Forthcoming Articles

Full text of published articles can be found on the Wiley page here:

Final issue assignment is subject to change.

November 2019 Issue

Alphabeticity Bias in 401(k) Investing

Sardarli, Sabuhi; Doellman, Thomas; Itzkowitz, Jennifer; Itzkowitz, Jesse

Structural factors which cause irrational investment in defined contribution savings plans are of great concern. Using a proprietary database of 401(k) plans we show that alphabeticity – the order that fund names appear when listed in alphabetical order – significantly biases participants’ investment allocation decisions. While we show a larger impact as the number of funds in the plan increases, this bias is strong even when relatively few funds are available in the plan menu. Importantly, our findings suggest that a more strategic ordering of funds could result in favorable outcomes for participants.  alpha bias pdf

What Determines Fund Performance Persistence? International Evidence

Ramos, Sofia; Ferreira, Miguel ; Keswani, Aneel; Miguel, Antonio

We study performance persistence across a global sample of equity mutual funds from 27 countries. In contrast to the existing U.S.-based evidence, we find that net performance persistence is present in the majority of fund industries, suggesting that fund manager skill is commonplace rather than a rarity. Consistent with the intuition that more competition in the mutual fund industry makes remaining a winner fund less likely but keeping a loser fund at the bottom of the performance ranks more probable, we show that competitiveness explains the cross-sectional variation in performance persistence.  persistence.pdf

Sentimental Mutual Fund Flows

Jiang, George; Yuksel, H. Zafer

We show that many stylized empirical patterns for mutual fund flows are driven by investor sentiment. Specifically, when sentiment is high, investors exhibit a stronger tendency of chasing past fund performance; fund flows are less sensitive to fund expenses; and investors are attracted more to funds with sheer visibility. Moreover, the well-documented positive relation between fund flows and future fund performance is significant only during high sentiment periods and is mainly driven by expected component of fund flows. Finally, we show that mutual fund investors exhibit a significantly negative timing ability at the individual fund level when sentiment is high.  sentiment_mutual_funds.pdf

Intangible Capital, Volatility Shock, and the Value Premium

Ahn, Yongkil

This paper extends the canonical, neoclassical investment-based asset-pricing model through the incorporation of intangible capital and the formulation of a joint productivity distribution with economic uncertainty shocks at the firm level. The distinctive evolutionary dynamics of intangible capital as opposed to that of physical capital mitigate the negative impact of temporary uncertainty shock on production and serve well to explain the value premium with modest assumptions. The value premium is unconditionally positive but the realized value spread plummets to negative after major transient second-moment shocks, e.g., the Loma Prieta Earthquake and the 9/11 terrorist attack.  intangible_capital.pdf

Why Do Large Shareholders Adopt a Short-Term versus a Long-Term Investment Horizon in Different Firms?

Tosun, Onur

I ask why the same large shareholders have different investment horizons. Using data for 1998–2013, I examine four fundamental firm policies for their potential influence on blockholders’ investments with different time horizons. The panel OLS, difference-in-difference (using the Sarbanes-Oxley Act), logistic and dynamic GMM regression analyses reveal that blockholders adopt a short-term horizon in smaller firms with a less independent board, high leverage, and high dividends while the same blockholders keep their investments longer in firms with a more independent board and low dividends. Under various economic conditions, different firm characteristics gain importance in blockholders’ decision on short-term versus long-term investments. large_shareholders.pdf

Return Predictability: The Dual Signaling Hypothesis of Stock Splits

Gao, Lei; Elnahas, Ahmed; Ismail, Ghada

This paper aims to differentiate between optimistic splits and overoptimistic/opportunistic splits. Although markets do not distinguish between these two groups at the split announcement time, optimistic (over-optimistic/opportunistic) splits precede positive (negative) long-term buy-and-hold abnormal returns. Using the calendar month portfolio approach, we show that the zero-investment, ex-ante identifiable, and fully implementable trading strategy proposed in this paper can generate economically and statistically significant positive abnormal returns. Our findings indicate that pre-split earnings management and how it relates to managers’ incentives, is an omitted variable in the studies of post-split long-term abnormal returns.  dual_signaling.pdf


The Aggregate Cost of Equity Underdiversification

Bjarne Florentsen, Ulf Nielsson, Peter Raahauge, Jesper Rangvid

We analyse equity diversification of all retail investors in a country (Denmark). We find that underdiversification is pervasive. We calculate the nationwide aggregate loss due to underdiversification and express it in absolute and expected-return terms. The aggregate loss is large. We find that investors with low education, low income, and low wealth are more likely to underdiversify. In spite of better diversification, the larger fraction of the aggregate loss nevertheless adheres to the top of the income/wealth distribution. Finally, our results indicate that underdiversification arises because investors have limited information about the benefits of diversification.

