Knowledge that Transforms

The Society for Financial Society (SFS) is a global, nonprofit academic society in finance. It owns and runs three academic journals: (1) the Review of Asset Pricing Studies, (2) the Review of Corporate Finance Studies, and (3) the Review of Financial Studies. It also organizes two annual academic conferences: (1) the SFS Cavalcade Asia-Pacific and (2) the SFS Cavalcade North America. It also runs several smaller, specialized conferences and financially supports and co-sponsors other independent conferences. Its governing board is the SFS Council. This annual report provides an overview of SFS activities during 2019-2020, including all three journals, both Cavalcade conferences, and the SFS financial and policy report. The purpose of this annual report is to share this information more broadly with SFS members and friends and to create a permanent record for the long-run (i.e., institutional memory).

Abstract We develop a benchmark model to study the equilibrium consequences of indexing in a standard rational expectations setting. Individuals incur costs to participate in financial markets, and these costs are lower for individuals who restrict themselves to indexing. A decline in indexing costs directly increases the prevalence of indexing, thereby reducing the price efficiency of the index and augmenting relative price efficiency. In equilibrium, these changes in price efficiency in turn further increase indexing, and raise the welfare of uninformed traders. For well-informed traders, the share of trading gains stemming from market timing increases relative to stock selection trades.

Abstract We document a hump-shaped relation between corporate cash and both real and nominal interest rates in both aggregate and firm-level data. We rationalize this result in a model where firms finance investment with cash and risky debt. The risky rate rises endogenously with the risk-free rate, spurring precautionary cash demand. Simultaneously, foregone interest lowers cash demand. The first mechanism dominates at low interest rates, and the second at high interest rates. The model matches several data moments and reproduces a nonmonotonic cash–interest relation. This nonmonotonicity implies that interest rates are unlikely to be behind the recent rise in corporate cash.

Abstract We study the personal credit market using unique individual-level data covering fintech and traditional lenders. We show that fintech lenders acquire market share by lending first to higher-risk borrowers and then to safer borrowers, and rely mainly on hard information to make credit decisions. Fintech borrowers are significantly more likely to default than neighbor individuals with the same characteristics borrowing from traditional financial institutions. Furthermore, they tend to experience a short-lived reduction in the cost of credit, because their indebtedness increases more than non-fintech borrowers after loan origination. However, fintech lenders’ pricing strategies are likely to take this into account.

Abstract I examine the effect of house price declines on voter participation using a novel person-level panel data set. Contrary to what the “angry voter hypothesis” predicts, I find that a 10% decline in local house prices decreases the participation rate of the average mortgaged homeowner by 1.6 percentage points. Consistent with a financial distress channel, house price declines have no effects on renters and particularly severe effects on highly leveraged households. My findings are consistent with the existence of a feedback loop between financial distress and inequality operating through voter participation.

Abstract To dampen trading frenzy in the stock market, the Chinese government tripled the stamp tax for stock trading on May 30, 2007. The greatly increased trading cost triggered a migration of the trading frenzy from the stock market to the warrant market, which was not subject to the stamp tax. This migration exacerbated a price bubble in the warrant market. Our analysis of investor account data uncovers not only large inflows of new investors to the warrant market but also greatly intensified trading by existing warrant investors. This episode exemplifies the so-called “whack-a-mole” game in financial regulations.

Abstract We propose an incentive-based theory of how a savings glut produces financial fragility. Originators must be incentivized to produce high-quality assets. Assets are distributed to informed intermediaries or uninformed investors. A savings glut reduces origination incentives by compressing spreads between the prices paid for high-quality assets by informed intermediaries and prices paid by uninformed investors for generic assets. The narrowing of spreads relaxes intermediaries’ borrowing constraints, resulting in higher leverage. This generates financial fragility: intermediaries are more likely to become insolvent if unforeseen losses arise. Our model offers a coherent narrative of the run-up to the Global Financial Crisis.

Abstract Using contract-level supervisory data, we show that dollar forward sales by non-U.S. banks that are initiated at the end of a quarter and mature shortly after it concludes trade at higher prices and higher volumes. These effects are driven by banks with large net on-balance-sheet dollar assets that they can hedge around quarter ends by selling dollars forward (increasing off-balance-sheet short positions), which suggests regulatory arbitrage to reduce capital charges for open foreign exchange (FX) exposure. Our results indicate that demand effects related to banks’ management of FX exposure are an important driver of deviations from covered interest rate parity.

Abstract Rank-and-file employees are becoming increasingly critical for many firms, yet we know little about how their employment dynamics matter for stock prices. We analyze new data from the individual CV’s of public company employees and find that rank-and-file labor flows can be used to predict abnormal stock returns. Accounting data and survey evidence indicate that workers’ labor market decisions reflect information about future corporate earnings. Investors, however, do not appear to fully incorporate this information into their earnings expectations. The findings support the hypothesis that rank-and-file employees’ entry and exit decisions reveal valuable insights into their employers’ future stock performance.