Forthcoming Articles

Equilibrium Price Dynamics of Emission Permits

Steffen Hitzemann and Marliese Uhrig-Homburg
This paper presents a stochastic equilibrium model for environmental markets that allows us to study the characteristic properties of emission permit prices induced by the design of today’s cap-and-trade systems. We characterize emission permits as highly nonlinear contingent claims on economy-wide emissions and reveal their hybrid nature between investment and consumption assets. Our model makes predictions about the dynamics and volatility structure of emission permit prices, the forward price curve, and the implications for option pricing in this market. Empirical evidence from existing emissions markets shows that the model explains the stylized facts of emission permit prices and related derivatives.

Corporate Environmental Policy and Shareholder Value: Following the Smart Money

Chitru S. Fernando, Mark P. Sharfman, and Vahap B. Uysal
We examine the value consequences of corporate social responsibility through the lens of institutional shareholders. We find a sharp asymmetry between corporate policies that mitigate the firm’s exposure to environmental risk and those that enhance its perceived environmental friendliness (“greenness”). Institutional investors shun stocks with high environmental risk exposure, which we show have lower valuations as predicted by risk management theory. These findings suggest that corporate environmental policies that mitigate environmental risk exposure create shareholder value. In contrast, firms that increase greenness do not create shareholder value and are also shunned by institutional investors.

Market Timing and Investment Selection: Evidence from Real Estate Investors

Yael V. Hochberg and Tobias Mühlhofer
We examine commercial real estate fund managers’ abilities to generate abnormal profits through selection of outperforming property sub-market segments or through the timing of entry into and exit from sub-markets. The vast majority of portfolio managers exhibit little market timing ability, with the exception of non-NYSE REITs after the financial crisis. A substantial fraction of managers seem able to successfully select property sub-markets. Selection performance exhibits significant persistence. Managers that are active in more liquid markets tend to exhibit better timing performance, while managers exhibiting better selection ability appear to be active in less liquid markets.

Economic Risk Premia in the Fixed Income Markets: The Intra-Day Evidence

Pierluigi Balduzzi and Fabio Moneta
We use high-frequency data to precisely estimate bond price reactions to macroeconomic announcements and the associated compensation for macro risks. We find evidence of a single factor summarizing the reaction of bond prices to different announcements. Prior to the financial crisis, the factor risk premium is substantial, significant, and mainly earned before announcement releases. After the crisis, the stock-bond covariance becomes negative and the pre-announcement factor risk premium becomes insignificant. Our empirical results are consistent with information leakages that take place ahead of announcement releases, and with the implications of a long-run risks model of bond risk premia.

Asymmetry in Stock Comovements: An Entropy Approach

Lei Jiang, Ke Wu, and Guofu Zhou
We provide an entropy approach for measuring asymmetric comovement between the return on a single asset and the market return. This approach yields a model-free test for stock return asymmetry, generalizing the correlation-based test proposed by Hong, Tu, and Zhou (2007). Based on this test, we find that asymmetry is much more pervasive than previously thought. Moreover, our approach also provides an entropy-based measure of downside asymmetric comovement. In the cross-section of stock returns, we find an asymmetry premium: high downside asymmetric comovement with the market indicates higher expected returns.

The Effect of Cultural Similarity on Mergers and Acquisitions: Evidence from Corporate Social Responsibility

Fred Bereskin, Seong K. Byun, Micah S. Officer, and Jong-Min Oh
We study the effect of corporate cultural similarity on merger decisions and outcomes. Using the similarity in firms’ corporate social responsibility characteristics to proxy for cultural similarity, we find that culturally similar firms are more likely to merge. Moreover, these mergers are associated with greater synergies, superior long-run operating performance, and fewer write-offs of goodwill. Our evidence is consistent with the notion that cultural similarity eases post-deal integration. Our results contribute to the literature on the determinants of merger success, provide new evidence on the impact of corporate culture, and offer a new approach to defining firms’ cultural similarity.

Time Will Tell: Information in the Timing of Scheduled Earnings News

Travis L. Johnson and Eric C. So
Using novel earnings calendar data, we show that firms’ advanced scheduling of earnings announcement dates foreshadows their earnings news. Firms that schedule later-than-expected announcement dates subsequently announce worse news than those scheduling earlier-than-expected announcement dates. Despite scheduling disclosures being observable weeks ahead of earnings announcements, we show equity markets fail to reflect the information in these disclosures until the announcement itself. By also showing that option markets respond efficiently to “volatility-timing” information embedded in the same scheduling disclosures, we provide novel evidence markets fail to react to information about future earnings despite investors immediately trading on the underlying signal.

Event-Related Exchange Rate Forecasts Combining Information from Betting Quotes and Option Prices

Michael Hanke, Rolf Poulsen, and Alex Weissensteiner
Betting quotes provide valuable information on market-implied probabilities for outcomes of events like elections or referendums, which may have an impact on exchange rates. We generate exchange rate forecasts around such events based on a model that combines risk-neutral event probabilities implied from betting quotes with risk-neutral exchange rate densities extracted from currency option prices. Its application to predict exchange rates around the Brexit referendum and the U.S. presidential elections shows that these forecasts — conditional on the respective outcomes — were accurate, and markets were able to separate their views on the likelihood and the impact of these events.

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