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We propose target date funds modified to exploit stock return predictability driven by the variance risk premium. The portfolio rule of these tactical target date funds (TTDFs) is extremely simplified relative to the optimal one, making it easy to implement and to communicate to investors. We show that saving for retirement in TTDFs generates economically large welfare gains, even after we introduce turnover restrictions and transaction costs, and after taking into account parameter uncertainty. This predictability also appears to be uncorrelated with individual household risk, suggesting that households are in a prime position to exploit it. This paper was accepted by Tomasz Piskorski, finance.

We examine international equity allocations at the fund level and show how excess foreign returns influence portfolio rebalancing, capital flows, and currencies. Our equilibrium model of incomplete foreign exchange (FX) risk trading where exchange rate risk partially segments international equity markets is consistent with the observed dynamics of equity returns, exchange rates, and fund-level capital flows. We document that rebalancing is more intense under higher FX volatility and find heterogeneous rebalancing behavior across different fund characteristics. A granular instrumental variable approach identifies a positive currency supply elasticity. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

The paper focuses on an innovative bank-intermediated trade finance contract, which we call dynamic trade finance (DTF, under which banks dynamically adjust loan interest rates as an order passes through different steps in the trade process). We examine the value of DTF, the impact of process uncertainties and the associated information frictions on this value, and the strategic interaction between DTF and FinTech. As more than 30% of global trade involves bankintermediated trade finance (Bank for International Settlements 2014), examining contract innovation in trade finance (DTF) and its strategic interaction with FinTech is of practical importance. Also, analyzing trade finance in the presence of process dynamics and information frictions complements the existing academic literature. We construct a parsimonious model of a supply chain process consisting of two steps. The duration of each step is uncertain, and the process may fail at either step. Information delay may also occur when verifying that the requisites for passing a step have been satisfied. The seller (borrower) borrows from a bank to finance this 2-step process either through uniform financing (the interest rate remains constant throughout the process) or DTF (the interest rates are adjusted according to a pre-committed schedule as the process passes each step). While lending, the bank faces regulatory capital requirement (the bank is required to hold capital reserve when issuing risky loans) or information asymmetry (the borrower possesses more accurate information about the trade process than the bank). The value of DTF lies in its ability of reducing transactional deadweight loss (under regulatory capital requirement) and screening (separate high-quality borrowers from the low-quality ones under information asymmetry). This value increases as the trade process becomes more reliable or lengthier, yet its ability of screening is stronger when the process is less reliable. The severity of information delay hurts the value of DTF convexly. Numerical results based on calibrated parameters suggest that DTF could lower the borrower’s financing cost substantially. Finally, FinTech that expedites information transmission and verification and enables automatic execution complements DTF, and those that segment customers more efficiently could substitute DTF. Our results shed light on how the underlying trade process dynamics and the type of information frictions involved affect the optimal deployment of contract innovations (DTF) and FinTech in trade finance.

We argue that the pervasive practice of evaluating portfolio managers relative to a benchmark has real effects. Benchmarking generates additional, inelastic demand for assets inside the benchmark. This leads to a “benchmark inclusion subsidy:” a firm inside the benchmark values an investment project more than the one outside. The same wedge arises for valuing M&A, spinoffs, and IPOs. This overturns the proposition that an investment’s value is independent of the entity considering it. We describe the characteristics that determine the subsidy, quantify its size (which could be large), and identify empirical work supporting our model’s predictions.

We present a simple, linear asset pricing model of the cross section of Mortgage-Backed Security (MBS) returns. MBS earn risk premia as compensation for their exposure to prepayment risk. We measure prepayment risk and estimate security risk loadings using real data on prepayment forecasts vs. realizations. Estimated loadings on prepayment risk are monotonically decreasing in securities’ coupons relative to the par coupon, as predicted by the fundamental effect of prepayment on the value of bonds trading above and below par. Prepayment risks appear to be priced by specialized MBS investors. In particular, we find convincing evidence that prepayment risk prices change sign over time with the sign of a representative MBS investor’s exposure to prepayment risk.

