas capture signals, and so should be part of merger gains. Using matched-control samples, I rule out that market-wide movements and firms’ ability to time takeovers may drive these findings. Overall, the gains are larger than a traditional market model indicates, and mergers create substantial value for both firms.

Presenter: M. Vahid Irani, University of South Carolina

Discussant: Danni Tu, Iowa State University


REAL EFFECT OF BANK'S BLOCK-HOLDING ON FIRM'S MARKET POWER
Xiaotian Liu, City University of Hong Kong
Abstract
This paper finds that bank equity holdings of industrial firms have a profound impact on the product market competition. Relying on the exogenous variation of bank equity holdings from bank mergers, we conduct a difference-in-differences (DID) experiment. We find that firms experience lower profit margins and a higher likelihood of bank switch when their banks become shareholders of their rivals. In contrast, firms with bank shareholders enjoy higher profit margins and gain more market power. The effect is more pronounced in highly competitive industries, for R&D intensive firms, and when banks have more proprietary information of the borrowing firms.

Presenter: Xiaotian Liu, City University of Hong Kong

Discussant: Joshua Shemesh, Monash University


STREAM J - 18H15 TO 20H15 (NZST)


SESSION J1: Microstructure and Investment

CHAIRPERSON: Ivan Indriawan, Auckland University of Technology


FINANCIAL DISTRESS AND FORECAST ERRORS
Brooke Peel, Deakin University, Monash University
Abstract
This paper studies the effect of distress risk on analyst forecast errors (the difference between actual and forecasted earnings), as well as how forecast errors manifest in the distress risk anomaly. Using a sample of 6,632 unique analyst-covered firms, I document a strong negative relationship between distress risk and analyst forecast errors. This effect is robust to controls for stock characteristics associated with distress risk, including profitability. Furthermore, the documented negative relationship between distress risk and forecast errors is most pronounced for firms followed by analysts with stickier expectations and firms which received negative news coverage in the period preceding the announcement of forecasts. This result provides empirical evidence of analysts under-reacting to distress risk by over-estimating the future cash flows of financially distressed stocks. Moreover, I examine the implications of this important channel which manifests in the overpricing of financially distressed stocks for the distress risk anomaly. The distress risk anomaly is concentrated in firms where forecast errors are mostly negative. The evidence reported in this paper, therefore, provides support for an under-reaction interpretation of the distress risk anomaly.

Presenter: Brooke Peel, Deakin University, Monash University

Discussant: Ivan Indriawan, Auckland University of Technology


ON THE EFFECTS OF CONTINUOUS TRADING
Ivan Indriawan, Auckland University of Technology
Roberto Pascual, University of the Balearic Islands
Andriy Shkilko, Wilfrid Laurier University
Abstract
The continuous limit order book is a prominent design feature of modern securities markets. Theoretical models show that this feature is prone to generating adverse selection and recommend switching to batch auctions as a superior alternative. We examine an opposite move, whereby a modern stock exchange switches from auctions to continuous trading. Consistent with theory, adverse selection substantially increases. The increase is partly offset by reductions in other trading cost components. Trading volume increases, likely driven by latency arbitrage. Our results suggest that market design optimization is an intricate balancing act and help explain the current dominance of the continuous design.

Presenter: Ivan Indriawan, Auckland University of Technology

Discussant: Brooke Peel, Deakin University, Monash University


WHAT EXPLAINS PRICE MOMENTUM AND 52-WEEK HIGH MOMENTUM WHEN THEY REALLY WORK?
Pedro Barroso, Católica Lisbon School of Business & Economics
Haoxu Wang, University of New South Wales
Abstract
After long being one of the main puzzles in asset pricing, momentum has ironically become a case of observational equivalence. It can now be explained both by factors proxying for mispricing and by the risk-based q-factor theory. On top of this, the q-factor theory also explains the related 52-week-high anomaly. We note that all these recent tests are unconditional exercises while the bulk of momentum profits are predictable and occur after periods of low volatility. Comparing asset pricing models conditionally, when the strategies actually work, we find the unconditional fit is misleading. The models fit well most of the time but not when the profits are produced. Noticeably, q-theory implies time-varying loadings that are generally inconsistent with the data. We proxy underreaction more directly with earnings announcement returns and analyst forecast errors and find that it markedly decreases with volatility. This supports an underreaction channel as closer to the heart of both anomalies.

Presenter: Haoxu Wang, University of New South Wales

Discussant: Quan M. P. Nguyen, Massey University


MULTINATIONALS AND STOCK RETURN COMOVEMENT
Hung X. Do, Massey University and University of Technology, Sydney
Nhut H. Nguyen, Auckland University of Technology
Quan M. P. Nguyen, Massey University
Abstract
We find that when a domestic firm becomes a multinational (MNC), its returns comove more with existing multinational firms and less with purely domestic firms in the year post-MNC initiation. This result is robust to a propensity score matching method and an exogenous shock. The evidence on turnover comovement and changes in mutual funds’ holdings of these MNC initiators further provide support of investor preference for multinationals as a style investment. Moreover, MNC initiators with larger foreign sales experience larger shifts in return comovement. Finally, we find that the effect of MNC initiation on return comovement is relatively weaker for a more recent period.

Presenter: Quan M. P. Nguyen, Massey University

Discussant: Haoxu Wang, University of New South Wales


CONFERENCE CLOSING ADDRESS - 20H15 TO 20H45 (NZST)

Paper Awards

Special Issue Information

Closing Remarks