Knowledge that Transforms

Abstract Boards are crucial to shareholder wealth. Yet little is known about how shareholder oversight affects director incentives. Using exogenous shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions are less likely to discipline ineffective directors with negative votes. Consequently, independent directors face weaker monitoring incentives and exhibit poor board performance; ineffective independent directors are also more frequently appointed. Moreover, we find that the adverse effects of investor distraction on various corporate governance outcomes are stronger among firms with problematic directors. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.

AbstractWe develop a dynamic model of board decision-making akin to dynamic voting models in the political economy literature. We show a board could retain a policy all directors agree is worse than an available alternative. Thus, directors may retain a CEO they agree is bad—deadlocked boards lead to entrenched CEOs. We explore how to compose boards and appoint directors to mitigate deadlock. We find board diversity and long director tenure can exacerbate deadlock. We rationalize why CEOs and incumbent directors have power to appoint new directors: to avoid deadlock. Our model speaks to short-termism, staggered boards, and proxy access.

Abstract A detailed treatment of aggregation and capital heterogeneity substantially improves the performance of the investment CAPM. Firm-level predicted returns are constructed from firm-level accounting variables and aggregated to the portfolio level to match with portfolio-level stock returns. Working capital forms a separate productive input besides physical capital. The model simultaneously fits the value, momentum, investment, and profitability premiums and partially explains positive stock-fundamental return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, and the countercyclical and long-term dynamics of the value and investment premiums. However, the model falls short in explaining momentum crashes. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online..

Abstract We examine whether professional money managers overreact to large climatic disasters. We find that managers within a major disaster region underweight disaster zone stocks to a much greater degree than distant managers and that this aversion to disaster zone stocks is related to a salience bias that decreases over time and distance from the disaster, rather than to superior information possessed by close managers. This overreaction can be costly to fund investors for some especially salient disasters like hurricanes and tornadoes: a long-short strategy that exploits the overreaction generates a significant DGTW-adjusted return over the following 2 years.

Abstract I analyze a dynamic model of over-the-counter asset sales in which the seller receives stock-sensitive compensation, and the transaction conveys information about the firm’s value. I examine how the market’s response to an asset sale feeds back to the seller’s decision on the timing and the sale price and analyze the unique pattern of stock prices before and after the sale. The implications of bargaining power, inventories, gains from synergy, and the introduction of a vesting period are discussed. The model sheds light on observed properties of corporate sell-offs and explains market dry-ups during downturn periods. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Abstract I show that households’ demand for retail deposits decreases during stock market booms, which induces a contraction in bank lending and a decrease in real activity in bank-dependent firms. I identify this channel using geographic heterogeneity in households’ stock market participation. Banks in areas with greater stock ownership see a greater reduction in deposit growth when stock returns are high. This holds even across branches of the same bank and across ZIP codes within counties. Counties served by banks financed by more stock-active depositors see a greater decline in bank lending and bank-dependent-firm employment following high stock returns.

Abstract Our paper analyzes the geographical preferences of hedge fund investors and the implication of these preferences for hedge fund performance. We find that funds of hedge funds overweigh their investments in hedge funds located in the same geographical areas and that funds with a stronger local bias exhibit superior performance. Local bias also gives rise to excess flow comovement and extreme return clustering within geographic areas. Overall, our results suggest that while funds of funds benefit from local advantages, their local bias also creates market segmentation that can destabilize the underlying hedge funds.

Abstract Since October 2008, fixed rates for interest rate swaps with a 30-year maturity have been mostly below Treasury rates with the same maturity. Under standard assumptions, this implies the existence of arbitrage opportunities. This paper presents a model for pricing interest rate swaps, where frictions for holding bonds limit arbitrage. I analytically show that negative swap spreads should not be surprising. In the calibrated model, swap spreads can reasonably match empirical counterparts without the need for large demand imbalances in the swap market. Empirical evidence is consistent with the relation between term spreads and swap spreads in the model. Received April 16, 2017; editorial decision Januray 3, 2019 by Editor Stijn Van Nieuwerburgh.

Abstract This paper finds that declining bank equity or liquidity reduces liquidation values of bank-owned real estate and accelerates the pace of asset sales. Buyers of these assets earn significant returns for providing liquidity to banks, as prices tend to rebound sharply after sales by illiquid banks. Lower liquidation values also depress the prices of nearby real estate transactions. Policy interventions, such as equity injections and central bank asset purchases, increase liquidation values by providing institutions with the balance sheet capacity to slow asset sales. This evidence suggests that balance sheet adjustments at financial institutions can explain real asset price dynamics. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

10.1093/rfs/hhw062, volume 29, 3245-3277), after receiving reports on the inconsistency in the paper's use of Russell vs. CRSP market capitalization ranks between the published version of the paper and its previously publicly distributed working paper version.Using the data and code provided by the authors, the committee determined that the estimates based on the use of Russell vs. CRSP ranks were not substantially different from each other.However, the Committee discovered that equations ( 1) and (2) on page 3254, which describe the two-stage model, do not describe the actual regressions that were used to generate the results presented in the paper.Moreover, the committee found that the paper's main inferences are not robust if the models are estimated as described on page 3254 of the paper.In summary, the Committee concluded that the methodology described in the paper does not generate the results reported in that paper.Futhermore, the Committee concluded that the actual specification the authors acknowledged to have used in the paper was econometrically inconsistent.This is because the missing term constitutes an "excluded variable" which was not justified by the setting or discussed in the paper.The authors' misstatement prevented the issue from being discovered in the review process.