Knowledge that Transforms

This paper reexamines whether investors value payout and why. I study abnormal stock returns around regulatory enforcement actions that restrict bank dividends and repurchases. Market reactions are significantly worse for enforced banks that pay out than for those that do not. Withstanding alternative explanations and parallel trend concerns, these results present rare, causal evidence of a value to corporate distribution. The cross-section of abnormal returns suggests that risk-shifting, not agency cost-reduction, drives payout. In my sample of distressed banks, especially around financial crises, the ability to shift risk through payout has value.

While investor sentiment has been shown to have a robust, direct impact on stock returns, we know little about how it impacts returns through an indirect channel from conditional volatility. We conduct a global study of investor sentiment across 40 international stock markets to examine the impact of investor sentiment on stock returns via both direct and indirect channels and how the impact varies across bull and bear market regimes. Using turnover ratio as the sentiment proxy and applying GARCH-type models, we confirm a conditional impact of investor sentiment on stock returns via both channels: In bull regimes, optimistic (pessimistic) shifts in investor sentiment would increase (decrease) stock returns, while in bear regimes, optimistic (pessimistic) shifts would decrease (increase) stock returns.

Firms invest in Corporate venture capital (CVC) for strategic reasons. Consistent with maintaining financial flexibility to fund CVC driven innovation and acquisitions, CVC investing firms hold less debt and more cash. Our results are more pronounced among the highest CVC investors and strategically driven CVC investors as such firms maintain the most conservative financial policies. CVC firms are more likely to acquire using cash and this relationship is more pronounced among strategic CVC firms. Overall, our results are consistent with studies that advances that firms with growth or investment opportunities maintain financial flexibility.

I compare the timing of information acquisition among institutional investors and sell-side analysts. I find that hedge funds are unique: they anticipate analyst reports, and then reverse their positions after analysts publish reports. These trends are strongest for hedge funds and analysts most closely geographically situated. I also find that hedge funds generate their highest risk-adjusted returns among stocks with high analyst coverage. These results indicate that hedge funds are faster relative to analysts and other investors, and suggest that analysts assist hedge funds in exploiting their information acquisition advantages.

We examine whether the systematic response of monetary policy to financial imbalances matters for financial stability. We measure how responsive the Federal Reserve's policy is to imbalances in the equity, housing and credit markets. We find that changes in these policy sensitivities predict the subsequent development of financial imbalances. When monetary policy responds more counter-cyclically to market overheating, imbalances tend to decline over time. This effect is distinct from that of current and anticipated interest rate levels – the risk-taking channel. The evidence highlights the importance of the systematic component of monetary policy reaction function in shaping the financial cycle.

In this paper we carry out a cross-country analysis of the correlation risk premium. We examine the statistical properties of the implied and realized correlation in European equity markets and relate the resulting premium to US equity market correlation risk and a global correlation risk premium. We find evidence of strong co-movement of correlation risk premiums in European and US equity markets. Our results support the existence of a strong empirical relationship between the global correlation risk premium and international equity market option returns. We document the dependence of the correlation risk premium on macroeconomic uncertainty and related variables.

This paper provides survey evidence on higher purpose for individuals and organizations and develops a theoretical model consistent with the evidence. The survey of 1,019 individuals in the U.S. sought to learn about their commitment to and perceived value from personal and organizational higher purpose. One striking finding from the survey is that when an organization has a written statement of higher purpose, its employees tend to trust their leaders to not only be socially responsible, but also to make better business decisions, i.e. corporate governance is perceived to be better by the employees. We then develop a simple theoretical model that provides an economic rationale for this finding. In the model, an investment in higher purpose credibly signals the firm owner's ability/marginal productivity and elicits higher employee effort. When put in a banking context, the model shows that optimal contracting within a bank that pursues a higher purpose leads to higher wages for employees, higher monitoring effort and a lower probability of bank failure when the bank has more equity capital, even though the bank's capital does not affect the bank's higher purpose investment. Even absent a signaling motivation for investing in higher purpose, these results are qualitatively sustained if the bank's employees care about its purpose. Additionally, in this case, banks that invest more in higher purpose pay lower wages, elicit higher employee effort and have lower failure probabilities for any given capital ratio. Banks with higher capital ratios still pay higher wages, but the effect of capital on wages becomes weaker as the bank's higher purpose investment increases. The decrease in the exposure of the deposit insurer due to higher capital goes beyond the direct impact of capital on the bank's probability of failure.

Macroprudential policy and instruments are at the center of the discussion when (re)thinking about banking regulation. In particular, sectoral macroprudential devices have gained momentum to curb specific credit markets. However, there is scarce evidence on how, and by how much, these policies affect the credit markets they are intended to target. In this paper, we analyze one such regulation. We study how loan-loss-provisioning (LLP) affects the mortgage lending market. We do so by leveraging a policy change in Chile, that raised provisions, coupled with rich administrative data for the census of all real estate transactions, interest rates on mortgage loans, and bank balance sheet data. We find that the LLP regulation lowered the loan-to-value (LTV) ratio of granted loans by 2.8% and 9.8% for the mean and median borrowers, respectively. Banks with weaker balance sheets showed more extensive adjustments. We also find that the pass-through of higher expected provisioning cost to lending rates was quantitatively very small, reaching an upper bound of 0.2% at most. We argue that this evidence supports the notion that under imperfect information, banks do not compete only in terms of interest rates, but also in lending standards, and this latter channel can dominate the former.

White papers are likely the primary source of information provided to potential Initial Coin Offering (ICO) investors in platform-based ventures that may reduce information asymmetry between ICO issuers and investors. We use textual analysis to measure the information content of white paper documents. We examine how an informative white paper content signal and a concurrent potentially biased expert rating signal correlate with measures of ICO funding success, ICO underpricing, and post-ICO performance. Our empirical results suggest that high-quality ICO issuers signal their type by providing more informative white paper content, i.e., excess or new textual information not contained in recent and peer white papers. However, investors rely on the expert ratings signal in their decision to buy tokens that “jams” the white paper informative content signal. Once listed tokens receive a market valuation, white paper informative content is positively associated with our measures for underpricing, returns, and liquidity, while the expert ratings signal is rendered irrelevant.

Tail-correlation matrices are an important tool for aggregating risk measurements across risk categories, asset classes and/or business segments. This paper demonstrates that traditional tail-correlation matrices—which are conventionally assumed to have ones on the diagonal—can lead to substantial biases of the aggregate risk measurement’s sensitivities with respect to risk exposures. Due to these biases, decision-makers receive an odd view of the effects of portfolio changes and may be unable to identify the optimal portfolio from a risk-return perspective. To overcome these issues, we introduce the “sensitivity-implied tail-correlation matrix”. The proposed tail-correlation matrix allows for a simple deterministic risk aggregation approach which reasonably approximates the true aggregate risk measurement according to the complete multivariate risk distribution. Numerical examples demonstrate that our approach is a better basis for portfolio optimization than the Value-at-Risk implied tail-correlation matrix, especially if the calibration portfolio (or current portfolio) deviates from the optimal portfolio.