Knowledge that Transforms

Using data on asset pricing anomalies, I test the idea that the act of arbitrage turns “alphas” into “betas”: Assets with high initial abnormal returns attract more arbitrage and covary endogenously more with systematic factors that arbitrage capital is exposed to. This channel explains the exposures of 40 anomaly portfolios to aggregate funding liquidity shocks and arbitrageur wealth portfolio shocks. My results highlight that financial intermediaries that act as asset market arbitrageurs not only price assets given risks, but also actively shape these risks through their trades.

We examine how local newspaper closures affect public finance outcomes for local governments. Following a newspaper closure, municipal borrowing costs increase by 5–11 basis points, costing the municipality an additional $650,000 per issue. This effect is causal and not driven by underlying economic conditions. The loss of government monitoring resulting from a closure is associated with higher government wages and deficits and increased likelihoods of costly advance refundings and negotiated sales. Overall, our results indicate that local newspapers hold their governments accountable, keeping municipal borrowing costs low and ultimately saving local taxpayers money.

The benefit of investment advice depends on the quality of advice and the investor's counterfactual portfolio. We use changes in the Oregon University System Optional Retirement Plan to highlight the impact of plan design on the counterfactual portfolios of advice seekers. When brokers are available and target date funds (TDFs) are not, brokers help participants with high predicted demand for advice bear market risk, but they recommend higher-commission options. When brokers are removed and TDFs are added, new high-predicted-demand participants primarily invest in TDFs, which offer similar market risk but higher Sharpe ratios than the broker-advised portfolios within our sample.

One in five U.S. high-technology firms are led by CEOs with hands-on innovation experience as inventors. Firms led by “Inventor CEOs” are associated with higher quality innovation, especially when the CEO is a high-impact inventor. During an Inventor CEO's tenure, firms file a greater number of patents and more valuable patents in technology classes where the CEO's hands-on experience lies. Utilizing plausibly exogenous CEO turnovers to address the matching of CEOs to firms suggests these effects are causal. The results can be explained by an Inventor CEO's superior ability to evaluate, select, and execute innovative investment projects related to their own hands-on experience.

This paper studies the impact of the European Central Bank’s (ECB) Corporate Sector Purchase Programme (CSPP) announcement on prices, liquidity, and debt issuance in the European corporate bond market using a data set on bond transactions from Euroclear. I find that the quantitative easing (QE) programme increased prices and liquidity of bonds eligible to be purchased substantially. Bond yields dropped on average by 30 basis points (bps) (8%) after the CSPP announcement. Tri-party repo turnover rose by 8.15 million USD (29%), and bilateral turnover went up by 7.05 million USD (72%). Bid-ask spreads also showed significant liquidity improvement in eligible bonds. QE was successful in boosting corporate debt issuance. Firms issued 2.19 billion EUR (25%) more in QE-eligible debt after the CSPP announcement, compared to other types of debt. Surprisingly, corporates used the attracted funds mostly to increase dividends. These effects were more pronounced for longer-maturity, lower-rated bonds, and for more credit-constrained, lower-rated firms.

We provide a new methodology to empirically investigate the respective roles of systematic and idiosyncratic skewness in explaining expected stock returns. Using a large number of predictors, we forecast the cross-sectional ranks of systematic and idiosyncratic skewness, which are easier to predict than their actual values. Compared to other measures of ex ante systematic skewness, our forecasts create a significant spread in ex post systematic skewness. A predicted systematic skewness risk factor carries a significant and robust risk premium that ranges from 6% to 12% per year. In contrast, the role of idiosyncratic skewness in pricing stocks is less robust.

We study the impact of marital property legislation passed in the US South in the 1840s on households’ investment in risky, entrepreneurial projects. These laws protected the assets of newly married women from creditors in a world of virtually unlimited liability. We compare couples married after the passage of a marital property law with couples from the same state who were married before. Consistent with a simple model of household borrowing that trades off agency costs against risk sharing, the effect on investment was heterogeneous. It increased if most household property came from the husband and decreased if most came from the wife.

We show that inflation risk is priced in stock returns and that inflation risk premia in the cross-section and the aggregate market vary over time, even changing sign as in the early 2000s. This time variation is due to both price and quantities of inflation risk changing over time. Using a consumption-based asset pricing model, we argue that inflation risk is priced because inflation predicts real consumption growth. The historical changes in this predictability and in stocks’ inflation betas can account for the size, variability, predictability, and sign reversals in inflation risk premia.

Post-crisis stress tests have altered banks’ credit supply to small business. Banks most affected by stress tests reallocate credit away from riskier markets and toward safer ones. They also raise interest rates on small loans. Quantities fall most in high-risk markets where stress-tested banks own no branches, and prices rise mainly where they do. The results suggest that banks price the stress-test induced increase in capital requirements where they have local knowledge, and exit where they do not. Stress tests do not, however, reduce aggregate credit. Small banks seem to increase their share in geographies formerly reliant on stress-tested lenders.

An important milestone often reached in the life of an activist engagement is entering into a “settlement” agreement between the activist and the target's board. Using a comprehensive hand-collected data set, we analyze the drivers, nature, and consequences of such settlement agreements. Settlements are more likely when the activist has a credible threat to win board seats in a proxy fight and when incumbents’ reputation concerns are stronger. Consistent with incomplete contracting, face-saving benefits, and private information considerations, settlements commonly do not contract directly on operational or leadership changes sought by the activist but rather on board composition changes. Settlements are accompanied by positive stock price reactions, and they are subsequently followed by changes of the type sought by activists, including CEO turnover, higher shareholder payouts, and improved operating performance. We find no evidence to support concerns that settlements enable activists to extract rents at the expense of other investors. Our analysis provides a look into the “black box” of activist engagements and contributes to understanding how activism brings about changes in target companies.