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This study examines the liquidity characteristics of market anomalies and how liquidity affects institutional trading on those anomalies. We find that long-short portfolios based on market anomalies have pervasive liquidity exposures. For long-horizon anomalies, the long legs of the portfolios are less liquid and suffer from deteriorating liquidity relative to the short legs. Short-horizon anomaly portfolios exhibit the opposite pattern. Consistent with such liquidity characteristics and institutional liquidity preference, aggregate institutional trades appear to be in the right direction for short-horizon anomalies but in the wrong direction for long-horizon anomalies. Perverse institutional trading on long-horizon anomalies disappears after we control for liquidity. We further find that liquidity-driven and non-liquidity components of institutional trades have different impact on market mispricing. The magnitude of long-horizon anomalies is exacerbated by the liquidity-driven institutional trading when such trading is in the wrong direction, but not affected by the direction of the non-liquidity component of institutional trading.

We find that the relation between the idiosyncratic volatility (IVOL) anomaly and the beta anomaly is quite different at long horizons than at short horizons. IVOL has a significantly negative relation with subsequent stock returns at the short horizon of up to six months and beta does not predict stock returns at any horizon. However, both IVOL and beta significantly negatively predict stock alphas over horizons from a few months to beyond one year. At short horizons, neither anomaly can fully explain the other. At long horizons of beyond six months, the IVOL-alpha relation is explained by the beta-alpha relation. A measure of idiosyncratic volatility over a long window, popularly used by the investments industry to construct low-volatility portfolios, behaves similarly to beta in predicting returns and alphas at various horizons, and its predictive power is mostly explained by beta. Overall, IVOL and beta each has unique short-term information, but at long horizons the two anomalies appear to be the same. Our findings help reconcile a perceptional gap between academic studies and the investment industry on low volatility investing, and enrich the debate about the relation between the two low-risk anomalies.

We examine how CEO turnover and changes in information uncertainty affect the price and non-price terms of bank loan contracts. Firms face worsened loan terms following the departure of a CEO. Interestingly, the negative effect that CEO departures have on loan terms largely stems from forced CEO turnovers. Following forced CEO departures, firms pay higher loan spreads, see an increase in covenants, and are more likely to be subject to collateral requirements, when compared to voluntary turnover and non-turnover matched firms. We find that changes in information uncertainty helps to explain the observed worsened terms following these dismissals. Furthermore, a superior capital market information environment helps to mitigate the adverse effect of the forced departure on bank loan terms and weakens the channel effect of accounting information quality. Our results are robust to a number of controls for endogeneity and outline the importance of public information for bank loan contracting.

We examine how short sellers exploit anomaly-based trading strategies over time. While they increasingly use anomaly-based strategies to short overpriced firms, they even more intensively use these strategies to avoid underpriced firms. Over the entire sample period, short arbitrage of market anomalies fully explains abnormal returns to highly shorted stocks. However, market anomalies help shorters to avoid shorting wrong firms only in the early years, which is in contrast to recent years when non-anomaly strategies are increasingly used to avoid potential losses. Short interest increasingly contains more return predicative information beyond anomalies, and average investors are better off when trading on both anomalies and short interest and even more so in recent years. The evidence suggests that while short sellers continue to use anomaly signals over time, they have become more sophisticated in that they explore more non-anomaly signals to improve performance in recent years.

Upon examining the language used in recent SEC filings, we find that severance agreements are often paid whether or not the CEO leaves the firm due to a change in control. We hypothesize that since severance agreements compensate CEOs in the event of termination, CEOs with these agreements will have an incentive to increase firm risk and decrease effort. Consistent with this hypothesis, we document a significant positive relation between the use of severance agreements and the cost of debt (10% higher yield spreads for firms with severance agreements). The results hold after controlling for the probability of takeover, the probability of CEO turnover, and whether the firm has investment or non-investment grade debt. These results can be explained by an increase in firm risk and a higher likelihood of CEO turnover associated with severance agreements. Overall, the evidence suggests that the effects of severance agreements extend beyond takeovers, and that these additional implications are primarily negative for the firm and for debt holders in particular.

Existing literature has documented a number of cross-sectional stock return predictive patterns or the so-called anomalies. This paper examines two important issues: are the anomalies pervasive in different stock samples and do factor models provide valid inferences on anomalous returns? First, by shrinking the stock space along the dimension of predictive variable, we show that the BM and net stock issues effects are pervasive among different stock samples, whereas the size, momentum, and illiquidity effects are driven mainly by stocks on the long side, and the idiosyncratic olatility, accrual, capital expenditure, and sales growth effects mainly by stocks on the short side. Second, we provide evidence that commonly used factor models have limited explanatory power of stock returns and thus may offer invalid inference on abnormal returns. Restricting to the stock sample where the 4-factor model adequately explains the size, BM and momentum effects, we show that only the idiosyncratic volatility, accrual, and net stock issues effects have significant anomalous returns.

This paper estimates the sensitivity of fund flows to the expense ratio in the mutual fund industry using Berry (1994)'s discrete choice model of product differentiation. Based on logit and nested logit estimations with instrumental variables, I find the sensitivity of fund flows to the expense ratio in growth and index fund sectors to be significantly greater than those of previous studies. I also show that expense ratio competition in the mutual fund industry has intensified over time. These findings suggest that accounting for expense ratio endogeneity leads to a substantial improvement in the estimation of the impact of expense ratios on fund flows.