Showing papers in "Financial Management in 2020"
TL;DR: In this paper, the authors hypothesize that AON forces the entrepreneur to bear greater risk and encourages crowdfunders to pledge more capital enabling entrepreneurs to set larger goals, and further hypothesize AON is a costly signal of commitment for entrepreneurs yielding a separate equilibrium with higher quality and more innovative projects with greater success rates.
Abstract: Reward‐based crowdfunding campaigns are commonly offered in one of two models via fundraising goals set by an entrepreneur: “Keep‐It‐All” (KIA), where the entrepreneur keeps the entire amount raised regardless of achieving the goal, and “All‐Or‐Nothing” (AON), where the entrepreneur keeps nothing unless the goal is achieved. We hypothesize that AON forces the entrepreneur to bear greater risk and encourages crowdfunders to pledge more capital enabling entrepreneurs to set larger goals. We further hypothesize that AON is a costly signal of commitment for entrepreneurs yielding a separate equilibrium with higher quality and more innovative projects with greater success rates. Empirical tests support both hypotheses.
144 citations
TL;DR: This article measured financial literacy using questions assessing basic knowledge of four fundamental concepts in financial decision making: knowledge of interest rates, interest compounding, inflation, and risk diversification, and found that women, poor adults, and lower educated respondents suffer from gaps in financial knowledge.
Abstract: We measure financial literacy using questions assessing basic knowledge of four fundamental concepts in financial decision making: knowledge of interest rates, interest compounding, inflation, and risk diversification. Worldwide, just one in three adults are financially literate—that is, they know at least three out of the four financial concepts. Women, poor adults, and lower educated respondents are more likely to suffer from gaps in financial knowledge. This is true not only in developing countries but also in countries with well‐developed financial markets. Relatively low financial literacy levels exacerbate consumer and financial market risks as increasingly complex financial instruments enter the market. Credit products, many of which carry high interest rates and complex terms and conditions, are becoming more readily available. Yet only around half of adults in major emerging countries who use a credit card or borrow from a financial institution are financially literate. We discuss policies to protect borrowers against risks and encourage account holders to save.
139 citations
TL;DR: This article found that managers select financial policies partially by mimicking policies of peer firms, and that mimicking correlates to higher financing costs and lower future profitability, especially if it results in high leverage.
Abstract: Growing evidence suggests that managers select financial policies partially by mimicking policies of peer firms. We find that these peer effects in capital structure choice are unique to firms operating under weak external corporate governance. Cross‐sectional tests suggest that this finding is best explained by a quiet life hypothesis in which managers may be able to avoid the effort required to optimize financial policies and the scrutiny of market participants. Leverage ratios of mimicking firms display less sensitivity to a profitability shock. Finally, mimicking correlates to higher financing costs and lower future profitability, especially if it results in high leverage.
26 citations
TL;DR: This article showed that firms significantly increase cash holdings after they have experienced a cybersecurity attack, and this behavior persists for years, indicating that the detrimental effects of a cybersecurity breach are not isolated to the attacked firms, and peer firms are quick to follow in taking precaution.
Abstract: This paper shows that firms significantly increase cash holdings after they have experienced a cybersecurity attack, and this behavior persists for years. A cyberattack increases cash holdings from a base level of 23% of assets to 26.87%. Similar firms, defined by industry and geographical proximity also increase their cash holdings. Suppliers of attacked firms are also affected. Overall, the results of this study indicate that the detrimental effects of a cybersecurity breach are not isolated to the attacked firms, and peer firms are quick to follow in taking precaution.
21 citations
TL;DR: In this paper, the authors show that the migration of low-skilled, rural workers to urban centers has a negative causal effect on innovation of firms in such urban centers and support the view that an abundant supply of low skilled workers increases the benefit of using existing lowskilled technology and thus reduces firms' incentive to innovate.
