Knowledge that Transforms

We provide empirical evidence on the positive effect of non-executive employee stock options on corporate innovation. The positive effect is more pronounced when employees are more important for innovation, when free-riding among employees is weaker, when options are granted broadly to most employees, when the average expiration period of options is longer, and when employee stock ownership is lower. Further analysis reveals that employee stock options foster innovation mainly through the risk-taking incentive, rather than the performance-based incentive created by stock options.

Survey evidence suggests that many investors form beliefs about future stock market returns by extrapolating past returns. Such beliefs are hard to reconcile with existing models of the aggregate stock market. We study a consumption-based asset pricing model in which some investors form beliefs about future price changes in the stock market by extrapolating past price changes, while other investors hold fully rational beliefs. We find that the model captures many features of actual prices and returns; importantly, however, it is also consistent with the survey evidence on investor expectations.

We study which dimensions of corporate culture are related to a firm׳s performance and why. We find that proclaimed values appear irrelevant. Yet, when employees perceive top managers as trustworthy and ethical, a firm׳s performance is stronger. We then study how different governance structures impact the ability to sustain integrity as a corporate value. We find that publicly traded firms are less able to sustain it. Traditional measures of corporate governance do not seem to have much of an impact.

This paper argues that endogenizing how acquirers finance their cash bids is just as important for understanding bidding in takeovers as endogenizing acquirers׳ payment method choice. The paper shows that acquirers finance their cash bids with equity only if they lack access to competitive financing. This leads to underbidding and lower takeover premiums. Conversely, acquirers with access to competitive financing use debt and overbid. Endogenizing the payment method reveals that security (e.g., stock) bids carry lower premiums than cash bids, backed by competitive financing. These insights find empirical support and could help explain existing evidence, which contradicts prior theory.

In a standard four-factor framework, mutual fund return volatility is a reliable, persistent, and powerful predictor of future abnormal returns. However, the abnormal returns are eliminated by the addition of a “vol” anomaly factor contrasting returns on portfolios of low and high volatility stocks. Consistent with Novy-Marx (2014) and Fama and French (2014), the Fama and French (2015) profitability and investment factors are equally effective at eliminating the abnormal returns. Failure to account for the vol anomaly, either directly or indirectly, can lead to substantial mismeasurement of fund manager skill.

We provide empirical evidence for the existence, magnitude, and economic cost of stigma associated with banks borrowing from the Federal Reserve's Discount Window (DW) during the 2007–2008 financial crisis. We find that banks were willing to pay a premium of around 44 basis points (bps) across funding sources (126bps after the bankruptcy of Lehman Brothers) to avoid borrowing from the DW. DW stigma is economically relevant as it increased some banks' borrowing cost by 32bps of their pre-tax return on assets (ROA) during the crisis. The implications of our results for the provision of liquidity by central banks are discussed.

We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund industry increases, a fund׳s ability to outperform passive benchmarks declines. At the fund level, all methods considered indicate decreasing returns, though estimates that avoid econometric biases are insignificant. We also find that the active management industry has become more skilled over time. This upward trend in skill coincides with industry growth, which precludes the skill improvement from boosting fund performance. Finally, we find that performance deteriorates over a typical fund׳s lifetime. This result can also be explained by industry-level decreasing returns to scale.

Yield curve fluctuations across different currencies are highly correlated. This paper investigates this phenomenon by exploring the channels through which macroeconomic shocks are transmitted across borders. Macroeconomic shocks affect current and expected future short-term rates as central banks react to changing economic environments. Investors could also respond to these shocks by altering their required compensation for risk. Macroeconomic shocks thus influence bond yields both through a policy channel and through a risk compensation channel. Using data from the US, the UK, and Germany, we find that world inflation and US yield level together explain over two-thirds of the covariance of yields at all maturities. Further, these effects operate largely through the risk compensation channel for long-term bonds.

We study the dynamic relation between market risks and risk premia using time series of index option surfaces. We find that priced left tail risk cannot be spanned by market volatility (and its components) and introduce a new tail factor. This tail factor has no incremental predictive power for future volatility and jump risks, beyond current and past volatility, but is critical in predicting future market equity and variance risk premia. Our findings suggest a wide wedge between the dynamics of market risks and their compensation, which typically displays a far more persistent reaction following market crises.

This paper considers a property law enactment that gave creditors more rights over the assets underlying their secured loans to private firms and gave private firms more protections against the potential expropriation of their assets. We find that this property law enactment led to a significant increase in firm value. We also find that the law׳s impact on value was more profound for firms with more tangible assets, lower internal cash flows, and stronger growth opportunities, and less profound for politically connected firms. Taken together, our findings confirm the importance of property rights protection in enhancing firm value.