Forthcoming Articles

Time-Varying Beta and the Value Premium

Hui Guo, Chaojiang Wu, and Yan Yu

We model conditional market beta and alpha as flexible functions of state variables identified via a formal variable selection procedure. In the post-1963 sample, beta of the value premium comoves strongly with unemployment, inflation, and price-earnings ratio in a countercyclical manner. We also uncover a novel nonlinear dependence of alpha on business conditions: It falls sharply and even becomes negative during severe economic downturns but is positive and flat otherwise. The conditional CAPM performs better than the unconditional CAPM but this does not fully explain the value premium. Our findings are consistent with a conditional CAPM with rare disasters.

The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors

Stefania D’Amico, Roger Fan, and Yuriy Kitsul

We quantify the scarcity value of Treasury collateral by estimating the impact of security-specific demand and supply factors on the specific collateral repo rates of all outstanding U.S. Treasury securities. We find a positive and significant scarcity premium for on- and off-the-run Treasuries that persists for about three months and is larger in magnitude for shorter-term securities. This scarcity effect seems to pass through to Treasury cash market prices, providing additional evidence for the scarcity channel of QE. On the contrary, the Federal Reserve’s reverse repo operations could help reduce the scarcity premium by alleviating potential shortages of high-quality collateral.

Taxes, Capital Structure Choices, and Equity Value

Mara Faccio and Jin Xu

We use a multitude of tax reforms across OECD countries as natural experiments to estimate the market value of the tax benefits of debt financing. We report time-series evidence that tax reforms are followed by large changes in the value of corporate equity. However, the impact of tax reforms is greatly mitigated by the presence of leverage. The value of debt tax savings is greater among top tax payers, highly profitable firms, and in countries where tax laws are more strongly enforced. Importantly, the value of debt tax savings is in line with the benchmark implied by a traditional approach.

Do Antitakeover Provisions Spur Corporate Innovation? A Regression Discontinuity Analysis

Thomas Chemmanur and Xuan Tian

We study the effect of antitakeover provisions (ATPs) on innovation. To establish causality, we use a regression discontinuity approach that relies on locally exogenous variation generated by shareholder proposal votes. We find a positive, causal effect of ATPs on innovation. This positive effect is more pronounced in firms that are subject to a larger degree of information asymmetry and operate in more competitive product markets. The evidence suggests that ATPs help nurture innovation by insulating managers from short-term pressures arising from equity markets. Finally, the number of ATPs contributes positively to firm value for firms involved in intensive innovation activities.

Know Thy Neighbor: Industry Clusters, Information Spillovers and Market Efficiency

Joseph Engelberg, Arzu Ozoguz, and Sean Wang

Firms in industry clusters have market prices that are more efficient than firms outside clusters. To establish causality, we analyze exogenous firm relocations and find that firms that relocate into industry clusters have higher levels of industry-information in their prices. We argue that geographical proximity allows for information spillovers, reducing marginal cost to information producers. Our evidence supports this view: analysts are more likely to cover stocks inside industry clusters and that, when institutional investors have a large position in one stock in the industry cluster, they are more likely to hold other stocks in the same industry cluster.

Passive versus Active Fund Performance: Do Index Funds Have Skill?

Alan D. Crane and Kevin Crotty

We apply methods designed to measure mutual fund skill to a cross section of funds that is unlikely to exhibit managerial portfolio selection skill: index funds. Surprisingly, these tests imply index fund skill exists, is persistent, and is in similar proportion as in active funds. We use the distribution of passive fund performance to gauge incremental ability of active managers. Outperformance by top active funds is lower when benchmarked to the index fund distribution and disappears when we account for residual risk. Stochastic dominance tests suggest no risk-averse investor should choose a random active fund over a random index fund.

Right on Schedule: CEO Option Grants and Opportunism

Robert M. Daines, Grant R. McQueen, Robert J. Schonlau

After the public outcry over backdating, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates in order to obtain options with lower strike prices. We provide evidence that in recent years some CEOs manipulate stock prices to increase option compensation. We document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are explained by measures of a CEO’s incentive and ability to influence stock prices. We document several mechanisms CEOs use to lower the strike price, including changing the substance and timing of the firm’s disclosures.

Staying on Top of the Curve: A Cascade Model of Term Structure Dynamics

Laurent E. Calvet, Adlai J. Fisher, and Liuren Wu

This paper specifies term structure dynamics by a recursive cascade of heterogeneously persistent factors. The cascade naturally orders economic shocks by their adjustment speeds, and generates smooth interest-rate curves in closed form. For a class of specifications, the number of parameters is invariant to the size of the state space, and the term structure converges to a stochastic limit as the state dimension goes to infinity. High-dimensional specifications fit observed term structure almost perfectly, match the observed low correlation between movements in different maturities, and produce stable interest rate forecasts that outperform lower-dimensional specifications.

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