Abstract: We show that the migration of low‐skilled, rural workers to urban centers has a negative causal effect on innovation of firms in such urban centers. Our tests exploit the staggered relaxation of city‐level household registration system in China, which facilitates rural residents to migrate to cities. We find a significant decrease in innovation for firms headquartered in cities that have adopted such policies relative to firms headquartered in cities that have not. Overall, our results support the view that an abundant supply of low‐skilled workers increases the benefit of using existing low‐skilled technology and thus reduces firms’ incentive to innovate.
16 citations
TL;DR: In this article, a dynamic structural banking model is proposed to examine the interaction between risk-weighted capital adequacy and unweighted leverage requirements, their differential impact on bank lending, and equity buffer accumulation in excess of regulatory minima.
Abstract: We estimate a dynamic structural banking model to examine the interaction between risk‐weighted capital adequacy and unweighted leverage requirements, their differential impact on bank lending, and equity buffer accumulation in excess of regulatory minima. Tighter risk‐weighted capital requirements reduce loan supplies and lead to an endogenous fall in bank profitability, reducing bank incentives to accumulate equity buffers and, therefore, increasing the incidence of bank failure. Alternatively, tighter leverage requirements increase lending, preserve bank charter value, and incentives to accumulate equity buffers leading to lower bank failure rates.
15 citations
TL;DR: In this paper, the authors find that annual shareholder meetings conducted online can greatly increase the participation of shareholders, especially retail shareholders, and provide evidence that online shareholder meetings provide shareholders a cost-effective way to participate in governance issues.
Abstract: We find that annual shareholder meetings conducted online can greatly increase the participation of shareholders, especially retail shareholders. This finding is more evident when the cost of physically attending such a meeting is higher and when the firm’s ownership is more dispersed. We further document significant positive stock returns when firms initiate online annual meetings. We also find that retail shareholders indeed actively voice their concerns by voting against the proposals that potentially hurt their interests. Overall, we provide evidence that online shareholder meetings provide shareholders a cost-effective way to participate in governance issues.
13 citations
TL;DR: In this paper, the optimal portfolio of a utility maximizing investor trading in the S&P500 Index, cash, and index options bought at ask and written at bid prices stochastically dominates without options and yields returns with higher mean and lower volatility in most months from 1990 to 2013.
Abstract: In model‐free out‐of‐sample tests, we find that the optimal portfolio of a utility maximizing investor trading in the S&P500 Index, cash, and index options bought at ask and written at bid prices stochastically dominates the optimal portfolio without options and yields returns with higher mean and lower volatility in most months from 1990 to 2013. Unlike earlier claims of overpriced puts, our portfolios include mostly short calls and are particularly profitable when maturity is short and volatility is high. Similar results are obtained with the CAC and DAX indices. Neither priced factors nor a nonmonotonic stochastic discount factor explains the excess returns.
12 citations
TL;DR: In this paper, the presence of order anticipation strategies by examining predictable patterns in large order trades was examined. But the empirical findings were mostly consistent with the back-running theory that predicts delayed price impact as strategic traders learn about large orders gradually.
Abstract: I study the presence of order anticipation strategies by examining predictable patterns in large order trades. I construct three simple signals based on child‐order execution patterns and find empirical evidence that stronger signals are correlated with higher execution costs. I use the SEC's (Securities and Exchange Commission's) ban on unfiltered access and increase in noise trading as shocks to order anticipatory activities of algorithmic traders and find that the price impact of predictability is smaller when order anticipation becomes difficult. The empirical findings are mostly consistent with the back‐running theory that predicts delayed price impact as strategic traders learn about large orders gradually.
12 citations
TL;DR: The authors studied the effect of the credit supply on the speed of capital structure adjustment and found that firms that are financially constrained, are financially dependent on banks, and have less access to the public debt market and ability to geographically diversify the credit risk are more likely to benefit from deregulated banks.
Abstract: Using the staggered deregulation of the U.S. banking industry as a series of exogenous shocks, I study the effect of the credit supply on the speed of capital structure adjustment. I find robust evidence that interstate and intrastate banking deregulation are positively associated with leverage adjustments. Specifically, the speeds of adjustment to target leverage are faster in the post-deregulation periods. I also find that the positive effect is driven by firms that are financially constrained, are financially dependent on banks, and have less access to the public debt market and by deregulated banks’ ability to geographically diversify the credit risk.
