Forthcoming Articles

The Boss Knows Best: Directors of Research and Subordinate Analysts

Daniel Bradley, Sinan Gokkaya, and Xi Liu

Research departments are managed by Directors of Research (DORs). Subordinate analysts working for higher quality DORs provide superior earnings forecasts that elicit stronger market reactions, better investment recommendations, and have better career outcomes. For the broker, higher quality DORs drive more trading commissions. Economically, analysts benefit the most from DOR-analyst industry alignment resulting from DORs’ former analyst experience. We provide several tests to mitigate endogeneity concerns and explore various mechanisms to explain these results. Overall, our paper identifies a unique channel whereby industry-specific and general human capital of top management filters through to individual subordinates and consequently improves organizational performance.

Risk and Return in High-Frequency Trading

Matthew Baron, Jonathan Brogaard, Björn Hagströmer, and Andrei Kirilenko

We study performance and competition among high-frequency traders (HFTs). We construct measures of latency and find that differences in relative latency account for large differences in HFTs’ trading performance. HFTs that improve their latency rank due to colocation upgrades see improved trading performance. The stronger performance associated with speed comes through both the short-lived information channel and the risk management channel, and speed is useful for various strategies including market making and cross-market arbitrage. We find empirical support for many predictions regarding relative latency competition.

Risk-Shifting and Corporate Pension Plans: Evidence from a Natural Experiment

David J. Pedersen

Using a natural experiment to identify the causal effect of an increase in default risk on firm actions, I find little evidence managers shift risk to corporate pension plans following an exogenous shock to the firm’s long-term liabilities. The finding is robust to focusing on firms where the incentive to engage in risk shifting is arguably the greatest, such as financially vulnerable firms and firms with fewer agency conflicts. This study casts doubt on the risk-shifting hypothesis and shows managers do not take risk-shifting actions that would increase shareholder value even when those actions pose little threat to managerial utility.

Anticipating Uncertainty: Straddles Around Earnings Announcements

Chao Gao, Yuhang Xing, and Xiaoyan Zhang

Straddles on individual stocks generally earn significantly negative returns. However, average at-the- money straddles from three days before an earnings announcement to the announcement date yield a highly significant 3.34% return. The positive returns on straddles indicate that investors under-estimate the magnitude of uncertainty around earnings announcements. We find positive straddle returns are more pronounced for smaller firms, firms with higher volatility, higher kurtosis, more volatile past earnings surprises and less trading volume/higher transaction costs. This suggests that when firm signals are noisy, and/or when it is costlier to trade, investors underestimate the uncertainty associated with earnings announcements.

Global Political Risk and Currency Momentum

Ilias Filippou, Arie E. Gozluklu, and Mark P. Taylor

Using a measure of political risk, relative to the U.S., that captures unexpected political conditions, we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors. Our results are robust after controlling for transaction costs, reversals and alternative limits to arbitrage. The global political environment affects the profitability of the momentum strategy in the foreign exchange market; investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold, i.e., the past winners, and exploit the lower returns of loser portfolios. The risk compensation is mainly justified by the different exposures of foreign currencies in the momentum portfolio, to the U.S. political shocks, which is the main component of the global political risk.

Anticipatory Traders and Trading Speed

Raymond P. H. Fishe, Richard Haynes, and Esen Onur

We examine whether speed is an important characteristic of traders who anticipate local price trends. These anticipatory participants correctly trade prior to the overall market and systematically act before other participants. They use manual and algorithmic order entry methods, but most are not fast enough to be high frequency traders (HFTs). Those anticipating price trends have impacts as if they are informed traders, while the case for anticipatory participants affecting the volume of other traders is rejected. A follow-up sample shows significant attrition in accounts and difficulty maintaining the anticipatory strategies. To identify anticipatory traders, we devise novel methods to isolate local price trends using order book data from the WTI crude oil futures market.

Good Volatility, Bad Volatility, and Option Pricing

Bruno Feunou and Cédric Okou

Advances in variance analysis permit to split the total quadratic variation of a jump-diffusion process into upside and downside components. Recent studies establish that this decomposition enhances volatility predictions, and highlight the upside/downside variance spread as a driver of stock price distribution’s asymmetry. To appraise the economic gain of the decomposition, we design a new and flexible option pricing model in which the underlying asset price exhibits distinct upside and downside semi-variance dynamics driven by their model-free proxies. The new model outperforms common benchmarks, especially, the alternative that splits the quadratic variation into diffusive and jump components.

Accounting Losses as a Heuristic for Managerial Failure: Evidence from CEO Turnovers

Aloke (Al) Ghosh and Jun Wang

We study the effects of accounting losses on CEO turnover. If accounting losses provide incremental information about managerial ability, boards can utilize the information in losses to assess CEO’s stewardship of assets, which is why losses may serve as a heuristic for managerial failure. We find a positive relation between losses and subsequent CEO turnover after controlling for other accounting and stock performance measures. We also find that losses are associated with an increase in board activity and that losses predict poor operating performance and future financial problems. Our results explain why CEOs manage earnings to avoid losses.

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