Econometric research in the past two decades has vitnessed a considerable use of dummy variables in regression analysis. The analysis of covariance has long been a standard statistical technique to test the equality of coefficients in linear regressions. While students and researchers are generally aware of the close relationship between the two methods, they are often frustrated at choosing one method instead of the other in practice and wonder whether the two methods lead to the same test results. This note shows that the two methods are equivalent from the point of view of hypothesis testing.

This paper reexamines the apparent success of two prominent stock trading strategies: long-term contrarian and intermediate-term momentum. The paper demonstrates that long-term contrarian is entirely attributable to the classic January size effect, rather than to investor overreaction, as argued by De Bondt and Thaler (1985). Further, the paper also resolves the Novy-Marx (2011) concern about whether return autocorrelation “is really momentum” by demonstrating that the superior performance of intermediate-term momentum is due to strong January seasonality in the cross-section of returns. The implications are that long-term contrarian must be considered largely illusory, and intermediate-term momentum must take account of annual seasonalities in returns.

T HE CES (constant elasticity of substitution) production function derived by Arrow, Chenery, Minhas, and Solow [2] has become widely known and widely used. Possibly the weakest point of the SMAC (Arrow, Chenery, Minhas and Solow) formulation is the assumption of. . . the existence of a relationship between V/L (value added per unit of labor) and W (the wage rates), independent of the stock of capital [2, p. 231]. If this assumption does not hold, the value of the elasticity of substitution derived from the estimated CES function may be biased. The CES function is also subject to the limitation that the value of the elasticity of substitution is constant, although not necessarily unity. However, when the capital/ labor ratio varies, due to changes in the factor price ratio, it is possible that the elasticity of substitution will vary as the capital/labor ratio varies. The purposes of this paper are (1) to derive a more general form of the CES production function that does not depend on the SMAC assumption of independence and with a property of variable elasticity of substitution, (2) to examine the elasticity of substitution of the new function, and (3) to present some evidence of the desirability of using the new function.

We show that the commonly observed correlation between institutional investor ownership and the success of mergers is partly driven by active stock picking. Several mutual fund stock selection skill measures strongly predict the post-merger performance of corporate acquirers even after controlling for possible shareholder monitoring. These findings are stronger for funds with characteristics more indicative of active stock picking. Moreover, firms held by funds with higher stock selection skills are more likely to subsequently become acquirers, suggesting that the mutual fund skill set includes the ability to identify acquirers with value-enhancing acquisition opportunities.

We show that queue rationing under price controls is one driver of high-frequency trading. Uniform tick sizes constrain price competition and create rents for liquidity provision, particularly for securities with lower prices. The time priority rule allocates rents to high-frequency traders (HFTs) because of their speed advantage. An increase in relative tick size, defined as uniform tick sizes divided by security prices, increases the fraction of liquidity provided by HFTs but harms liquidity. We find that the message-to-trade ratio is a poor cross-sectional proxy for HFTs’ liquidity provision: stocks with more liquidity provided by HFTs have lower message-to-trade ratios. Received September 15, 2015; editorial decision October 7, 2017 by Editor Robin Greenwood.

Proxy advisory firms have become important players in corporate governance, but the extent of their influence over shareholder votes is debated. We estimate the effect of Institutional Shareholder Services (ISS) recommendations on voting outcomes by exploiting exogenous variation in ISS recommendations generated by a cutoff rule in ISS voting guidelines. Using a regression discontinuity design, we find that from 2010 to 2011, a negative ISS recommendation on a say-on-pay proposal leads to a 25 percentage point reduction in say-on-pay voting support, suggesting a strong influence over shareholder votes. We also use our setting to examine the informational role of ISS recommendations. Received April 13, 2015; editorial decision June 13, 2016 by Editor Itay Goldstein.

Using a dynamic selection model, we obtain consistent and unbiased estimates of risk and returns for infrequently traded bonds and conduct the first comprehensive asset pricing test of municipal bonds using the multifactor approach. Correction for sample selection and infrequent trading problems results in substantially higher beta estimates. Besides conventional risk factors, illiquidity and taxes are important for the pricing of municipal bonds. Importantly, bond returns contain a significant liquidity risk premium. Failing to account for sample selection bias leads to erroneous inference on the magnitude of systematic risk and substantial underestimation of risk premiums.

After exogenous demand shocks caused by natural disasters, FinTech lenders are more responsive to increased demand for reconstruction mortgages than traditional banks and non-FinTech shadow banks. Both FinTech and traditional banks increase credit supply, but FinTech supply is more elastic without increases in risk-adjusted interest rates or delinquency rates. Comparing lending supply channels, banks respond to regulatory incentives to lend to damaged areas, whereas FinTech lenders supply more credit when traditional banks rely more on balance sheet financing and physical branch networks. Compared to traditional banks, FinTech lenders increase supply elasticity more aggressively in response to local competitive pressure.

We model how a rent-protection motive drives the choice of flotation method in new equity issuance between two polar cases: rights issues and cash offers. Unexpected new blockholders would emerge in control-diluting cash offers and share in jealously guarded control benefits. But rights issues help the incumbent controlling shareholders avoid control dilution and safeguard their private benefits. Under asymmetric information about private benefits, the choice of flotation method can convey information about hidden private benefits and hence firm value. Our model can explain even a negative announcement effect of rights issues, and it supports not just one but three important equilibriums.