Forthcoming Articles

Do Mutual Fund Investors Overweight the Probability of Extreme Payoffs in the Return Distribution?

Ferhat Akbas and Egemen Genc

We investigate the role of extreme positive payoffs in the distribution of monthly fund returns in investors’ mutual fund preferences. We document a positive and significant relationship between the maximum style-adjusted monthly return (MAX) and future fund flows. The relationship is robust to controlling for average performance, volatility, skewness, and various other fund characteristics. Our findings are consistent with the notion that fund investors overweight the probability of high payoff states in the past return distribution. We further show that MAX is not a useful predictor of future performance and increase in a fund’s visibility does not explain our findings.

Risk Aversion in a Dynamic Asset Allocation Experiment

Isabelle Brocas, Juan D. Carrillo, Aleksandar Giga, and Fernando Zapatero

We conduct a controlled laboratory experiment in the spirit of Merton (1971), in which subjects dynamically choose their portfolio allocation between a risk-free and risky asset. Using the optimal allocation of an investor with hyperbolic absolute risk aversion (HARA) utility, we fit the experimental choices to characterize the risk profile of our participants. Despite substantial heterogeneity, decreasing absolute risk aversion and increasing relative risk aversion are the predominant types. We also find some evidence of increased risk taking after a gain. Finally, the session level risk attitudes show a different profile than the individual descriptions of risk attitudes.

 

Pricing Intertemporal Risk When Investment Opportunities Are Unobservable

Scott Cederburg

The intertemporal capital asset pricing model (ICAPM) predicts that an unobservable factor capturing changes in expected market returns should be priced in the cross section. My Bayesian framework accounts for uncertainty in the intertemporal risk factor and gauges the effects of prior information about investment opportunities on model inferences. Whereas an uninformative-prior specification produces weak evidence that intertemporal risk is priced, incorporating prior information about market return predictability generates a large space of ex ante reasonable priors in which the estimated intertemporal risk factor is positively priced. Overall, the cross-sectional tests reject the CAPM and indicate support for the ICAPM.

The Effect of Financial Flexibility on Payout Policy

Anil Kumar and Carles Vergara-Alert

We use variation in real estate prices as exogenous shocks to firms’ debt capacity to study the causal effect of financial flexibility on payout policy. We show that an increase in financial flexibility results in higher dividends, share repurchases, and payout flexibility. We find that a one-standard-deviation increase in the firms’ collateral value results into a 0.26 and 0.55 percentage points increase in non-discretionary payout and discretionary payout, respectively. This effect is stronger for firms with few investment opportunities. Moreover, highly leveraged firms are more likely to cut dividends in response to a sharp decrease in their financial flexibility.

Bank Interventions and Trade Credit: Evidence from Debt Covenant Violations

Zilong Zhang

This study examines the consequences of conflicts between creditors. Using the setting of debt covenant violations, I employ a regression discontinuity design to identify the effect of bank interventions on their borrowers’ trade credit. The results show that trade credit experiences a substantial decline when banks intervene in the borrowing firm following loan covenant violations. The decline is mitigated by the presence of dependent suppliers and exacerbated by banks’ incentives to exercise control rights. Such creditor conflicts are reflected in the loan contract design. Borrowing firms sign less restrictive loan contracts when they rely more on trade credit.

Dead Hand Proxy Puts and Hedge Fund Activism

Sean J. Griffith and Natalia Reisel

We investigate the Dead Hand Proxy Put, a contractual innovation in corporate debt agreements that may impact hedge fund activism. We find the provision principally in loans, not bonds, and provide evidence linking adoption of the provision to hedge fund activism. Further, controlling for endogeneity, we find that the provision significantly reduces the cost of loans. Bondholder wealth also increases. Moreover, cross-sectional analysis of share returns reveals that the provision is positively associated with repeat banking relationships and negatively associated with free cash flow problems, suggesting a cost-benefit tradeoff.

Best of the Best: A Comparison of Factor Models

Shamim Ahmed, Ziwen Bu, and Daniel Tsvetanov

We compare major factor models and find that the Stambaugh and Yuan (2016) four-factor model is the overall winner in the time-series domain. The Hou, Xue, and Zhang (2015) q-factor model takes second place and the Fama and French (2015) five-factor model and the Barillas and Shanken (2018) six-factor model jointly take third place. But the pairwise cross-sectional R2 and the multiple model comparison tests show that the Hou, Xue, and Zhang (2015) q-factor model, the Fama and French (2015) five-factor and four-factor models, and the Barillas and Shanken (2018) six-factor model take equal first place in the horse race.

Are Buybacks Good for Long-Term Shareholder Value? Evidence from Buybacks around the World

Alberto Manconi, Urs Peyer, and Theo Vermaelen

Using a sample of over 9,000 buyback announcements from 31 non-U.S. countries, we find support for the results of studies based on U.S. data: on average, share repurchases are associated with significant positive short-term and long-term excess returns. However, excess returns depend on the likelihood of undervaluation and the efficiency and liquidity of equity markets. In contrast to findings in U.S. markets, we do not find that these long-term excess returns are simply a compensation for takeover risk or have become less significant in recent years.