Forthcoming Articles

Liquidity and Information in Limit Order Markets

Ioanid Roşu

How does informed trading affect liquidity in limit order markets, where traders can choose between market orders (demanding liquidity) and limit orders (providing liquidity)? In a dynamic model, informed trading overall helps liquidity: a higher share of informed traders (i) improves liquidity as proxied by the bid–ask spread and market resiliency, and (ii) has no effect on the price impact of orders. The model generates other testable implications, and suggests new measures of informed trading.

Do Informal Contracts Matter for Corporate Innovation? Evidence from Social Capital

Atul Gupta, Kartik Raman, and Chenguang Shang

We examine the relevance of informal contracting mechanisms for corporate innovation. Using social capital to capture the social costs imposed on opportunistic behavior by management, we report evidence that firms headquartered in states with higher levels of social capital are associated with more innovation. This result is more pronounced when employees are more susceptible to holdup, e.g., firms with low labor union coverage, firms located in states with weak legal protections for employees, firms surrounded by few external employment opportunities, or when employees face higher levels of information asymmetry. Our study highlights the importance of informal contracts for innovation.

Do Underwriters Price-Up IPOs to Prevent Withdrawal?

Walid Y. Busaba, Zheng Liu, and Felipe Restrepo

We examine whether underwriters price-up weakly-demanded IPOs to prevent withdrawal. Our empirical strategy exploits a discontinuity in the distribution of IPO prices around the low boundary of the filing range. Offerings with a high ex-ante withdrawal probability that are priced at this boundary are likely priced-up to meet issuers’ reservation prices. We compare the aftermarket returns of these IPOs to the returns of other weakly-demanded offerings where issuers’ reservation prices were likely not binding, and identify a negative 8.4-percentage point differential attributable to the aggressive pricing inherent in setting the price at the low boundary when withdrawal risk is high.

CEO Turnover and Volatility under Long-Term Employment Contracts

Peter Cziraki and Moqi Groen-Xu

We study the role of the contractual time horizon of CEOs for CEO turnover and corporate policies. Using hand-collected data on 3,954 fixed-term CEO contracts, we show that remaining time under contract predicts CEO turnover. When contracts are close to expiration, turnover is more likely and is more sensitive to performance. We also show a positive within-CEO relation between remaining time under contract and firm risk. Our results are similar across short and long contracts and are driven neither by firm or CEO survival, nor technological cycles. They are consistent with incentives to take long-term projects with interim volatility.

Currency Regimes and the Carry Trade

Olivier Accominotti, Jason Cen, David Chambers, and Ian W. Marsh

This study exploits a new long-run data set of daily bid and offered exchange rates in spot and forward markets from 1919 to the present to analyze carry returns in fixed and floating currency regimes. We first find that outsized carry returns occur exclusively in the floating regime, being zero in the fixed regime. Second, we show that fixed-to-floating regime shifts are associated with negative returns to a carry strategy implemented only on floating currencies, robust to the inclusion of volatility risks. These shifts are typically characterized by global flight-to-safety events that represent bad times for carry traders.

Leverage and the Beta Anomaly

Malcolm Baker, Mathias F. Hoeyer, and Jeffrey Wurgler

The well-known weak empirical relationship between beta risk and the cost of equity–the beta anomaly–generates a simple tradeoff theory: As firms lever up, the overall cost of capital falls as leverage increases equity beta, but as debt becomes riskier the marginal benefit of increasing equity beta declines. As a simple theoretical framework predicts, we find that leverage is inversely related to asset beta, including upside asset beta, which is hard to explain by the traditional leverage tradeoff with financial distress that emphasizes downside risk. The results are robust to a variety of specification choices and control variables.


Investor Sentiment and Employment

Maurizio Montone and Remco C. J. Zwinkels

We develop a multi-country model with moral hazard and noise traders, and show that investor sentiment should affect employment growth both domestically and abroad. Using a large sample of international industry-level data, we find strong support for the model’s predictions. We show that U.S. investor sentiment has a positive association with labor market conditions around the world, due to spillover effects as well as foreign direct investments from the US. We also find that U.S. sentiment amplifies the negative effect of local financial crises on job losses, which supports the idea that financial development has a “dark side.”

Information Barriers in Global Markets: Evidence from International Subcontracting Relationships

Massimo Massa and David Schumacher

We study the link between information barriers in global markets and the organizational form of asset management. Fund families outsource funds in which they are at an informational disadvantage to generate performance. Using a structural model of self-selection, we endogenize the outsourcing decision and estimate positive gains from outsourcing of 414 basis points per month, thereby reconciling underperformance of outsourced funds with performance maximization by fund families. The gains from outsourcing provide a novel proxy for the information barriers that segment global financial markets: the more segmented the underlying markets where the funds invest, the larger the gains from outsourcing.

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