Regulatory support for transmission investment by private investors follows a complex process of dialogue, information sharing, commitments, and incentives. Whilst this process has attracted substantial research, the formulation of efficient solutions still remains an open question and this has become more complex with the emergence of new intermittent and battery-storage resources. We propose an optimal incentive solution in which the private transmission company earns congestion rents and an incentive fee, set by agreement with the regulator. This fee is set in the context of assessing the impact of current and future generation resources (conventional, intermittent, and batteries) on the congestion rents. The welfare-optimizing solution follows from a mixed integer, nonlinear, bilevel optimization problem, which is computationally challenging. We re-cast the problem for tractability and devise a disjunctive-based decomposition algorithm. Its performance has been successfully demonstrated on two standard IEEE case studies.

This study investigates how companies adjusted their investments in key strategic resources—i.e., their workforce, capital expenditures, R&D, and CSR—in response to the sharp increase in the cost of credit (the “credit crunch”) during the financial crisis of 2007-2009. We compare companies whose long-term debt matured shortly before versus after the credit crunch to obtain (quasi-)random variation in the extent to which companies were hit by the higher borrowing costs. We find that companies that were adversely affected followed a “two-pronged” approach of curtailing their workforce and capital expenditures, while maintaining their investments in R&D and CSR. We further document that firms that followed this two-pronged approach performed better post-crisis.

Relying on gender-role congruity theory, this paper investigates the relationship between the gender of the top management teams of venture philanthropy firms and their business risk-taking orientation. The research also assesses if and how experience moderates this relationship. Using a combination of survey data to capture the venture philanthropy firm’s risk orientation and biographical data to identify managers’ gender and experience, it finds that only gender affects business risk-orientation in these firms. Surprisingly, this is the opposite direction than expected, whereby teams with a higher proportion of women have a higher risk-taking profile. This suggests the need to revise the applicability of gender role congruity theory, the existence of a gender-bind dilemma, and the relevance of context in venture philanthropy.

This study provides descriptive evidence on how firms respond to activist short seller reports and how these responses are associated with outcomes for the targeted firms. We show that the frequency of these reports has grown substantially in recent years. Although we find that firms respond only 31% of the time, this rate increases substantially when the report is accompanied by significantly negative abnormal returns and when the report contains new evidence. Not responding is associated with a less negative stock price response at report release and fewer adverse outcomes. Firms that launch internal investigations following the report release have significantly higher subsequent rates of stock exchange delisting and SEC enforcement actions, and lower rates of being acquired. Overall, our results highlight the impact of activist short sellers on target firms and that firm responses are associated with material outcomes.

Using the first reported case of COVID-19 in a given U.S. county as the event day, we find that firms headquartered in an affected county experience, on average, a 27-bps lower return in the 10-day post-event window. This negative effect nearly doubles in magnitude for firms in counties with a higher infection rate (−50 bps). We test a number of transmission channels. Firms belonging to labor-intensive industries and those located in counties with a large mobility decline have worse stock performance. Firms sensitive to COVID-19-induced uncertainty also exhibit more negative returns. Finally, more negative stock returns are associated with downward revisions in earnings forecasts.

Are female founders penalized when raising funds for their ventures based on industry served? Across an observational study conducted on ventures seeking funding (*N*=392) and an experimental study conducted on investors allocating venture funding (*N*=130), we find significant evidence for a “lack of fit” effect: First, we document that female-led ventures receive significantly less funding at significantly lower valuations while retaining significantly smaller equity amounts than male-led ventures. Next, we demonstrate that female founders of ventures catering to male-dominated industries receive significantly less funding at significantly lower valuations with significantly reduced equity retention than female founders of ventures catering to female-dominated industries, while male founders attain similar funding outcomes regardless of the gender dominance of the industry to which they cater. Lastly, we confirm this is because investors perceive significantly lower degrees of fit between founding CEO and venture for female-led ventures catering to male- as opposed to female-dominated industries (with no fit differences for male-led ventures across industries). Degree of investor sophistication emerges as a potential attenuating factor, appearing to help reduce gender bias from perceived lack of fit.

