Forthcoming Articles

When Does the Family Govern the Family Firm?

Øyvind Bøhren, Bogdan Stacescu, Line F. Almli, and Kathrine L. Søndergaard

We find that the controlling family holds both the chief executive officer and chair positions in 79% of Norwegian family firms. The family holds more governance positions when it owns large stakes in small, profitable, low-risk firms. This result suggests that the family trades off expected costs and benefits by conditioning participation intensity on observable firm characteristics. We find that the positive effect of performance on participation is twice as strong as the positive effect of participation on performance. The endogeneity of participation should therefore be carefully accounted for when analyzing the effect of family governance on the family firm’s behavior.

Early Exercise Decision in American Options with Dividends, Stochastic Volatility, and Jumps

Antonio Cosma, Stefano Galluccio, Paola Pederzoli, and Olivier Scaillet

Using a fast numerical technique, we investigate a large database of investor suboptimal non-exercise of short maturity American call options on dividend-paying stocks listed on the Dow Jones. The correct modelling of the discrete dividend is essential for a correct calculation of the early exercise boundary, as confirmed by theoretical insights. Pricing with stochastic volatility and jumps instead of the Black–Scholes–Merton benchmark cuts the amount lost by investors through suboptimal exercise by one quarter. The remaining three quarters are largely unexplained by transaction fees and may be interpreted as an opportunity cost for the investors to monitor optimal exercise.

Distracted Institutional Investors

Daniel Schmidt

We investigate how distraction affects the trading behavior of professional asset managers. Exploring detailed transaction-level data, we show that managers with a large fraction of portfolio stocks exhibiting an earnings announcement are significantly less likely to trade in other stocks, suggesting that these announcements absorb attention which is missing for the choice of which stocks to trade. This distraction effect is more pronounced for non-passive managers that engage in active stock selection choices. Finally, we identify three channels through which distraction hurts managers’ performance: distracted managers trade less profitably, incur slightly higher transaction costs and are less likely to close losing positions.

Hometown Biased Acquisitions

Feng Jiang, Yiming Qian, and Scott E. Yonker

We show that CEOs exhibit a hometown bias in acquisitions. Firms are over twice as likely to acquire targets located in the states of their CEOs’ childhood homes than similar targets domiciled elsewhere. Small, private home-state deals underperform other small, private deals, and the bias is stronger when acquirer governance is lax, suggesting that CEOs acquire private home-state targets for their own benefits. In contrast, large, public home-state acquisitions are value-enhancing. CEOs create value in public home-state acquisitions by avoiding extremely poor deals and through deals with higher synergies. Thus, both agency issues and hometown advantages drive home-state acquisitions.

Liquidity Transformation and Financial Fragility: Evidence from Funds of Hedge Funds

Vikas Agarwal, George O. Aragon, and Zhen Shi

We examine liquidity transformation by funds of hedge funds (FoFs) by developing a new measure, illiquidity gap, which captures the mismatch between the liquidity of their portfolios and the liquidity available to their investors. We find that higher liquidity transformation is driven by FoFs’ incentives to attract more capital and earn higher compensation. Greater liquidity transformation is associated with higher exposure to investor runs and worse performance during crisis periods. Finally, FoFs mitigate the risks associated with liquidity transformation by maintaining higher cash buffers.

 

Do Mutual Fund Investors Overweight the Probability of Extreme Payoffs in the Return Distribution?

Ferhat Akbas and Egemen Genc

We investigate the role of extreme positive payoffs in the distribution of monthly fund returns in investors’ mutual fund preferences. We document a positive and significant relationship between the maximum style-adjusted monthly return (MAX) and future fund flows. The relationship is robust to controlling for average performance, volatility, skewness, and various other fund characteristics. Our findings are consistent with the notion that fund investors overweight the probability of high payoff states in the past return distribution. We further show that MAX is not a useful predictor of future performance and increase in a fund’s visibility does not explain our findings.

Risk Aversion in a Dynamic Asset Allocation Experiment

Isabelle Brocas, Juan D. Carrillo, Aleksandar Giga, and Fernando Zapatero

We conduct a controlled laboratory experiment in the spirit of Merton (1971), in which subjects dynamically choose their portfolio allocation between a risk-free and risky asset. Using the optimal allocation of an investor with hyperbolic absolute risk aversion (HARA) utility, we fit the experimental choices to characterize the risk profile of our participants. Despite substantial heterogeneity, decreasing absolute risk aversion and increasing relative risk aversion are the predominant types. We also find some evidence of increased risk taking after a gain. Finally, the session level risk attitudes show a different profile than the individual descriptions of risk attitudes.

 

Pricing Intertemporal Risk When Investment Opportunities Are Unobservable

Scott Cederburg

The intertemporal capital asset pricing model (ICAPM) predicts that an unobservable factor capturing changes in expected market returns should be priced in the cross section. My Bayesian framework accounts for uncertainty in the intertemporal risk factor and gauges the effects of prior information about investment opportunities on model inferences. Whereas an uninformative-prior specification produces weak evidence that intertemporal risk is priced, incorporating prior information about market return predictability generates a large space of ex ante reasonable priors in which the estimated intertemporal risk factor is positively priced. Overall, the cross-sectional tests reject the CAPM and indicate support for the ICAPM.

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