Forthcoming Articles

Optimists and Pessimists in (In)Complete Markets

Nicole Branger, Patrick Konermann, and Christian Schlag

We study the effects of market incompleteness on speculation, investor survival, and asset pricing moments, when investors disagree about the likelihood of jumps and have recursive preferences. We consider two models. In a model with jumps in aggregate consumption, incompleteness barely matters, since the consumption claim resembles an insurance product against jump risk and effectively reproduces approximate spanning. In a long-run risk model with jumps in the long-run growth rate, market incompleteness affects speculation, and investor survival. Jump and diffusive risks are more balanced regarding their importance and, therefore, the consumption claim cannot reproduce approximate spanning.

Do Public and Private Firms Behave Differently? An Examination of Investment in the Chemical Industry

Albert Sheen

I compare the U.S. capacity expansion decisions of public and private producers of seven commodity chemicals from 1989–2006. I find that private firms invest differently than public firms. Private firms are more likely than public firms to increase capacity prior to a positive demand shock (an increase in price and quantity) and less likely to increase capacity before a negative demand shock. Potential mechanisms include public firm overextrapolation of past demand shocks and agency problems arising from greater separation between ownership and control.

Relative Performance Evaluation in CEO Compensation: A Talent-Retention Explanation

David De Angelis and Yaniv Grinstein

Relative performance evaluation (RPE) in CEO compensation can be used as a commitment device to pay CEOs for their revealed relative talent. We find evidence consistent with the talent-retention hypothesis, using two different approaches. First, we examine the RPE terms in compensation contracts and document features that are consistent with retention motives. Second, using a novel empirical specification for detecting RPE, we find RPE is less prevalent when CEO talent is less transferrable: among specialist CEOs, founder CEOs, and retirement-age CEOs, as well as in industries and states where the market for CEO talent is more restrictive.

Growth Options and Related Stock Market Anomalies: Profitability, Distress, Lotteryness, and Volatility

Turan Bali, Luca Del Viva, Neophytos Lambertides, and Lenos Trigeorgis

We provide new evidence about the economic role of growth options behind the profitability, distress, lotteryness, and volatility anomalies. We use idiosyncratic skewness to measure growth options and estimate expected idiosyncratic skewness capturing investors’ expectation about the firm’s mix of growth options versus assets-in-place. We find that investors require a positive premium to hold stocks of inflexible firms with low growth options and negative expected skewness, and that a newly proposed skewness factor based on growth options explains the aforementioned anomalies. Thus, the new measure of expected idiosyncratic skewness may serve to reduce the number of anomalies in the literature.

Trust and Local Bias

Chishen Wei and Lei Zhang

This paper examines the effect of social trust on local bias. Our evidence suggests that institutional investors located in high trust regions of the United States exhibit lower local bias. Moreover, we find that high trust investors are better diversified, suggesting that trust helps accomplish greater diversification. The results are not due to firm, demographic, or local economic characteristics. Additional analysis reveals that the documented informational advantage in local holdings exists only in low trust regions. We show that this finding is consistent with a trust explanation.


Corruption and Corporate Innovation

Jesse Ellis, Jared Smith, and Roger White

We examine whether political corruption impedes innovation. Using data on US firms, we find that corruption has a substantial, negative relation with the quantity and quality of innovation. These results are robust to using various fixed effects, proxies for corruption and innovation, and subsamples. To establish causality, we employ two instruments for corruption: local ethnic diversity and the corruption of the state a firm’s founder grew up in. Corruption appears to reduce innovation output both on average and for the most innovative firms. Overall, this evidence is consistent with the notion that corruption reduces social welfare by impeding innovation.

Does Trading Anonymously Enhance Liquidity?

Patrick Dennis and Patrik Sandas

Is liquidity better when a trade counterparty’s brokerage firm is unknown (anonymous) or known (transparent)? We examine a quasi-natural experiment where some firms switched from transparent to anonymous trading and then, one year later, switched back. Our results for inside spread, price impact, and limit order book depth suggest that liquidity improves when anonymous post-trade reporting is introduced and liquidity worsens when anonymous post-trade reporting is reversed.

Shorting in Broad Daylight: Short Sales and Venue Choice

Adam V. Reed, Mehrdad Samadi, and Jonathan S. Sokobin

Using a novel database on venue short sales and market design characteristics, we ask: Where do short sellers exploit their information advantage? Exchange short sales comprise a larger proportion of trading and are more informative about future prices than dark pool short sales, particularly in the presence of short-lived information. Our results indicate that short sellers value the immediacy of exchanges over the lower transaction costs of dark pools, as predicted by Zhu (2014). When examining market design characteristics, we find that dark pools offering VWAP crossing attract more short sales while those offering block trading attract fewer short sales.


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