11 citations
TL;DR: In this paper, the authors analyzed the determinants of buyout funds' investment decisions and found that established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen.
Abstract: This paper analyzes the determinants of buyout funds' investment decisions. In a model in which the supply of capital is "sticky" in the short run, we link the timing of funds' investment decisions, their risk-taking behavior, and the returns they subsequently earn on their buyouts to changes in the demand for private equity, conditions in the credit market, and funds' ability to influence their perceived talent in the market. Using a proprietary dataset of 207 buyout funds that invested in 2,274 buyout targets over the last two decades, we then investigate the implications of the model. Our dataset contains precisely dated cash inflows and outflows in every portfolio company, links every buyout target to an identifiable buyout fund, and is free from reporting and survivor biases. Thus, we are able to characterize every buyout fund's precise investment choices. Our empirical findings are consistent with the model. First, established funds accelerate their investment flows and earn higher returns when investment opportunities improve, competition for deal flow eases, and credit market conditions loosen. Second, the investment behavior of first-time funds is less sensitive to market conditions. Third, younger funds invest in riskier buyouts, in an effort to establish a track record. Fourth, following periods of good performance, funds become more conservative, and this effect is stronger for younger funds.
TL;DR: In this paper, the cross-country differences in the cash cycles of companies and find a negative relation between a country's development and the cash cycle of its corporations, indicating that companies with shorter cash cycles invest more in R&D and participate in more acquisitions.
Abstract: We study the cross‐country differences in the cash cycles of companies and find a negative relation between a country's development and the cash cycles of its corporations. The ability of companies to obtain raw materials on credit and to better manage inventory plays significant roles in shortening the cash cycle. Various country‐specific factors affect cash cycles. Firms with shorter cash cycles invest more in R&D and participate in more acquisitions. They also have a higher valuation and lower leverage. Overall, our findings indicate a close relation between a company's working capital management, its valuation, and the country's level of development.
TL;DR: In this article, the authors measure learning capacity as institutional classification, geographical proximity to Norway, and cultural closeness to Norwegian investors, and conclude that concentrated investment strategies in foreign markets can be optimal (disastrous) for investors with higher learning capacity.
Abstract: Using security holdings of 49,857 foreign investors on the Oslo Stock Exchange (OSE), I test whether concentrated investment strategies in international markets result in excess risk‐adjusted returns. I find that investors with higher learning capacity increase returns, while investors with lower learning capacity decrease returns from the portfolio concentration. I measure learning capacity as institutional classification, geographical proximity to Norway, and cultural closeness to Norwegian investors (as based on the Hofstede cultural closeness measures). I conclude, consistent with the information advantage theory, that concentrated investment strategies in foreign markets can be optimal (disastrous) for investors with higher (lower) learning capacity.
TL;DR: In this paper, the authors propose that the performance of mutual fund managers is linked to how efficiently they allocate attention across assets in their investment set, and they show that the efficiency of attention allocation has a significantly positive impact on future fund performance.
Abstract: This study proposes that the performance of mutual fund managers is linked to how efficiently they allocate attention across assets in their investment set. Motivated by existing models of optimal portfolio choice and rational inattention, we posit that the efficiency of attention allocation increases when a manager chooses larger (smaller) active positions in assets which need more (less) information acquisition effort to resolve uncertainty about future payoffs. We show that the efficiency of attention allocation has a significantly positive impact on future fund performance. Efficient attention allocation has a lesser impact on performance as the total demands on a manager’s limited attention increase.
TL;DR: In this paper, the authors investigate the causal impact of mandatory disclosure on the peer selection process and find that while firms for the most part choose performance peers to better identify their CEOs' impact on firms' performance, they also tend to select underperforming peers.
