Forthcoming Articles

Consumption and Portfolio Choice under Internal Multiplicative Habit Formation

Servaas van Bilsen, A. Lans Bovenberg, and Roger J. A. Laeven

This paper explores the optimal consumption and investment behavior of an individual who derives utility from the ratio between his consumption and an endogenous habit. We obtain closed-form policies under general utility functionals and stochastic investment opportunities, by developing a non-trivial linearization to the budget constraint. This enables us to explicitly characterize how habit formation affects the marginal propensity to consume and optimal stock-bond investments. We also show that in a setting which combines habit formation with Epstein-Zin utility, consumption no longer grows at unrealistically high rates at high ages and investments in risky assets decrease.

The Efficient IPO Market Hypothesis: Theory and Evidence

Kevin R. James and Marcela Valenzuela

We derive the optimal underwriting method and the quantitative IPO pricing rule that this method implies in a market with informational frictions consisting of fully rational banks, issuers, and investors. In an efficient IPO market, an issuer’s expected initial return will be determined entirely by the combination of this pricing rule and issuer fundamentals. Applying this rule, we find that we can explain the quantitative magnitude of the principal aspects of the time-series and cross-sectional variation in IPO average initial returns. We conclude that the IPO market is efficient.

Emerging Markets Are Catching Up: Economic or Financial Integration?

Amir Akbari, Lilian Ng, and Bruno Solnik

We propose a simple metric to measure two aspects of market integration, namely economic integration (defined as a common cash flow dynamic) and financial integration (defined as a common risk pricing dynamic) and then examine their evolution through time while controlling for volatility. We find that developed (DEV) countries exhibit greater degrees of financial and economic integration than emerging (EMG) markets. While the financial integration gap between these markets remains large throughout the sample period, the EMG economies are catching up with their DEV counterparts in recent years — their level of economic integration has reached that of DEV countries.

 

Personal Bankruptcy Laws and Corporate Policies

Yi-Wen Chen, Joseph Taylor Halford, Hung-Chia Scott Hsu, and Chu-Bin Lin

This paper examines whether and how changes in personal bankruptcy laws, viewed as a shock to employees’ expected personal wealth, affect corporate policies. Following a reform in personal bankruptcy laws that limits individuals’ access to bankruptcy protection, firms more affected by this regulation reform increase labor costs, reduce investment, and engage in less risk taking. The effects are stronger when employees have more bargaining power. Furthermore, firms in industries characterized by a high unemployment risk reduce leverage. These results support the view that firms choose more conservative policies to mitigate employees’ expected welfare losses

Individual Commitment and Team Performance: Evidence from Mutual Fund Managers

Jiang Luo and Zheng Qiao

The psychology literature suggests that individual commitment has a positive effect on team performance by mitigating the free-rider problem. With its detailed management-team information, the mutual fund industry provides a unique opportunity to study how individual managerial commitment is related to performance. Committed fund managers are defined as those who work only for one fund. With few incentives to acquire private information, teams with no committed members underperform those with committed members. These findings remain robust after we incorporate various controls. We also explore why non-committed teams have been used increasingly often despite their poor performance.

 

Busy Directors and Shareholder Satisfaction

Kevin Chen and Wayne Guay

Prior research has examined the firm-level performance implications of “busy” boards. Firm-level analysis, however, masks important heterogeneity in the time constraints and expertise of individual busy directors. We develop and validate shareholder voting on individual directors as a proxy for shareholders’ satisfaction. Our director-specific tests show that busy directors generally receive lower shareholder satisfaction, but the effects vary substantially depending on the individual director’s other time constraints, such as retirement status, committee workload, and workload shocks. We also find that shareholders are more supportive of the expertise and advisory role of busy directors in young and growing firms.

 

The Causal Effects of Proximity on Investment: Evidence from Flight Introductions

Jesse Ellis, Leonardo Madureira, and Shane Underwood

We use direct flight introductions as an exogenous shock to the travel time between mutual funds and firms to estimate the causal effects of proximity on fund investment decisions and performance. We find that a fund invests significantly more in firms that become more proximate following the introduction of direct flights, and that these more proximate investments exhibit superior performance. Our findings are robust to the inclusion of a variety of fixed effects and potential confounders such as firm-level shocks, fund-level shocks, and time trends. Collectively, our results indicate that proximity enhances investors’ ability to acquire value-relevant information about firms.

Short-Sale Constraints and Options Trading: Evidence from Reg SHO

Yi-Wen Chen, Sheng-Syan Chen, and Robin K. Chou

We examine the effects of a temporary suspension of short-sale price tests on the options market. Consistent with the notion that put option trading substitutes for short selling, we find a significant reduction in put option volume. In addition, pressure on put option prices significantly declines, violations of the put-call parity become significantly less frequent, and option volume becomes less informed. Our findings add clarity to a long-standing debate on whether investors use options to circumvent equity short selling restrictions.