We examine the economic determinants and consequences associated with the inclusion of covenants with similar levels of restrictiveness in bond contracts. Using a unique Moody’s bond covenant dataset, we develop measures that capture similarity in the restrictiveness of bond covenants relative to previously issued peer bonds. We document that the demand for similarity by issuers, their advisors and bond investors follows the predictions of sociological and economic theories. Further, consistent with similarity in covenants reducing bond investors’ information acquisition and processing costs, we show that bonds with more similar covenant restrictiveness receive lower yields at issuance. These bonds are also more likely to be held by long-term bond investors, such as insurance companies, and are characterized by greater liquidity in the secondary market, providing a partial explanation for the lower bond yields. Our results highlight the benefits of covenant similarity and suggest that the use of covenants with similar restrictiveness levels brings information acquisition and processing cost savings that may be larger than the monitoring benefits provided by covenants with more tailored features.

Using a novel pairwise measure of firms’ acquisition of rivals’ disclosures, we show that investment opportunities drive interfirm information flows. We find that these flows predict subsequent mergers and acquisitions as well as how and how much firms invest, relative to rivals. Moreover, firms’ use of rivals’ information often hinges on the similarities of their products. Our results suggest that rivals’ public information, far from being unusable, helps facilitate investment and product decisions, including acquisitions and product differentiation strategies. The findings also support a learning mechanism that could partly underlie the emerging literature on peer investment effects.

Extensive research has explored the style exposures of actively managed equity funds. We conducted an exhaustive set of return-based and holdings-based analyses to understand actively managed credit funds. We found that credit long–short managers tend to have high passive exposure to the credit risk premium. In contrast, we found that long-only managers that focus on high-yield credits provide less exposure to the credit risk premium than do their respective benchmarks. For both credit hedge funds and long-only credit mutual funds, we found that neither has economically meaningful exposures to well-compensated systematic factors.

This study presents a field experiment we conducted in which media articles for a random sample of firms with earnings announcements are promoted to a one percent subset of Yahoo Finance users. The promoted firms have similar fundamental and earnings-news characteristics as control firms, yet we find that promoted firms have higher abnormal returns on the day of the earnings announcement, and some evidence of lower bid-ask spreads. Moreover, these results are more pronounced for less visible firms, negative earnings news, and on days with fewer promoted firms. We do not find evidence of significant increases in trading volume, or of information acquisition by users subject to the promotion. These findings suggest that investor attention affects the pricing of earnings and that retail investors buy stocks that catch their attention, in a setting where attention is randomly assigned.

Empirical evidence suggests that investor protection significantly affects ownership concentration and asset prices. We develop a dynamic asset pricing model to address the empirical regularities and uncover some of the underlying mechanisms at play. Our model features a controlling shareholder that endogenously accumulates control over a firm, and diverts a fraction of its output. Better investor protection decreases stock holdings of controlling shareholders, increases stock mean returns, and increases stock return volatilities when ownership concentration is sufficiently high, consistent with the related empirical evidence. The model also predicts that better protection increases interest rates and decreases the controlling shareholder’s leverage.Received August 14, 2017; editorial decision January 15, 2019 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Prior studies on the relation between corporate taxes and future macroeconomic growth present contradictory evidence. We argue this mixed evidence is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax exemptions, tax deductions, tax enforcement and firms’ tax planning. We propose an alternative tax rate measure that aggregates cash effective tax rates of listed firms, which reflect not only statutory tax rates, but also other features of the tax code, enforcement, and firms' tax planning. We find a strong robust negative relation between country-level effective tax rates and future macroeconomic growth.

We examine whether there is a correlation between personal wealth interests of politicians and their decisions to intervene in the economy. We use the setting of the government’s support of financial institutions under the 2008 Emergency Economic Stabilization Act (ESSA). We find that the personal wealth interests of politicians are positively associated with voting in favour of the EESA.