Abstract: We take advantage of comprehensive panel data available as a result of the 2006 SEC disclosure rules on relative performance evaluation (RPE) to (i) better understand how firms choose performance peer groups used in CEO RPE contracts and (ii) to investigate the causal impact of mandatory disclosure on the peer selection process. We find that while firms for the most part choose performance peers to better identify their CEOs’ impact on firms’ performance, they also tend to select underperforming peers. Dynamically, we find that peers that are added and retained every year are weaker than ones that were not chosen. These findings suggest managers may have some influence on the choice of performance peers. Lastly, using a quasi-natural experiment we find that the enhanced disclosure did not affect the tendency of firms to select underperforming peers.
TL;DR: The authors investigate how short-lived liquidity supply due to order cancellations affects the order-placement behavior of slow traders and conclude that it is not necessary to require limit orders to have a minimum lifespan.
Abstract: We investigate how short‐lived liquidity supply due to order cancellations affects the order‐placement behavior of slow traders. When order cancellations increase, slow traders submit fewer and less aggressive orders. Both short‐ and long‐lived liquidity supply have positive effects on the market overall, reducing spreads and increasing depth. We conclude that it is not necessary to require limit orders to have a minimum lifespan. We develop econometric and machine‐learning frameworks that allow traders to predict whether a quote is likely to have a short or long life, increasing the ability of slow traders to respond strategically to changing order flow.
TL;DR: This article showed that exogenous board distraction affects board monitoring intensity and leads to a higher level of inactivity by management, highlighting the impact of limited director attention on the effectiveness of corporate governance and the importance of directors in keeping management active.
Abstract: This paper shows that exogenous director distraction affects board monitoring intensity and leads to a higher level of inactivity by management. We construct a firm-level director "distraction'' measure by exploiting shocks to unrelated industries in which directors have additional directorships. Directors attend significantly fewer board meetings when they are distracted.
Firms with distracted board members tend to be inactive and experience a significant decline in firm value. Overall, this paper highlights the impact of limited director attention on the effectiveness of corporate governance and the importance of directors in keeping management active.
TL;DR: Shin et al. as mentioned in this paper found that firms with heavy inheritance taxes acquire affiliates owned by heirs, who then convert private target shares into acquirer shares while avoiding inheritance taxes, which is the motivation behind intragroup mergers in Korea.
Abstract: Correspondence HojongShin,CollegeofBusiness,California State University, LongBeach, 1250NBellflowerBlvd, LongBeach,CA90815. Email: hojong.shin@csulb.edu Abstract This article documents a novel way to transfer control in family firms while avoiding inheritance taxes: intragroup mergers. I provide evidence that avoiding inheritance taxes is themotivation behind intragroup mergers in Korea. In 1999, Korea initiated a tax reform that bumped up personal inheritance taxes by 25 percentage points. In the posttax-reformperiod, I find that family firms increase stock-forstock intragroup mergers involving targets owned by heirs. Specifically, firms with heavy inheritance taxes acquire affiliates owned by heirs, who then convert private target shares into acquirer shares while avoiding inheritance taxes.
TL;DR: In this paper, the authors present evidence that managers facing short-termist incentives set a lower threshold for accepting projects and find that the market responds less positively to a new project announcement when the firm's managers have incentives to focus on shortterm stock price performance.
Abstract: This paper analyzes value creation in firms at the project level. We present evidence that managers facing short‐termist incentives set a lower threshold for accepting projects. Using novel data on new client and product announcements in both the U.S. and international markets, we find that the market responds less positively to a new project announcement when the firm's managers have incentives to focus on short‐term stock price performance. Furthermore, textual analysis of project announcements shows that firms with short‐termist chief executive officers use vaguer and generically positive language when introducing new projects to the marketplace.
TL;DR: In this article, the authors link the firm's required return on equity to its target debt ratio, and find that a firm's expected ROE is increasing in the product of the distance between its debt ratio and its target ratio, its speed of adjustment, and the spread of the tax benefits of its debt over its bankruptcy costs of debt.