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February 2020 Issue

Managerial Effect or Firm Effect: Evidence from Private Debt Market

Hasan, Iftekhar; Francis, Bill; Zhu, Yun

This paper provides evidence that the managerial effect is a key determinant of firms’ cost of capital, in the context of private debt contracting. Applying the novel empirical method developed by Abowd, Karmarz, and Margolis (1999) to a large sample that tracks the job movement of top managers, we find that the managerial effect is a critical and significant factor that explains a large part of the variation in loan contract terms more accurately than firm fixed effects. Additional evidence shows that banks “follow” managers when they change jobs and offer loan contracts with preferential terms to their new firms. managerialeffect.pdf

The Syndicate Structure of Securitized Corporate Loans

Zhang, Shage; Guo, Zhengfeng

Securitized loans have lower lead bank shares but larger shares held by non-CLO institutional investors than non-securitized loans. The result can largely be explained by their degree of information asymmetry and credit risk. We find that lead banks increase their holdings after a non-securitized loan becomes securitized, but they do not reduce financial exposure to securitized facilities during the boom of the CLO market. Furthermore, we find that securitized loans do not perform differently from similar non-securitized loans. We conclude that differences in syndicate structure are likely shaped by participants’ investment preference rather than a manifestation of adverse selection. syndicated loads pdf

Officers’ Fiduciary Duties and Acquisition Outcomes

Reza, Syed Walid

Using a Delaware case law that recognized officers’ distinct fiduciary duties (OFDs) for the first time in 2009, I examine the effect of OFDs on corporate acquisitions. I find that firms with entrenched officers prior to 2009 experienced increased announcement-period abnormal stock returns, mainly because their acquisitions created more synergies and reduced officers’ incentives to preserve control. These firms increased liability insurance premium expenditures, but reduced value-decreasing acquisition frequencies. Furthermore, the effect of OFDs is more pronounced in firms where officers are not directors, have wealth risk, face less product market competition, are insulated from the market for corporate control, or are able to avoid board monitoring. Overall, OFDs are a critical corporate governance mechanism that works in tandem with other disciplinary mechanism.  fiduciary.pdf

Corporate Decision-Making in the Presence of Political Uncertainty: The Case of Corporate Cash Holdings

Hankins, William; Stone, Anna-Leigh; Cheng, Chak Hung; Chiu, Ching-Wai

Using a quarterly panel of U.S. corporations over the period 1985 – 2014 we show that corporate managers respond to political uncertainty and economic policy uncertainty shocks in different ways. We proxy for political uncertainty using the Partisan Conflict Index and employ a prevalent empirical macroeconomic methodology to construct structural shocks that are orthogonal to shocks captured by the Economic Policy Uncertainty Index. Following a political uncertainty shock, corporations increase cash but do not adjust investment. Alternatively, following an economic policy uncertainty shock, firms appear to draw on cash and reduce capital spending to increase R&D spending. corporate cash holdings pdf

Too Much Liquidity? Seemingly Excess Cash for Innovative Firms

Zhaozhao He, Stephen Ciccone

We show that more cash allows innovative firms facing financing constraints to undertake more research and development (R&D) projects and that this phenomenon has been more pronounced since 1980. In contrast to the secular increase in the level of cash holdings, average excess cash has not increased appreciably. We analyze excess cash disposition and document a strong relation between excess cash and R&D spending. Last, our results suggest that increased difficulty in valuing R&D might be a source of financing frictions. These findings imply that “seemingly excess cash” has played an increasingly important role in mitigating underinvestment in innovation.  liquidity pdf

