Knowledge that Transforms

The Society for Financial Studies (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. SFS holds an annual membership meeting in May every year. At that meeting the SFS President, Executive Editors, Cavalcade Chair, and Secretary-Treasurer report on SFS activities. This year, for the first time, we have written up those reports and integrated them into this annual report of the Society for Financial Studies, which will be published in all three SFS journals. The reasons for doing this are to share this information more broadly with SFS members and friends and to create a permanent record for the long run (that is, institutional memory).

This paper finds noninterest income is positively correlated with the total systemic risk for U.S. banks. Decomposing total systemic risk into three components, we find that noninterest income is positively related to a bank’s tail risk, positively related to a bank’s interconnectedness risk, and an insignificantly related to a bank’s exposure to macroeconomic and finance factors. We also find that noninterest income is more volatile and negatively related to interest income. Finally, we find trading and other noninterest income to be positively correlated with systemic risk. Other noninterest income, compared with trading income, has a slightly larger economic impact. (JEL G01, G18, G20, G21, G32, G38) Received October 31, 2019; editorial decision February 3, 2020 by Editor Andrew Ellul.

The policy response to COVID-19 includes the provision of credit guarantees to firms, a provision that may generate zombie lending. According to the recent literature, the relative performance of healthy firms deteriorates as the fraction of zombies increases. We argue that this literature faces a serious identification problem, because firm performance is often used to define zombies (sometimes implicitly). We show that, under general conditions for the distribution of firm performance, the correlation between healthy firm performance and zombies is a mechanical consequence of an increase in the fraction of zombies with no causal meaning.

Market reactions to the 2019 novel coronavirus disease (COVID-19) provide new insights into how real shocks and financial policies drive firm value. Initially, internationally oriented firms, especially those more exposed to trade with China, underperformed. As the virus spread to Europe and the United States, corporate debt and cash holdings emerged as important value drivers, relevant even after the Fed intervened in the bond market. The content and tone of conference calls mirror this development over time. Overall, the results illustrate how anticipated real effects from the health crisis, a rare disaster, were amplified through financial channels. (JEL G01, G12, G14, G32, F14) Received: May 27, 2020; editorial decision June 16, 2020 by Editor Andrew Ellul.

We analyze how 14, 000 top U.S. executives exercise their stock options. Factors suggested by existing theories have low or moderate explanatory power. Variables that model executives’ motive to diversify fare particularly poorly, whereas variables that capture reference-dependent preference, such as past highs and lows of stock prices, perform better. By contrast, characteristics of option portfolios are of first-order importance and suggest that managers have target ownership levels. Institutional features like vesting restrictions or blackout periods also have a first-order impact. We conclude that executives’ main motivations for exercising stock options early seem to be outside the scope of extant models. (JEL G30, M52)Received August 20, 2018; editorial decision December 28, 2019 by Editor Andrew Ellul.

I investigate whether restrictive loan covenants disrupt or improve firms’ operating performance. Using an instrumental variables approach to address the endogenous relationship between covenant strictness and firms’ efficiency, I find that stricter loan covenants lead to an increase in profitability and firm value even when firms do not violate a covenant. Stricter covenants improve performance only in firms with managerial agency conflicts: those without large shareholder ownership, facing softer competition in their product market, or with weaker shareholder rights. The evidence suggests that by designing stringent contracts ex ante, creditors create positive externalities in poorly governed firms through managerial incentives. Received December 7, 2018; editorial decision May 31, 2019 by Editor Uday Rajan.

We study tax and nontax incentives for corporate inversions in a hand-collected data set of 691 inversions out of 11 home countries into 45 host destinations over the 1996–2013 period. Even though lower tax rates generally attract inversions, only 2 of 5 firms invert into tax havens, and two-thirds of firms invert into host destinations with lower statutory tax rates than those faced at home. Moreover, firms invert to geographically close destinations with similar governance standards. Using staggered country-pair-level policy changes as experiments, we find that host-country governance may explain why not all firms invert. Received December 6, 2018; Editorial decision August 12, 2019 by Editor Andrew Ellul.

We find that bond issues have substantially increased since the onset of the COVID-19 crisis in calendar week 12 (March 16-20) for bonds rated A or higher, but surprisingly also for bonds rated BBB or lower. In contrast to existing evidence on bond maturities in economic downturns, we document that maturities exceed those of bonds issued before by the same firms as well as the average maturities during normal times. Determinants of corporate bond spreads substantially differ between COVID-19 and normal times. Most prominently, asset tangibility has a highly significant negative effect on spreads during normal times. During COVID-19, this is reversed, especially in industries heavily affected by lockdown measures, reflecting the inflexibility associated with fixed assets. A different picture emerges for equity issues, which slowed considerably during the first 4 weeks of the pandemic, before accelerating again. Capital raised during COVID-19 via equity issues is approximately 5% of capital raised via bond issues.

In March 2020, banks faced the largest increase in liquidity demands ever observed. Firms drew funds on a massive scale from preexisting credit lines in anticipation of cash flow and financial disruptions stemming from the advent of the COVID-19 crisis. The increase in liquidity demands was concentrated at the largest banks, who serve the largest firms. Precrisis financial condition did not constrain large banks’ liquidity supply. Coincident inflows of funds from both the Federal Reserve’s liquidity injection programs and depositors, along with strong preshock bank capital, explain why banks were able to accommodate these liquidity demands. (JEL G21, G28) Received June 7, 2020; editorial decision June 23, 2020 by Editor Isil Erel.

The COVID-19 pandemic and the subsequent lockdown brought about an exogenous and unparalleled stock market crash. The crisis thus provides a unique opportunity to test theories of environmental and social (ES) policies. This paper shows that stocks with higher ES ratings have significantly higher returns, lower return volatility, and higher operating profit margins during the first quarter of 2020. ES firms with higher advertising expenditures experience higher stock returns, and stocks held by more ES-oriented investors experience less return volatility during the crash. This paper highlights the importance of customer and investor loyalty to the resiliency of ES stocks. (JEL G12, G32, M14) Received: June 3, 2020; editorial decision June 24, 2020 by Editor Andrew Ellul.