Abstract: We link the firm's required return on equity to its target debt ratio. We find that a firm's expected return on equity is increasing in the product of the distance between its debt ratio and its target debt ratio, its speed of adjustment, and the spread of the tax benefits of its debt over its bankruptcy costs of debt. Our empirical tests validate the testable implications of our model.
TL;DR: In this article, the authors examine whether hedge fund managers provide superior before-fee performance through managers' fund selection, style allocation, and active management abilities, and find that hedge funds held by FOHFs outperform their style indices and over half of the individual hedge funds in the Lipper Trading Advisor Selection System (TASS).
Abstract: This study examines whether funds of hedge funds (FOHFs) provide superior before‐fee performance through managers’ fund selection, style allocation, and active management abilities. Using reported holdings of Securities and Exchange Commission–registered FOHFs, we find that FOHF managers have fund selection abilities, as hedge funds held by FOHFs outperform their style indices and over half of the individual hedge funds in the Lipper Trading Advisor Selection System (TASS) database. We also find that FOHF managers add value through active management of FOHFs’ holdings, while evidence on their style allocation abilities is mixed. Our findings suggest that FOHFs generate superior before‐fee performance and that FOHF managers’ skillset is broader than previously documented. Thus, our study helps explain why FOHFs continue to survive and suggests that FOHF fee structure reform merits consideration.
TL;DR: In this article, the authors explored whether option volume soon after market open has predictive power for intraday stock returns and found that a composite option trading score (OTS) in the first 30 min of market open predicts stock returns during the rest of the trading day.
Abstract: Prior literature finds that information is reflected in option markets before stock markets, but no study has explored whether option volume soon after market open has predictive power for intraday stock returns. Using novel intraday signed option‐to‐stock volume data, we find that a composite option trading score (OTS) in the first 30 min of market open predicts stock returns during the rest of the trading day. Such return predictability is greater for smaller stocks, stocks with higher idiosyncratic volatility, and stocks with higher bid–ask spreads relative to their options’ bid–ask spreads. Moreover, OTS is a significantly stronger predictor of intraday stock returns after overnight earnings announcements. The evidence suggests that option trading in the 30 min after the opening bell has predictive power for intraday stock returns.
TL;DR: In this paper, the authors investigate price violations in credit markets using a data sample spanning from 2002 to 2016 and find that price violations are highly persistent during the crisis period, particularly for speculative grade bonds.
Abstract: This paper investigates price violations in credit markets using a data sample spanning from 2002 to 2016. We find that price violations are highly persistent during the crisis period, particularly for speculative‐grade bonds. There is evidence that price distortions and market disintegration are linked to market‐wide and firm‐level impediments to arbitrage and limited capital provision. Higher firm‐level impediments to arbitrage lead to less market integration, and more severe and persistent pricing discrepancies. Moreover, we find that the negative CDS basis persists in the postcrisis period, which is attributable to dealers’ lower capital commitment and deterioration in market‐making quality.
TL;DR: This paper develops a portfolio model that penalizes the deviation from a reference portfolio that significantly outperforms various existing models and renders a robust portfolio that performs superior under parameter uncertainty.
Abstract: This paper develops a portfolio model that penalizes the deviation from a reference portfolio. The proposed model renders a robust portfolio that performs superior under parameter uncertainty. Penalizing the deviation also improves the performance of existing shrinkage portfolio models that are sub‐optimal due to model parameter uncertainty. The equal‐weight portfolio turns out to be a better reference portfolio than the currently holding portfolio even in the presence of transaction costs. A data‐driven method for determining the degree of penalization is offered. Comprehensive simulation and empirical studies suggest that the proposed model significantly outperforms various existing models.
TL;DR: In this paper, the authors study how conflicts within a lending syndicate affect loan contract and syndicate formation, and they argue that loan provisions serve an important dual function: in addition to moderating borrower-lender conflicts, they reduce within-syndicate conflicts.