This dissertation consists of three essays which examine topics in corporate information environment, voluntary disclosure, and the role of geography in shaping corporate policies. The first essay investigates the relation between summary disclosures and retail investor decisions. Using a novel disclosure setting of mutual fund factsheets, which convey short-form summaries of fund performance and risk, I explore voluntary disclosure of mutual funds and its relation with fund flows. I find evidence that flows are more sensitive to performance and risk metrics when disseminated, and therefore made salient, through factsheets than when they are not. Consistent with individual investors with limited attention driving the results, the effect is stronger for flows pertaining to retail share classes. The findings might be of interest to regulators and standard setters as they explore alternative ways of simplifying the communication of relevant information to investors. In the second essay, we examine the role of geography in shaping competitive environment of a firm. As such, we develop a time-varying firm-specific measure of localized competition faced by a given firm in a given year based on firms' disclosures about economically relevant U.S. states in their 10-K filings. We define the competitive effect experienced at firm-level as a combination of the competitive effects of each geographically segmented individual localized market that a firm operates given geographically segmented nature of U.S. market. Then, we validate this measure using major customer and U.S. Census data and document its association with the rate of mean reversion of profitability. Using this novel measure, we show that higher level of localized competition is associated with higher levels of innovation and higher levels of cash and is incremental to alternative measures of product market competition. Further, the economic relevance of the localized competition measure is greater in industries with high geographic segmentation and for firms which are geographically concentrated. The measure also predicts earnings volatility and earnings levels. Overall, our findings suggest that localized competition is one channel by which geography matters for firm?s fundamental performance. Finally, in the last essay, we analyse the way in which corporate investment decisions differ with respect to foreign versus domestic markets. Adapting the design of Biddle et al. (2009) we find evidence that a significant portion of MNCs tend to over-invest in the US while under-investing abroad, consistent with the notion of home bias. Further analysis reveals that the likelihood of an MNC exhibiting home-bias declines when boards are more geographically diverse and when they invest in foreign markets with high quality financial reporting. Preliminary evidence indicates that investors recognize the home bias inherent in MNCs investment decisions. Finally, we document that MNCs tend to cut foreign investment before domestic investment, even when the economics would suggest otherwise, with these firms subsequently experiencing significantly poorer future performance. Taken together our results suggest that managers exhibit a home bias in their investment decisions which may destroy value.

International audience; We analyze information production incentives for traders in financial markets, when firms condition investment decisions on information revealed through stock prices. We show that traders’ private value of information about a firm’s investment project increases with the ex ante likelihood the project will be undertaken. This generates an informational amplification effect of shocks to firm value. Information production by traders may exhibit strategic complementarities for projects that would not be undertaken in the absence of positive news from the stock market. A small decline in fundamentals can lead to a market breakdown where information production ceases, and investment and firm value collapse. Our theory sheds light on how productivity shocks are amplified over the business cycle.

This paper evaluates the economic benefits to over-installing turbines on capacity-constrained wind farm sites in order to capture more energy at low wind speeds. Although this implies curtailment at high wind speeds, we show that over installing generation facilities can increase returns to investors and reduce system costs. A detailed model-based analysis is developed using British data, with variations in the range of over installation, the renewable policy support systems (fixed feed-in tariffs or green certificate premia to wholesale energy prices) and the extent of replacement of fossil generation in the technology mix with wind. In the cases of premia to market prices, we use agent-based, computational learning and risk simulation to model market prices. Not only is over installation beneficial under fixed feed-in tariffs, but is more so under premia to market prices and increasingly so as wind replaces fossil generation.

Optimal government bond supply is examined under asymmetric information and safe asset scarcity. Corporations issue junk debt when demand for safe debt is high since uninformed investors then migrate to risky overheated debt markets. Uninformed demand stimulates informed speculation, driving debt prices toward fundamentals, encouraging pooling at high leverage. As borrower of first resort, government can issue bonds, siphoning off uninformed demand for risky corporate debt, reducing wasteful informed speculation. Government bonds eliminate pooling at high leverage or improve risk sharing in such equilibria. Optimal government bond supply is increasing in demand for safe assets and non-monotonic in marginal Q.

The decarbonization of electricity generation presents policy makers in many countries with the delicate task of balancing initiatives for technological change with a commitment to market liberalization. Despite the theoretical attractions, it has become doubtful whether carbon markets by themselves can offer the desired solution. We address this question through an integrated modeling framework, stylized for the Great Britain (GB) power market within the EU ETS, which includes three distinct components:\ud \ud (a) long-term least-cost capacity planning, similar in functionality to many used\ud in policy analysis, but innovative in providing the endogenous calculation of\ud carbon prices;\ud \ud (b) short-term price risk analysis producing hourly dispatch and pricing outputs, which are used to test the annual financial performance metrics implied by the longer-term investments; and\ud \ud (c) agent-based computational learning to derive pricing behavior in imperfect markets.\ud \ud The results indicate that the risk/return profile of electricity markets may deteriorate substantially as a result of decarbonization, reducing the propensity of companies to invest in the absence of increased government support and/or more beneficial market circumstances. If allowed, markets may adjust by deferring investment until conditions improve, consolidating to increase market power, or operating in a tighter market with reduced spare capacity. To the extent that each of these "market-led" solutions may be politically unpalatable, policy design will need to sustain a delicate regulatory regime, moderating the possible increased market power of companies while maintaining low-carbon subsidies for longer than expected. This paper considers some of the modeling implications for this compromise.

