Knowledge that Transforms

Abstract We show that the decision to go public is influenced by spatial variation in the supply of equity financing. We measure the amount of capital of equity investors in each U.S. region and document that the incidence of initial public offerings (IPOs) by intangible-intensive resident firms increases significantly when regional equity capital is abundant. Using a novel empirical strategy and hand-collected data on out-of-state pension flows, we confirm that our findings are not due to underlying regional factors.

Abstract We develop a capital structure model in which firms differ in their ability to adjust output prices. Firms with inflexible prices are more exposed to nominal and real shocks, leading to lower leverage, shorter debt maturity, higher cost of debt, tighter covenants, and greater precautionary cash holdings. Shocks to cash flow volatility raise the cost of debt more for firms with less pricing flexibility. We empirically confirm these predictions: Firms with inflexible prices experience significantly larger increases in credit spreads following monetary policy shocks and the 2008 Lehman Brothers bankruptcy, especially when they face high preshock rollover risk.

Abstract We exploit U.S. states’ staggered adoption of Universal Demand (UD) laws to study how the risk of shareholder lawsuits affects insider trading. UD laws, which make it harder for shareholders to bring derivative lawsuits against directors and officers, lead to more profitable insider trades, especially sales. This effect is stronger among smaller firms and firms with lower institutional monitoring. After UD laws, the timing of insiders’ trades also appears more opportunistic and riskier, for example, sales increase before negative earnings surprises. Overall, our study offers clean evidence that the threat of shareholder litigation deters opportunistic insider trading.

Abstract We exploit heterogeneity in decreasing returns to scale (DRS) parameters across mutual funds to analyze the importance of scalability for investors’ capital allocation decisions. We find strong evidence that steeper DRS attenuate flow sensitivity to performance. We calibrate a rational model of active fund management and show that a large fraction of cross-sectional variation in assets-under-management is due to investors anticipating the effects of scale on return performance. We conclude that DRS play a key role in achieving equilibrium in the intermediated investment management market.

Abstract This article studies the making of return predictability among economically linked firms. I characterize an asymmetric cross-firm tug-of-war: i) High peer overnight returns are followed by elevated overnight returns for focal stocks, which fully reverse during intraday, and ii) high peer intraday returns are followed by high intraday returns but minor overnight price reactions. This pattern aligns with the story that individuals’ persistent trading on salient information distorts opening prices, while slow-moving arbitrage by professional investors gradually corrects mispricing. Mutual fund and hedge fund flows exhibit distinct associations with the tug-of-war, supporting the hypothesis that heterogeneous demand drives the return predictability.

Abstract We report evidence consistent with institutional investors using industry-level information that they obtain from their investments in venture capital (VC) funds to earn excess returns in publicly traded stocks. We use court rulings regarding the Freedom of Information Act as an exogenous shock affecting the information flow between VC funds and institutional investors to show that the excess returns are explained by information received via this channel. Thus, institutional investors serve as conduits of information from private to public markets. In the process, institutional investors earn higher returns from their VC investments than implied by the cash flows received therefrom.

Abstract We characterize optimal mutual fund risk-taking strategies in competitive multi-period tournaments among multiple players. With multiple competitors, every player begins by taking maximum risk. In the final period, all players continue to take maximum risk except the leading player, who employs a “lock-in” strategy that depends on the magnitude of the lead. Our theory predicts the leader should strategically lock in advantage by reducing risk-taking if and only if the lead is great enough, rather than an increase in risk-taking by the trailers to try to catch up. Empirical evidence from style-adjusted mutual fund tournaments provides strong and robust support.

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An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.