Knowledge that Transforms

We investigate the performance of funds that specialise in cryptocurrency markets. In doing so, we contribute to a growing literature that aims to understand the value of digital assets as investments. The main empirical results support the argument that cryptocurrency funds generate significantly positive alphas compared to passive benchmarks or conventional risk factors. To understand whether the fund managers have sufficient skills to more than cover their costs, we compare the actual fund alphas against the simulated values from a panel semi-parametric bootstrap approach. The analysis shows that the extreme outperformance is unlikely to be explained by the luck of fund managers. However, the significance of the alphas becomes statistically weaker after considering the cross-sectional correlation in fund returns.

This paper examines the multi-dimensional concept of bank complexity and its relationship with credit risk for Italian banks using data at the bank-firm level. The different aspects of bank complexity are identified through the use of a factor analysis on a large set of bank-level variables. Bank complexity is well described by four factors: exposure to international commercial banking activities, geographic diffusion over the domestic territory, integration of market trading activities and fee income diversification. Our main result is that geographic diversification is associated to a decrease in the supply of lending to riskier firms; access to many local credit markets might provide banks with more chances to expand their loan supply by targeting safer borrowers. On the contrary, we document a positive relationship between banks’ fee income diversification and the amount of credit granted to riskier borrowers, but only when the latter hold multiple bank credit relationships. This evidence might point out that competition fosters banks’ risk-taking incentives on loan origination to sell additional financial services.

Organization capital represents the stock of knowledge, capabilities, culture, and business processes, and systems that integrate human skills with physical capital to enhance organizational efficiency. We investigate whether and how a firm's payout choices are related to its level of organization capital. Using a large sample of U.S. firms during the period 1980–2017, we find that both the likelihood and the levels of cash dividend distribution and share repurchases are significantly higher for firms with more organization capital. Our findings hold up to a battery of robustness checks and endogeneity tests. We further explore related channels and find strong evidence that the positive association between organization capital and dividend payments (share repurchases) is largely attributable to agency problems (executive compensation incentives). We find weak evidence for the signaling argument for corporate payouts. Overall, we document that organization capital plays a central role in shaping corporate payout choices.

This paper evaluates the short-run economic and financial implications of tightening the environmental regulations. We build an Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model that combines green policies aiming to reduce firms’ emission together with financial frictions and endogenous default. The simulation results show that tightening environmental policies dampens the positive impact of expansionary shocks, compromises the firms’ ability to repay loans, and consequently poses risks to the financial stability. For the empirical analysis, we examine the effect of environmental regulations tightened by the Chinese 11th Five-Year Plan on manufacturing firms’ productivity and its implications for the financial sector. Using the difference-in-difference approach, we find that the manufacturing firms’ productivity deteriorated due to the enhanced environmental regulation stringency, making the profitability and total output decline accordingly. As a result, firms located in the cities with higher emission reduction targets were more likely to default, threatening the financial stability.

We propose a flow-based explanation for two long-standing anomalies in empirical finance – Sell in May and the January effect. We find that mutual fund flows exhibit similar seasonal patterns as stock returns. After controlling for fund flows both calendar effects become insignificant. We provide new evidence on what drives this correlation. We show that return seasonality is due to unanticipated fund flow driven by uninformed (flow-motivated) retail investor trading. Active funds indicate flow-induced price pressure with a corresponding reversal of the effect, while passive funds suggest feedback trading instead. These seasonalities are remarkably pervasive, exhibiting little variation across different types of stocks, and are equally strong in periods of either high or low sentiment.

We show that private equity-sponsored public-to-private buyouts in the US evoke positive externality effects among their targets’ industry peers. Industrial organization and strategic theory suggest buyouts may impact their industry peers as a result of increased takeover threat and competitive pressure felt by the peers. We document that buyouts are associated with positive market returns and better fundamental performance in the three years following a buyout acquisition in the industry. Drilling down into specific channels of improvement, we document that industry peers mitigate the increased takeover threat and competitive pressure by significantly improving several dimensions of operational efficiency, by engaging in long-term innovation and by enhancing their corporate governance. Our results suggest that competitive factors rather than takeover threat is responsible for the spillover effects.

Interest-rate benchmark reform has revived short-rate modelling. One reason is that short-rate models provide a consistent framework in which different benchmarks, and contracts linked to them, can be compared. Another reason is that new benchmarks can be directly dependent on very short-term rates; the key example is a backward-looking compounding of overnight rates, a prominent alternative to forward-looking Libor. Indeed, under Libor, one can often safely ignore aspects of short-rate behaviour, especially jumps. At least partially for this reason, jumps are inadequately treated in the interest-rate literature, particularly expected jumps (jumps with known timing). We estimate a model with expected and unexpected jumps, which involves separating their effect on term rates. We then price forward- and backward-looking caplets, quantifying the spread exhibited by the latter over the former. Expected jumps lead to significantly time-inhomogeneous option behaviour, particularly for short-term options linked to a backward-looking benchmark.

We develop an agent-based model of traditional banks and asset managers to investigate the contagion risk related to fire sales and balance sheet interactions. We take a structural approach to the price formation in fire sales as in Bluhm et al. (2014) and introduce a market clearing mechanism with endogenous formation of asset prices. We find that, first, banks which are active in both the interbank and securities markets act as plague-spreaders during financial distress. Second, higher bank capital requirements may aggravate contagion by creating incentives for banks to increase exposures in the interbank market, which also leads to lower levels of a voluntary capital buffer above the minimum capital requirement. Third, asset managers absorb small liquidity shocks, but they exacerbate contagion when their voluntary liquid buffers are fully utilised. Fourth, a system with larger and more interconnected agents is more prone to contagion risk stemming from funding shocks.

We exploit a quasi-natural experiment (the adoption of state anti-recharacterization laws) to study the effect of strengthened creditor rights on corporate mergers and acquisitions. We find that, following the passage of anti-recharacterization laws, firms decrease overall acquisition activities. This effect is stronger for firms with worse agency problems. Announcement returns to shareholders are larger and post-merger operating cash flows are better for acquirers with weaker governance. Furthermore, returns to bondholders of these firms are also higher, indicating no wealth transfers. Taken together, our evidence suggests that ex-ante strengthened creditor rights can discipline firm managers to reduce value-destroying acquisitions and conduct higher quality deals.

This study examines intra-industry information transfer in the emerging market of China, where financial and market institutions are underdeveloped and the majority of investors are inexperienced individual investors. In an analysis of the management earnings forecasts of publicly listed firms, we find that investors in China transfer information between peer firms, with a stronger transfer when earnings forecasts are more accurate and credible, and when the investors of non-announcing firms are more sophisticated. We also find that the non–market-based resource allocation and entry restrictions in China discourage intra-industry information transfer between firms. Overall, our results suggest that intra-industry information transfer in China is constrained by institutional barriers. Reforms aimed at removing these barriers can help enhance these markets’ stock price efficiency. Our results provide policy implications to other emerging markets with institutional environments similar to China.