Abstract: We study how conflicts within a lending syndicate affect loan contract and syndicate formation. We argue that loan provisions serve an important dual function: In addition to moderating borrower–lender conflicts, they reduce within‐syndicate conflicts. We show that greater potential for within‐syndicate conflicts is associated with more and stricter covenants. Loans are less restrictive when the interests of participants and the lead arrangers are better aligned, for example, when participant–banks have stronger relationships with the lead arranger or hold borrower's equity (indirectly). Overall, our results show that covenant choice, syndicate formation, and lead arranger's loan allocation all play an important role in reducing within‐syndicate conflicts.
TL;DR: This article found that managers from countries with higher security value exhibit lower fund return volatility, trade less frequently, and follow benchmarks more closely, while the impact of home country security value decays as managers spend more time away from their home countries.
Abstract: I find that home‐country culture affects portfolio managers’ investment risk‐taking and performance. I focus on security value, which measures the degree to which people in a country assign importance to security, safety, and stability. Funds managed by managers from countries with higher security value exhibit lower fund return volatility, trade less frequently, and follow benchmarks more closely. These funds also tend to avoid lottery‐type stocks and hence perform significantly better. However, the impact of home‐country security value decays as managers spend more time away from their home countries.
TL;DR: In this article, Delta Air Lines (Delta) purchased a mothballed oil refinery and used this case to illustrate when, how, and why vertical integration can hedge input price risk.
Abstract: In April 2012, Delta Air Lines (Delta) purchased a mothballed oil refinery. We use this case to illustrate when, how, and why vertical integration (VI) can hedge input price risk. First, we show that stockholders and creditors expected the move to create wealth. Consistent with their predictions, Delta's exposure to refining margins, cash flow volatility, cost of debt, and default probability all decreased, relative to peers, postacquisition. Our evidence is consistent with the refinery influencing Delta's operating strategies, especially in its most affected markets. The case demonstrates how asset specificity and financial hedging frictions can justify VI.
TL;DR: In this paper, the authors report that the mispricing component, but not the growth options component, predicts abnormal returns for up to 5 years and that after controlling for mis-pricing, value no longer beats growth.
Abstract: Empirical research finds that stocks with low market‐to‐book (MTB) ratios outperform stocks with high MTB ratios. Rhodes‐Kropf, Robinson, and Viswanathan separate the MTB ratio into mispricing and growth options components. We report that the mispricing component, but not the growth options component, predicts abnormal returns for up to 5 years. We also find that the mispricing component, but not the growth options component, provides incremental information relative to existing asset pricing models. Moreover, after controlling for mispricing, value no longer beats growth. Overall, our evidence is consistent with a behavioral explanation of the value premium.
TL;DR: This article investigated whether religion-induced risk aversion affects municipal bond market outcomes from 1990 to 2017 and found that local government bonds issued from U.S. counties with a high Catholic-to-Protestant population ratio have lower credit risk ratings and lower yield spreads, and are less likely to have credit enhancement.
Abstract: This study investigates whether religion‐induced risk aversion affects municipal bond market outcomes from 1990 to 2017. The results indicate that local government bonds issued from U.S. counties with a high Catholic‐to‐Protestant population ratio have lower credit risk ratings and lower yield spreads, and are less likely to have credit enhancement. The results stand up to additional tests. I control for issuer's county political party affiliation and state term limits, and continue to find significant effects. The effects are not driven by the issuer's county fiscal policies. Furthermore, the effects persist when I use an alternate specification that controls for omitted factors that are time invariant. Overall, my evidence suggests that a bond issuer's religion‐induced risk aversion plays a significant role in the pricing of local government bonds.
TL;DR: This article showed that fund-specific return skewness is associated with managerial skill and future hedge fund performance, and used a new measure of investment skill that accounts for this managerial ability.
Abstract: We show that fund‐specific return skewness is associated with managerial skill and future hedge fund performance. Specifically, skewness in fund returns reflects managerial skill in avoiding large drawdowns. Using a new measure of investment skill that accounts for this managerial ability, we demonstrate that traditional performance measures underestimate (overestimate) managerial performance when returns exhibit positive (negative) fund‐specific skewness. Our new measure is particularly valuable during periods of economic crisis, when the annual risk‐adjusted outperformance is 5.5%.