Knowledge that Transforms

We explore how individual risk perception influences prices and trading behavior in a market setting. Specifically, our study lets experimental participants trade assets characterized by varying shapes of return distributions. While common mean-variance models predict identical prices for most of our assets, we find trading prices to differ significantly. Assets that are perceived as being less risky on average (despite having identical volatility) trade at significantly higher prices. Individually, traders who perceive a certain asset to be less risky are also net buyers on average. With regard to different risk measures, our results show that the probability of a loss is the strongest predictor of transaction prices and risk perception. All these results hold also for experienced traders and when traders can trade two assets at the same time.

Investment managers specializing in insurance-linked securities (ILS) generate returns that behave unlike those of any other asset class. We introduce four ILS-specific factor models, which explain their time-series and cross-sectional variation. Despite a strong fit, we are left with positive-significant alphas for about one quarter of the funds in our sample, some of which can be attributed to industry loss warranty (ILW) exposures. In addition, they are related to fund size, age, and performance fees. Although we do not find evidence for market timing abilities, we can rule out luck as a cause of outperformance by controlling for false discoveries.

This paper provides new evidence that correlated abnormal compensation of CEOs and directors is symptomatic of agency problems associated with cronyism. We find that director abnormal compensation has a negative impact on the likelihood of CEO turnover and reduces the sensitivity of CEO turnover to poor stock performance. However, for firms with greater institutional ownership the adverse effects of director abnormal compensation are mitigated, and the negative impact of abnormal compensation on firm performance is reduced. These findings suggest that correlated abnormal compensation of CEOs and directors is likely associated with agency problems.

This paper examines how collateralization in small business lending varies with bank-borrower proximity. Our analysis establishes a robust inverse relationship between distance and collateral: Borrowers located in the vicinity of the bank face higher collateral requirements. The estimated relationship is independent of the allocation of decision-making authority within the lending organization, competitive pressure in the local credit markets, or risk rating of the borrower. Our findings seem consistent with the notion that distance reflects transaction costs associated with the assessment, inspection, and possible repossession of collateral.

This study analyzes the impact of a legislation introduced in Chile in 2013, which gradually reduced the maximum legal interest rate for consumer loans from 54% to 36%. Using a representative sample of households that matches survey data and banking loan records, I compare consumers with risk-adjusted interest rates slightly above and slightly below the legal interest rate ceiling, two groups of similar characteristics but who are differently affected by the law. After accounting for both macroeconomic shocks and unobserved household heterogeneity, the results show that being above the interest rate cap reduces the probability of credit access by 8.7% on average. A counterfactual exercise shows that the new legislation excluded 9.7% of the borrowers from banking consumer loans. The law’s impact was strongest on the youngest, least educated and poorest families. Finally, I show that the new law affected all lenders of consumer loans in Chile, not just banks.

Contains fulltext : 199743.pdf (Publisher’s version ) (Open Access)

We explore how an accounting measure of information asymmetry between lead and participating lenders influences syndication structures by examining whether lead lenders’ commercial and industrial (C&I) loan-loss provision validity affects the fraction of loans they retain. We first conduct multiple tests showing that C&I provision validity reflects banks’ underlying screening and monitoring effectiveness. We then find lead lenders’ loan share decreases with C&I provision validity, but not with non-C&I provision validity. Consistent with an information effect, we further find this association is attenuated by (i) alternative information sources about the borrowers and (ii) previous lead/participant relationships and participant/borrower relationships.

Prior studies on the relation between corporate taxes and future macroeconomic growth present contradictory evidence. We argue this mixed evidence is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax exemptions, tax deductions, tax enforcement and firms’ tax planning. We propose an alternative tax rate measure that aggregates cash effective tax rates of listed firms, which reflect not only statutory tax rates, but also other features of the tax code, enforcement, and firms' tax planning. We find a strong robust negative relation between country-level effective tax rates and future macroeconomic growth.

Using the equity market liberalization of 23 emerging market countries between 1996 and 2006, we examine how the degree of competition for a firm's shares affects the price of information asymmetry. We find evidence of a significant decline in the pricing of information asymmetry as countries remove regulatory restrictions on foreign ownership. Our study provides novel evidence on the link between the degree of competitiveness of equity markets and the price of information asymmetry. The work also furthers our understanding of the economic consequences of foreign stock ownership.

We experimentally investigate how jargon affects investment willingness for investors with different industry knowledge, and whether such effects vary with good or bad jargon. We find that for investors without industry knowledge, jargon decreases investment willingness because it decreases understanding. However, for investors with some but low industry knowledge, jargon increases investment willingness because it increases perceived product premium. Such effects exist whether good or bad jargon is used. Finally, investors with high industry knowledge differentiate between good and bad jargon, and reduce investment willingness only when bad jargon is used. These findings have implications for regulators, managers, and investors.