This thesis examines corporate investment decisions and financing choices of firms. It combines an introductory chapter, two essays and a concluding chapter. In the first essay, I investigate the impact of uncertainty on firm-level capital investment and examine whether this effect depends on the degree of competition that firms face. I exploit a unique empirical setting to construct a time-varying uncertainty measure that is exogenous to economic conditions and firm behavior. I show that higher uncertainty results in a decrease in investment for firms in more concentrated industries. The effect is stronger for firms that face higher costs associated with reversing investments. This finding is in line with irreversible investment models that predict a negative relationship between uncertainty and investment. In contrast, firms in highly competitive industries increase investment in response to higher uncertainty, supporting the argument that competition can erode the option value of deferring investment. In that case, other industry and firm characteristics such as operational flexibility can result in increased investment in response to heightened uncertainty. I also find economically significant effects of uncertainty on other types of investment such as R&D spending, advertising and investment in human capital. Collectively, my results illustrate that the degree of competition plays an important role in the link between uncertainty and investment. In the second essay, I examine the benefits foreign firms gain from cross-listing shares on a major U.S. exchange. I study sovereign credit rating changes in 49 countries to investigate whether secondary listings in the U.S. are associated with improvements in a firm's information environment. Controlling for systematic differences in firm characteristics between cross-listed and non-cross-listed firms, I document that firms without a cross-listing experience significantly negative abnormal returns around negative sovereign rating events, while foreign firms with secondary listings on major U.S. exchanges on average experience no significant surprise reaction. I show that these events are value-relevant for cross-listed firms and that the difference in abnormal return behavior is not a result of unobservable disparities in firm characteristics between cross-listed firms and firms without a secondary listing. I further examine heterogeneity in abnormal returns within the group of cross-listed firms and provide evidence for a link between trading activity in the U.S. market and abnormal returns of cross-listed firms around sovereign rating announcements. Several proxies for the amount of (private) information incorporated in U.S. share prices such as trading volume and price nonsynchronicity are determinants of abnormal return behavior for cross-listed firms around sovereign rating announcements. Ownership of cross-listed U.S. shares by more informed investors such as institutional investors similarly reduces price sensitivity to these events for cross-listed firms. In addition, I examine the lead-lag relationship between returns of cross-listed U.S. shares and the underlying home market shares and document information spillovers from the U.S. to the home market shares in the period prior to a sovereign rating announcement. These findings suggest that information revealed by credit rating agencies is for the most part already priced for cross-listed firms. Thus, they benefit from more informative stock prices as a result of informed trading on U.S. exchanges. These results provide an information based rather than corporate governance related explanation for the observed value premium of cross-listed firms.

This paper examines the effect of accounting conservatism on firm-level investment during the 2007–2008 global financial crisis. Using a differences-in-differences design, we find that firms with less conservative financial reporting experienced a sharper decline in investment activity following the onset of the crisis compared to firms with more conservative financial reporting. This relation is stronger for firms that were financially constrained, faced greater external financing needs, or had higher information asymmetry. We also find that more conservative firms experienced lower declines in both debt raising activity and stock performance. The evidence suggests that accounting conservatism reduces underinvestment in the presence of information frictions

