Knowledge that Transforms

[In corporate finance and asset pricing empirical work, researchers are often confronted with panel data. In these data sets, the residuals may be correlated across firms or across time, and OLS standard errors can be biased. Historically, researchers in the two literatures have used different solutions to this problem. This paper examines the different methods used in the literature and explains when the different methods yield the same (and correct) standard errors and when they diverge. The intent is to provide intuition as to why the different approaches sometimes give different answers and give researchers guidance for their use.]

[Commodity derivatives are becoming an increasingly important part of the global derivatives market. Here we develop a tractable stochastic volatility model for pricing commodity derivatives. The model features unspanned stochastic volatility, quasi-analytical prices of options on futures contracts, and dynamics of the futures curve in terms of a low-dimensional affine state vector. We estimate the model on NYMEX crude oil derivatives using an extensive panel data set of 45,517 futures prices and 233,104 option prices, spanning 4082 business days. We find strong evidence for two predominantly unspanned volatility factors.]

[We study the effect of the Global Analyst Research Settlement and related regulations on sell-side research. These regulations attempted to mitigate the interdependence between research and investment banking. We document that following the regulations many brokerage houses have migrated from the traditional five-tier rating system to a three-tier system. Optimistic recommendations have become less frequent and more informative, whereas neutral and pessimistic recommendations have become more frequent and less informative. Importantly, the overall informativeness of recommendations has declined. The likelihood of issuing optimistic recommendations no longer depends on affiliation with the covered firm, although affiliated analysts are still reluctant to issue pessimistic recommendations.]

[I examine the introduction of syndicated bank loan ratings by Moody's and Standard & Poor's in 1995 to evaluate whether third-party rating agencies affect firm financial and investment policy. The introduction of bank loan ratings leads to an increase in the use of debt by firms that obtain a rating, and also increases in firms' asset growth, cash acquisitions, and investment in working capital. Consistent with a causal effect of the ratings, the increase in debt usage and investment is concentrated in the set of borrowers who are of lower credit quality and do not have an issuer credit rating before 1995. A loan-level analysis demonstrates that previously unrated borrowers who obtain a loan rating gain increased access to the capital of less-informed investors. The results suggest that third-party debt certification has real effects on firm investment policy]

[Compared to mutual funds, hedge funds prefer smaller, opaque value securities, and have higher turnover and more active share bets. Decomposing returns into three components, we find that hedge funds are better than mutual funds at stock picking by only 1.32% per year on a value-weighted basis, and this result is insignificant on an equal-weighted basis or with price-to-sales benchmarks. Hedge funds exhibit no ability to time sectors or pick better stock styles. Surprisingly, we find only weak evidence of differential ability between hedge funds. Overall, our study raises serious questions about the perceived superior skill of hedge fund managers.]

[I investigate the effect of assets' liquidation values on capital structure by exploiting the diversity of track gauges in nineteenth-century American railroads. The abundance of track gauges limited the redeployability of rolling stock and tracks to potential users with similar track gauge. Moreover, potential demand for both rolling stock and tracks was further diminished when many railroads went under equity receiverships. I find that the potential demand for a railroad's rolling stock and tracks were significant determinants of debt maturity and the amount of debt that was issued by railroads. The results are consistent with liquidation values models of financial contracting and capital structure]

[This paper attempts to explain the credit default swap (CDS) premium, using a novel approach to identify the volatility and jump risks of individual firms from high-frequency equity prices. Our empirical results suggest that the volatility risk alone predicts 48% of the variation in CDS spread levels, whereas the jump risk alone forecasts 19%. After controlling for credit ratings, macroeconomic conditions, and firms' balance sheet information, we can explain 73% of the total variation. We calibrate a Merton-type structural model with stochastic volatility and jumps, which can help to match credit spreads after controlling for the historical default rates. Simulation evidence suggests that the high-frequency-based volatility measures can help to explain the credit spreads, above and beyond what is already captured by the true leverage ratio.]

[This paper provides a comprehensive evaluation of the short-horizon predictive ability of economic fundamentals and forward premiums on monthly exchange-rate returns in a framework that allows for volatility timing. We implement Bayesian methods for estimation and ranking of a set of empirical exchange rate models, and construct combined forecasts based on Bayesian model averaging. More importantly, we assess the economic value of the in-sample and out-of-sample forecasting power of the empirical models, and find two key results: (1) a risk-averse investor will pay a high performance fee to switch from a dynamic portfolio strategy based on the random walk model to one that conditions on the forward premium with stochastic volatility innovations and (2) strategies based on combined forecasts yield large economic gains over the random walk benchmark. These two results are robust to reasonably high transaction costs.]

[I evaluate the effect of loyalty on individuals' portfolio choice using a unique dataset of retirement contributions. I exploit the statutory difference that, in 401(k) plans, stand-alone employees can invest directly in their division, while conglomerate employees must invest in the entire firm, including all unrelated divisions. Consistent with loyalty, employees of stand-alone firms invest 10 percentage points (75%) more in company stock than conglomerate employees. Support is also found using variation in loyalty between different groups of employees, across and within firms. The cost to employees of loyalty is large, amounting to nearly a 20% loss in retirement income.]

[We analyze the effects of heterogeneity across large shareholders, using a new blockholderfirm panel dataset in which we can track all unique blockholders among large public firms in the United States. We find statistically significant and economically important blockholder fixed effects in investment, financial, and executive compensation policies. We also find blockholder fixed effects in firm performance measures, and differences in corporate policies are systematically related to differences in firm performance. We study potential sources of the heterogeneity and find that blockholders with a larger block size, board membership, direct management involvement, or with a single decision maker are associated with larger effects on corporate policies and firm performance.]