Forthcoming Articles

Investor Inattention and Stock Prices: Evidence from Acquisitions with a Choice of Payment Type

Erik Lie

I report evidence that shareholders holding a combined 15 percent of shares are inattentive or partially inattentive when confronted with the decision to receive cash or stock for their shares in acquisitions. The average cost of such inattention is two percent, and it increases to six percent for the tertile of transactions with the greatest difference between the cash and stock values. Most interestingly, I show that inattention affects stock prices, as attentive shareholders bid up the stock price in anticipation of a wealth transfer from inattentive shareholders.

Business Loans and the Transmission of Monetary Policy

Santiago Barraza, Andrea Civelli, and Nicola Zaniboni

We study the transmission mechanism of monetary policy through business loans and illustrate subtle aspects of its functioning that relate to loans’ contractual characteristics and borrower-lender types. We show that the puzzling increase in business loans in response to monetary tightening, documented before the Great Recession, is largely driven by drawdowns from existing commitments at large banks. Spot loans also rise and take considerable time to adjust. Banks, nonetheless, do curtail credit supply by shortening maturities of new loans. Following the Great Recession, the mechanism has worked differently, with loan responses to monetary tightening displaying a significant downward shift.

A Shadow Rate or a Quadratic Policy Rule? The Best Way to Enforce the Zero Lower Bound in the United States

Martin Andreasen and Andrew Meldrum

We study whether it is better to enforce the zero lower bound (ZLB) in models of U.S. Treasury yields using a shadow rate model or a quadratic term structure model. We show that the models achieve a similar in-sample fit and perform comparably in matching conditional expectations of future yields. However, when the recent ZLB period is included in the sample, the models? ability to match conditional expectations away from the ZLB deteriorates because the time-series dynamics of the pricing factors change. In addition, neither model provides a reasonable description of conditional volatilities when yields are away from the ZLB.

High-Frequency Trading Competition

Jonathan Brogaard and Corey Garriott

Theory on high-frequency traders (HFT) predicts that market liquidity for a security decreases in the number of HFT trading the security. We test this prediction by studying a new Canadian stock exchange, Alpha, that experienced the entry of 11 HFT firms over four years. Bid-ask spreads on Alpha converge to those at the Toronto Stock Exchange as more HFT trade on Alpha. Effective and realized spreads for nonHFT improve as HFT firms enter the market. To explain the contrast with theory, which models HFT as a price competitor, we provide evidence more consistent with HFT fitting a quantity competitor framework.

SOX Section 404 and Corporate Innovation

Huasheng Gao and Jin Zhang

This paper exploits a quasi-natural experiment to investigate the relation between Sarbanes-Oxley Act (SOX) and corporate innovation: firms with a public float under $75 million can delay compliance with Section 404 of the Act. We find a significant decrease in the number of patents and patent citations for firms that are subject to Section 404 compliance relative to firms that are not. This relation is more pronounced when firms are financially constrained and when firms face high litigation risk. Overall, our evidence suggests that SOX imposes real costs to the economy by decreasing corporate innovativeness.

Shelf versus Traditional Seasoned Equity Offerings: The Impact of Potential Short Selling

Marie Dutordoir, Norman Strong, and Ping Sun

Traditional SEOs elicit short selling from traders trying to increase offering discounts. Such short selling is more difficult for shelf offerings, as the time between their announcement and issuance tends to be shorter. We predict and find that firms with higher short-selling potential (SSP) are more likely to choose shelf over traditional SEOs. This result is robust to alternative proxies for SSP and other sensitivity tests. Further analysis suggests that shelf issuers aim to mitigate the threat of manipulative short selling. Our findings add to a growing literature showing that short selling has a real impact on corporate finance decisions.

Labor Adjustment Costs and Risk Management

Yue Qiu

This paper studies the effects of labor adjustment costs on corporate risk management. Labor adjustment costs attenuate the correlation between a firm?s internal funds and its investment opportunity and create more incentives for the firm to smooth internal funds. Using a state border discontinuity approach, I find that state-level labor protection laws significantly impact a firm?s use of foreign currency derivative contracts. I further find that a firm holds more cash when labor adjustment costs are larger and such an effect concentrates on firms that do not engage in derivative hedging.

Regional Economic Activity and Stock Returns

Esad Smajlbegovic

This paper studies the diffusion of regional macroeconomic information into stock prices. I identify all U.S. states that are economically relevant for a company through textual analysis of annual reports and find that economic activity forecasts of company-relevant regions positively predict cross-sectional stock returns. Information arising from all relevant states is more important than that which relates to the headquarter state alone. These forecasts also predict firms’ performance and earnings surprises, suggesting that the return predictability stems from future cash flows that are gradually reflected in prices. Finally, regional information takes longer to be incorporated into prices among difficult-to-arbitrage stocks.

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