We examine how analysts’ changing incentives driven by changes in market uncertainty affect analyst output. Analysts issue more optimistically biased forecasts and buy recommendations under high market uncertainty (VIX). The lower reputational costs and larger benefits of optimistic output explain the increased optimistic output: Analysts are less likely to be penalized for inaccuracy and can stimulate more trading activity from optimistically biased output when market uncertainty is high. We find that the likelihood of analysts’ turnover decreases, while the trading volume associated with optimistic output increases, with VIX. No evidence suggests that analysts’ self-selection affects our findings on optimism and uncertainty.
Firms receiving shareholder proposals are 16% more likely to become a target of acquisition. Such companies earn approximately 7.2% lower acquisition returns compared to gains for targets with no proposals. Higher acquisition likelihood and lower target returns are primarily associated with proposals drawing a larger proportion of favorable votes, larger voter turnout, as well as with proposals submitted shortly before takeover announcements, and motivated by the removal of antitakeover provisions. Our findings suggest that shareholder proposals can assist bidders in the identification of targets or signal the willingness of target shareholders to accept bids with lower premiums.
Lewellen and Nagel (2006) propose that, in conditional affine factor models, the estimated risk prices should satisfy certain unconditional constraints. We test this proposition on two different types of conditional factor models and results show that the proposition only applies to the conditional models with time-varying betas. Also, from the functional relationship between conditional and unconditional betas, we identify an unconditional constraint on unconditional betas for time-varying beta models and develop a testing procedure to incorporate this unconditional constraint. We show that imposing this unconditional constraint changes estimates of unconditional betas and risk prices significantly.
Using the informational sufficiency procedure from Forni and Gambetti (2014) along with data from McCracken and Ng (2014), we update the results of Lee (1992) and find that his Vector Autoregression (VAR) is informationally deficient. To correct this problem, we estimate a Factor Augmented VAR (FAVAR) and analyze the differences once informational deficiency is corrected with an emphasis on the relationship between real stock returns and inflation. In particular, we examine Modigliani and Cohn’s (1979) inflation illusion hypothesis, Fama’s (1983) proxy hypothesis, and the “anticipated policy hypothesis.”
We use daily data for a panel of 34 countries to investigate regional differences in sovereign credit default swaps (CDS) spread determinants and the significance of local vs. global market factors. Similar to prior studies, we find a high level of commonality among CDS spreads, but our results show that this effect is stronger in Latin American CDS. The results of our quantile panel regression model show that while global forces drive spreads across the conditional distribution, changes in credit ratings are significant in explaining CDS spreads only in the upper quantiles. We also confirm the existence of regional differences in spread determinants.
The use of bank-owned life insurance (BOLI) has more than tripled since 2001 and has caught the attention of the Office of the Comptroller of the Currency. We find increases in BOLI lead to higher levels of liquidity risk, credit risk, and interest rate risk. Robustness tests confirm these results and suggest over and under investment in BOLI and use of BOLI as a tax shelter contribute to risk increases. Results indicate that the concerns expressed by regulators are warranted, and suggest insurance may not always have the intended effect of reducing firm risk because of unintended consequences or misuse
We study the intertemporal risk-return tradeoff relations based on returns from 18 international markets. We find striking new empirical evidence that the inclusion of U.S. market returns significantly changes the estimated risk-return tradeoff relations in international markets from mostly negative to predominantly positive. Our results are consistent with the lead-lag effect between U.S. and international markets in the sense of Rapach, Strauss, and Zhou (2013).