This dissertation examines how diversification in firms and banks affects the efficiency of capital allocation. In the first chapter, I focus on multinational firms and geographical diversification. I show that there are important differences between industrial and geographical diversification with associated efficiency effects. Using a unique sample of 212 UK multinational firms and 4,676 subsidiaries, I show that multinational firms attract, on average, a global diversification premium of approximately 16% compared with local non-multinational firms, and that on average better corporate governance practices explain roughly one-third of the value premium. The results suggest that multinational firms are compensated for exporting good corporate governance through global diversification. In the second chapter, I examine how banks��� ability to diversify affects the efficiency of allocation in the real economy. I document that the deregulation of bank branching restrictions in the United States triggered a reallocation across sectors. In particular, the reallocation can be explained by mean-variance portfolio theory applied to sectoral returns: the realized sectoral allocation of output at the state level converges towards this benchmark allocation, at a rate that is hastened following the deregulation. The result is particularly strong in sectors characterized by young, small and external finance dependent firms, and for states that have a larger share of such sectors. The results suggest that improving bank access to branching affects sectoral specialization (or diversification) of output. The final chapter is a theoretical investigation into the allocation of capital within a multidivisional firm. I show that ex-post efficient capital allocation in an internal capital market may destroy incentives, resulting in value destruction. Specifically, even where agents are assumed to behave efficiently, competition for resources may decrease efficiency where divisions are sub-optimally grouped together. The implication is that firms that exhibit a diversification discount may not be inefficient in the traditional sense, but that even when the firm is being run optimally a diversification discount persists.

This thesis analyzes how firms make capital strucure and corporate investment decisions when there are imperfections in firms' financing activities. This thesis consists of two studies. In Chapter 2, I develop a model nesting two existing theories for why non-fundamental stock price movements affect corporate investment. In the financing-constraint theory. a non-fundamental increase in stock price relaxes financing constraints, thereby increasing investment. In the market-driven theory, managers use the current stock price to compute the cost of capital. Therefore, a non-fundamental increase in stock price raises investment via discount factors. I test the model on a panel of US firms. I find support for the financing-constraint theory but none fror the inarket-driven theory. Controlling for the endogeneity of financing constraints to non-fnndarnental stock price movements is crucial: spurious support for the market-driven theory obtains, absent this control but disappears once I add it. Finally, I expect shareholders with long (short) horizons to favor investment as in the financing-constraint (market-driven) theory. Consistent with this. I find partial support for the market-driven theory for firms in which shareholders have short horizons. In Chapter 3, a central tradeoff in the efficiency of a bankruptcy code is considered. This tradeoff concerns the possibility of too many continuations, if the code is equityholder-friendly versus too many liquidations if the code is creditor-friendly. We provide evidence that firm-level leverage is affected by this tradeoff, as measured by the anticipated deadweight cast from liquidating the firm under the applicable bankruptcy code. In particular. we relate variation in firm leverage to time-series and cross-country variation in bankruptcy codes. Both the time-series and the cross-sectional evidence lend support to the hypothesis that firms use capital Structure as am earns to unwind the inefficiency of bankruptcy codes.

This thesis consists of three studies examining the interaction between market participant behaviour and equity market dynamics. Chapter 2 examines the relationship between sell-side analysts and investors in the presence of repeated interaction and trade generation incentives. I find that optimistic analysts generate more trade for their brokerage firms, as do high reputation analysts. Sell-side analysts face a conflict between telling the truth to build their reputation, and misleading investors to generate short-term increases in commission. When the investor is unsure of the analyst's type and when short sales constraints are present, I show using a simple model that equilibrium forecast optimism can exist, even when investment-banking affiliations are removed. Chapter 3 examines the behaviour of individual investors. Behavioural models generally assume that investment decisions of irrational investors aggregate in a systematic way. Using a unique dataset of individual investor trades I find aggregate individual investor trades exhibit strong systematic patterns, including negative feedback trading and substantial persistence. In addition the trades of a large number of independent retail brokerage firms are highly contemporaneously correlated. However I do not find that the net trades of retail investors consistently predict future returns in a negative fashion. While small investors do act in a highly systematic fashion, their actions may not, at least in the short run, be classed as irrational. Chapter 4 examines the behaviour of individual and institutional investors to assess whether there is evidence of noise trader risk in a broad equity market context. I find that increases in institutional participation are associated with future excess volatility and excess correlations between stocks. I also find evidence of a significant priced noise trader factor in returns. I conclude that there is evidence of noise trader risk, however this risk is not associated with individual investors, but instead with institutional investors. I argue that institutional frictions are a much more plausible source of noise trader risk than is individual investor sentiment.