Local Corporate Misconduct and Local Initial Public Offerings

Palkar, Darshana; Kuvvet, Emre

This paper investigates the cost of going public through initial public offerings (IPOs) for firms located in regions with significant fraud density. We find that companies in regions with a high proportion of nearby firms that have committed corporate misconduct have more pronounced underpricing, experience higher post-IPO stock return volatility, and are more likely to withdraw their offerings. Overall, our results show that local corporate misconduct is associated with the pricing of initial public offerings, and the breach of trust is related to costly IPOs for newcomers.misconduct.pdf

Not assigned an issue

State Ownership and Banks’ Information Rents: Evidence from China

Wang, Wei; Yu, Fengyan; Liang, Qi

A bank with an information advantage regarding its client tends to hold up the borrower and charge higher interest rates. We conjecture that state-owned enterprises (SOEs), with worse information asymmetry, are subject to greater information rents. State-owned banks place less emphasis on information production and extract lower rents compared to profit-maximizing private banks. We use the decline of loan interest rates around the borrowers’ equity initial public offerings (IPOs) as the proxy of banks’ information rents. We find SOEs in China experience larger declines in interest rates around their IPOs, and the central government–controlled Big Four banks exhibit smaller declines in rates they charge.  state_ownership.pdf

The Local Market Perception of Firm Risks during Cross-listing Events

Schumann-Foster, Kayti; Semaan, Elias; Sono, Hui

We examine the local investors’ perceptions on the relative idiosyncratic risks around cross-listing events. We find that increases in relative firm-specific risks around the listing date are temporary and small for Level I ADRs while Level III ADRs have the most variations. For exchange-listed ADRs from emerging markets there is a significant decrease in the relative firm-specific risk in the year prior to listing which increases during the cross-listing, while there are only significant increases in relative firm-specific risks for developed market firms. We interpret these as evidences of negative relationship between firm opaqueness and relative firm specific risks.  local perception pdf

Wealth transfer through private placements? Evidence from China

Jing Lin, Steven Xiaofan Zheng, Mingshan Zhou

We examine private issuance of public equity (PIPE) in China, and our results suggest that PIPE investors benefit from the price manipulation before and after issuance. These investors tend to cash out after lockup expiration and make large profits. We also find evidence that the trading of PIPE investors after lockup expiration is informed. Tests about the abnormal returns in the three years after lockup expiration suggest that at least part of the benefits PIPE investors receive come from wealth transfer from outside investors. Overall, PIPE issuers in China seem to use an opaque mechanism to compensate PIPE investors.  Private placement pdf


Does Local Political Support Influence Financial Markets? A Study on the Impact of Job Approval Ratings of Political Representatives on Local Stock Returns

Kim, Dong; Joo, Sunghoon; Park, Jung Chul

Using data on job approval ratings of governors, U.S. senators, and the president, we find that firms located in states with high approval ratings outperform firms located in states with low approval ratings by 0.64% per month. Furthermore, this relationship is stronger when investors are actively involved in politics, when local politicians are closer to the center of political power, for small firms that have a larger proportion of local investors, and for financially strong areas where investors are ready to execute investments in local stocks. Overall, our study shows that investors’ political sentiment is important in determining stock returns.  political job approval pdf

Financial crises and the asymmetric relation between returns on banks, risk factors, and other industry portfolio returns

Koutmos, Gregory; Högholm, Kenneth; Knif, Johan; Pynnomen, Seppo

We show that the relations between the returns on the banking industry, risk factors, and other industries often are asymmetric. Lagged banking industry returns seem to improve predictability but the positive impact of a one-month lag of the return on the banking portfolio is much higher in the lower part of the return distribution. However, after the Dodd-Frank Act in 2010 the cross-autocorrelation with banks is changed and becomes negative in the upper part of the distribution.  Returns on banks also seem to lead returns on five risk factors. This relation however, is not robust across the distribution. financial crisis pdf


Uncertain Times and Early Predictions of Bank Failure

Cullen Gunner

The Great Financial Crisis shows that bank failure in the United States, while rare, is a concern during uncertain times. Our interest is in the ability to predict future failures at the start of a crisis, when the recent past has few events on which to base our inferences. We show that policymakers using estimates based on the S & L crisis would identify in early 2009 that 2.0% of banks were in critical condition and 7.0% were unhealthy. This is comparable to the 1.7% of banks that failed within a year and the 3.9% of banks that would fail during the crisis.  bank failure pdf