Research Seminars

Operating Leverage, Risk Taking and Coordination Failures

Finance

Speaker: Matthieu Bouvard
Desautels Faculty of Management

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

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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∗

Finance

Speaker: Mikhail Simutin
Rotman School of Management

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

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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

Finance

Speaker: Liyan Yang
Rotman School of Management

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

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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*

Finance

Speaker: Anton Lines
Columbia Business School

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

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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?

Finance

Speaker: Ian Martin
LSE

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.

Sovereign credit risk and exchange rates: Evidence from CDS quanto spreads

Finance

Speaker: Mikhail Chernov
UCLA Anderson School of Management

3 May 2018 - T015 - From 2:00 pm to 3:15 pm

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Sovereign CDS quanto spreads { the difference between CDS premiums denominated in U.S. dollars and a foreign currency { tell us how fnancial markets view the interaction between a country's likelihood of default and associated currency devaluations (the twin Ds). A noarbitrage model applied to the term structure of quanto spreads can isolate the interaction between the twin Ds and gauge the associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate and monetary policy, allowing us to link cross-sectional variation in their term structures to cross-country differences in fscal policies. The ratio of the risk-adjusted to the true default intensities is 2, on average. Conditional on the occurrence default, the true and risk-adjusted 1-wee probabilities of devaluation are 4% and 75%, respectively. The risk premium for the euro
devaluation in case of default exceeds the regular currency premium by up to 0.4% per week.

Finance

Speaker: Adrien Matray
Princeton University

12 April 2018 - T004 - From 11:15 am to 12:30 pm


Entrepreneurial Wages

Finance

Speaker: Paige Ouimet
UNC Kenan–Flagler Business School

5 April 2018 - From 2:00 pm to 3:15 pm

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Do young firms pay less? Previous studies have argued that employees earn less when they join young firms. Using US Census employer-employee matched data, we confirm lower average wages at new firms. However, after including worker fixed effects, nearly two thirds of this decline disappears, suggesting differences in worker quality at new firms. Moreover, once we control for
firm fixed effects, absorbing time invariant firm quality, the wage difference between new and established firms becomes economically unimportant. Overall, our findings indicate that, for a given worker who has job opportunities at similar quality new and established firms, the expected wage penalty of going to work at the new firm are, on average, economically insignificant.

Swap Trading after Dodd-Frank: Evidence from Index CDS

Finance

Speaker: Haoxiang Zhu
MIT Sloan School of Management

22 March 2018 - From 2:00 pm to 3:15 pm

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The Dodd-Frank Act mandates that certain standard OTC derivatives, also known as swaps, must be traded on swap execution facilities (SEFs). Using message-level data, we provide a granular analysis of dealers' and customers' trading behavior on the two largest dealer-to-customer SEFs for index CDS. On average, a typical customer contacts few dealers when seeking liquidity. A theoretical model shows that the benefit of competition through wider order exposure is mitigated by an endogenous winner's curse problem. Consistent with the model, we find that order size, market conditions, and customer-dealer relationships are important empirical determinants of customers' choice of trading mechanism and dealers' liquidity provision.

Nonbank Lending

Finance

Speaker: Sergey Chernenko
Fisher College of Business

15 March 2018 - T004 - From 2:00 pm to 3:15 pm

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We provide novel systematic evidence on the terms of direct lending by nonbank financial institutions. Analyzing hand-collected data for a random sample of publicly-traded middle-market firms during the 2010-2015 period, we find that lending from nonbank financial institutions is substantial, with 30% of all loans being extended by nonbanks. Firms are more likely to borrow from a nonbank lender if local banks are poorly capitalized and less concentrated. Nonbank borrowers are smaller, riskier, and significantly more likely to have negative EBITDA. Nonbank lenders are less likely to include financial covenants in their loans, but appear to engage in substantial ex-ante screening: origination of nonbank loans is associated with larger positive announcement returns while ex-post performance is not distinguishable from bank loans. We also find that nonbank borrowers pay about 200 basis points higher interest rates than bank borrowers do. Using fuzzy regression discontinuity design and matching techniques generates similar results. Overall, our results provide evidence of market segmentation in the commercial loan market, where bank and nonbank lenders utilize different lending technologies and cater to different types of borrowers.


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