Research seminars

Transformation of Corporate Scope in US Bank Holding Companies: Patterns and Performance Implications


Speaker: Nicola Cetorelli
Federal Reserve Bank of New York

9 November 2016 - S211 - From 2:00 pm to 3:15 pm

This paper presents the first population‐wide study of the transformation in the business scope of US banks over the last 25 years. Using a novel database containing the time series details of the entire organizational structure of individual bank holding companies, we analyze the evolution of the boundaries of the US banking firm. We document an extremely dynamic industry, where the vast majority of banks pursue a wide array of scope‐transformation strategies, gaining control over diverse business subsidiaries that go well beyond the traditional confines of deposit‐taking and loan‐making, but also exiting from businesses they had entered before. At the industry level, this process of transformation shapes what constitutes the prevailing business model for a banking firm, with scale and scope increasing, and with popularity of particular types of subsidiaries waxing and waning over time, reflecting changes in the underlying technology of financial intermediation. We first duplicate existing research on banks’scope that had relied on listed companies, and confirm that diversification and scope expansion, on the whole, impact performance negatively. We then move beyond existing research by looking at the mode of diversification, considering divestitures, and looking at the specific industries into which banks expand. Due to the breadth of our data, we can track the de facto “modal” business model in terms of subsidiary composition in the sector. We find that firms whose expansion keeps them closer to the “modal bank” are better off compared to those pursuing generic diversification. Likewise, firms that move into “hot” activities, which is where their peers have been investing recently, also benefit. Acknowledging the potential influence of both technological evolution and pressures for conformity with industry trends, we unpack the dynamics of scope expansion over time. We find that early expanders into particular activities actually benefit more—whereas late adopters, rather than benefitting by “fitting the norm,” lose out. Our research thus provides a more nuanced view of the benefits and costs of bank diversification, pointing to the importance of sector‐level transformation and underlining the difference between early and late innovators in terms of changing business scope.

Operating Leverage, Risk Taking and Coordination Failures


Speaker: Matthieu Bouvard
Desautels Faculty of Management

14 June 2018 - S125 - From 2:00 pm to 3:15 pm


We study an economy with demand spillovers where firms' decisions to produce are strategic complements. Firms have access to an increasing returns to scale technology and choose their operating leverage trading off higher fixed costs for lower variable costs. Operating leverage raises the sensitivity of firms' profits to an aggregate labor productivity shock, thereby magnifying systematic risk. We show that firms take excessive risk as they do not internalize that higher operating leverage increases the likelihood of a coordination failure where output is infficiently depressed across the economy. More generally, our analysis suggests that individual risk-taking decisions aggregate into excessive output volatility in the presence of strategic complementarities among agents.

The Origins and Real Effects of the Gender Gap: Evidence from CEOs’ Formative Years∗


Speaker: Mikhail Simutin
Rotman School of Management

7 June 2018 - T004 - From 10:00 am to 12:30 pm


CEOs allocate more investment capital to male than female division managers. Using data from individual Census records, we find that this gender gap is driven by CEOs who grew up in male-dominated families—those where the father was the only income earner and had more education than the mother. The gender gap also increases for CEOs who attended all-male high schools and grew up in neighborhoods with greater gender inequality. The effect of gender on capital budgeting introduces frictions and erodes investment efficiency. Overall, the gender gap originates in CEO preferences developed during formative years and produces significant real effects.

Disclosure, Competition, and Learning from Asset Prices


Speaker: Liyan Yang
Rotman School of Management

31 May 2018 - T027 - From 2:00 pm to 3:15 pm


This paper studies the classic information-sharing problem in a duopoly setting in which firms learn information from a financial market. By disclosing information, a firm incurs a proprietary cost of losing competitive advantage to its rival firm but benefits from learning from a more informative asset market. Firms' disclosure decisions can exhibit strategic complementarity, which is strong enough to support both a disclosure equilibrium and a nondisclosure equilibrium. Allowing minimal learning from asset prices dramatically changes firms' disclosure behaviors: without learning from prices, firms do not disclose at all; but with minimal learning from prices, firms can almost fully disclose their information. Learning from asset prices benefits firms, consumers, and liquidity traders, but harms financial speculators.

Alpha Decay*


Speaker: Anton Lines
Columbia Business School

24 May 2018 - T020 - From 2:00 pm to 3:15 pm


Using a novel sample of professional asset managers, we document positive incremental alpha on newly purchased stocks that decays over twelve months. While managers are successful forecasters at these short-to-medium horizons, their average holding period is substantially longer (2.2 years). Both slow alpha decay and the horizon mismatch can be explained by strategic trading behavior. Managers accumulate positions gradually and unwind gradually once the alpha has run out; they trade more aggressively when the number of competitors and/or correlation among information signals is high, and do not increase trade size after unexpected capital flows. Alphas are lower when competition/correlation increases.

What is the Expected Return on a Stock?


Speaker: Ian Martin

17 May 2018 - From 2:00 pm to 3:15 pm

We derive a formula that expresses the expected return on a stock in terms of the risk-neutral variance of the market and the stock’s excess risk-neutral variance relative to the average stock. These quantities can be computed fromindex and stock option prices; the formula has no free parameters. We run panel regressions of realized stock returns onto risk-neutral variances, and find that the theory performs well at 6-month, 1-year, and 2-year forecasting horizons. The formula drives out beta, size, book-to-market and momentum, and outperforms a range of competitors in forecasting stock returns out of sample. Our results suggest that there is considerably more variation in expected returns, both over time and across stocks, than has previously been acknowledged.