Knowledge that Transforms

Using novel earnings calendar data, we show that firms’ advanced scheduling of earnings announcement dates foreshadows their earnings news. Firms that schedule later-than-expected announcement dates subsequently announce worse news than those scheduling earlier-than-expected announcement dates. Despite scheduling disclosures being observable weeks ahead of earnings announcements, we show that equity markets fail to reflect the information in these disclosures until the announcement itself. By also showing that option markets respond efficiently to volatility-timing information embedded in the same scheduling disclosures, we provide novel evidence that markets fail to react to information about future earnings despite investors immediately trading on the underlying signal.

Are firms more resilient to systemic banking crises in economies with higher levels of social trust? Using firm-level data in 34 countries from 1990 through 2011, we find that liquidity-dependent firms in high-trust countries obtain more trade credit and suffer smaller drops in profits and employment during banking crises than similar firms in low-trust economies. The results are consistent with the view that when banking crises block the normal bank-lending channel, greater social trust facilitates access to informal finance, cushioning the effects of these crises on corporate profits and employment.

The extant literature suggests that one of the main causes of the recent financial crisis was the excessive use of short-term debt by banks. Using a large sample of banks, we find that increases in repurchase agreements (repos) were recognized by external capital markets to increase bank risk in the pre-crisis period. In the crisis, we find a negative relationship between repos and risk. We attribute this result to evidence suggesting that “good” banks were able to continue funding their repos, whereas “bad” banks had to significantly decrease their repo funding.

Treasury Inflation-Protected Securities (TIPS) are frequently thought of as risk-free real bonds. Using no-arbitrage term structure models, we show that TIPS yields exceeded risk-free real yields by as much as 100 basis points when TIPS were first issued and up to 300 basis points during the 2007–2008 financial crisis. This spread predominantly reflects the poorer liquidity of TIPS relative to nominal Treasury securities. Other factors, including the indexation lag and the embedded deflation protection in TIPS, play a much smaller role. Ignoring this spread also significantly distorts the informational content of TIPS break-even inflation, a widely used proxy for expected inflation.

Using a unique sample of newly privatized firms from 59 countries, this article provides new evidence about the agency costs of state ownership and new insight into the corporate governance role of country-level institutions. Consistent with agency theory, we find strong and robust evidence that state ownership is positively related to corporate cash holdings. Moreover, we find that the strength of country-level institutions affects the relation between state ownership and the value of cash holdings. In particular, as state ownership increases, markets discount the value of cash holdings more in countries with weaker institutions.

We conduct a comprehensive out-of-sample assessment of the economic value adding of commodities in multiasset investment strategies that exploit the predictability of asset return moments. We find that predictability makes the inclusion of commodities profitable even when short selling and high leverage are not permitted. For instance, a mean-variance (non-mean-variance) investor with moderate risk aversion and leverage, rebalancing quarterly, would be willing to pay up to 108 (155) basis points per year after transaction cost for adding commodities to her stock, bond, and cash portfolio. Previous research had reached mixed or even opposite conclusions, especially in an out-of-sample context.

Masulis and Mobbs (2014), (2015) find that independent directors with multiple directorships allocate their monitoring efforts unequally based on a directorship’s relative prestige. We investigate whether bank loan contract terms reflect such unequal allocation of directors’ monitoring effort. We find that bank loans of firms with a greater proportion of independent directors for whom the board is among their most prestigious have lower spreads, longer maturities, fewer covenants, lower syndicate concentration, lower likelihood of collateral requirement, lower annual loan fees, and higher bond ratings. Our evidence indicates that independent directors’ attention is associated with lower cost of borrowing.

We reconsider whether hedge funds’ time-varying risk factor exposures are predictive of superior performance. We construct an overall measure (BA) of fund managers and present evidence that top beta active managers deliver superior long-term out-of-sample performance compared to top alpha active managers. BA captures the time-varying nature of beta exposures and can be interpreted as a common factor of both systematic risk (SR) and (1 - R 2 ) measures. BA also compares favorably to extant measures of market timing, capturing the explanatory power of such measures of hedge fund performance.

We examine a specific channel through which director connectedness may improve monitoring: financial reporting quality. We find that the connectedness of independent, non-co-opted audit committee members has a positive effect on financial reporting quality and accounting conservatism. The effect is not significant for non-audit committee or co-opted audit committee members. Our results are robust to tests designed to mitigate self-selection. Consistent with connected directors being valuable, the market reacts more negatively to the deaths of highly connected directors than to the deaths of less connected directors. Better connected directors also have better career prospects, suggesting they have greater incentives to monitor.

We document a strong decline in corporate-diversification activity since the late 1970s, and we develop a dynamic model that explains this pattern, both qualitatively and quantitatively. The key feature of the model is that synergies endogenously decline with technological specialization, leading to fewer diversified firms in equilibrium. The model further predicts that segments inside a conglomerate should become more related over time, which is consistent with the data. Finally, the calibrated model also matches other empirical magnitudes well: output growth rate, market-to-book ratios, diversification discount, frequency and returns of diversifying mergers, and frequency of refocusing activity.