Summer Term 2023

• September 21, 2023 / 1:00 pm - 2:00 pm / D3.0.218
  Paul Huebner (Stockholm School of Economics)
  "The Making of Momentum: A Demand-System Perspective"
  
  Abstract: I develop a framework to quantify which features of investors’ trading strategies lead to momentum in equilibrium. Specifically, I distinguish two channels: persistent demand shocks, capturing underreaction, and the term structure of demand elasticities, representing an intensity of arbitrage activity that decreases with investor horizon. I introduce both aspects of dynamic trading into an asset demand system and discipline the model using the joint behavior of portfolio holdings and prices. I estimate the demand of institutional investors in the U.S. stock market between 1999 and 2020. On average, investors respond more to short-term than longer-term price changes: the term structure of elasticities is downward-sloping. My estimates suggest that this channel is the primary driver of momentum returns. Moreover, in the cross-section, stocks with more investors with downward-sloping term structures of elasticities exhibit stronger momentum returns by 7% per year.

  
   

• September 8, 2023 / 12:30 - 1:30 pm / D3.0.218
  Youchang Wu (Lundquist College of Business, University of Oregon)
  "Private Equity and Gas Emissions: Evidence from Electric Power Plants" (joint work with Xuanyu Bai)
   

  Abstract: How does private equity ownership affect firms’ environmental performance? Using electricity generating unit level data from U.S. fossil fuel power plants, we find that private equity-backed buyouts reduce output-scaled CO2 and NOx emissions by 5.5% and 8.1%, respectively. The declines are mainly due to lower heat input per unit of output instead of lower input emission rates. The effects are concentrated in non-add-on deals, and are stronger for small plants and corporate divestiture deals. Our results suggest that private equity improves environmental performance by increasing production efficiency, but their effect on the non-efficiency component of environmental performance is generally insignificant.
   

• July 3, 2023 / 12:30 - 1:30 pm / D3.0.225
  Stefan Schantl (University of Melbourne)
  "Conversations between managers and investors" (joint work with Evgeny Petrov)
  
  Abstract: Managers and investors frequently converse and exchange complementary private information. We develop a model to study the conversation dynamics between a myopic manager and a long-term investor. The opportunity of the investor to convey private information affects the manager's disclosure strategy by creating an option value of disclosure. In particular, while such an opportunity elicits more disclosures in response to a favorable message from the investor (e.g., a question), the anticipation of conversations crowds out early disclosure, and the overall disclosure likelihood is lower. However, both the manager and the investor prefer conversations, as they can economize on disclosure costs. Lastly, we highlight that, with conversation opportunities, higher proprietary costs lead to more disclosure. Our study has implications for empirical research on disclosure around meetings with investors (e.g., earnings conference calls), on the effects of proprietary costs, and on the real effects of financial markets.
   

• June 6, 2023 / 12 noon - 1:00 pm / D3.0.225
  Enrichetta Ravina (Federal Reserve Bank of Chicago)

  "Retail Investors' Contrarian Behavior Around News, Attention, and the Momentum" (joint work with Cheng Luo, Marco Sammon and Luis M. Viceira)

  Abstract: Using a large panel of U.S. brokerage accounts trades and positions, we show that a large fraction of retail investors trade as contrarians after large earnings surprises, especially for loser stocks, and that such contrarian trading contributes to post earnings announcement drift (PEAD) and price momentum. Indeed, when we double-sort by momentum portfolios and retail trading flows, PEAD and momentum are only present in the top two quintiles of retail trading intensity. Finer sorts confirm the results, as do sorts by firm size and institutional ownership level. We show that the investors in our sample are representative of the universe of U.S. retail traders, and that the magnitude of the phenomena we describe indicate a quantitatively substantial role of retail investors in generating momentum. Alternative hypotheses, such as the disposition effect and stale limit orders, do not explain retail contrarian trading. Younger traders are more likely to be contrarian, and a firm’s dividend yield, leverage, size, book to market, and analyst coverage are associated with the fraction of contrarian trades they face around earnings announcements. Attentive investors are more likely to be contrarians.
   

• June 5, 2023 / 12:30 - 1:30 pm / TC.5.15
  Michalis Haliassos (Goethe University Frankfurt)

  "Consumption and Account Balances in Crises: Have we neglected cognitive load?" (joint work with Tiziana Assenza and Alberto Cardaci)

  Preliminary abstract: Geopolitical, financial and fiscal crises, Covid, and life events occupy people's minds while they make important economic decisions. We conducted an incentivized online experiment among a representative sample of 2000 French households. Facing a taxing and persistent cognitive load reduced consumption, especially under furlough risk, and increased account balances, especially for those not facing such risk. These effects did not arise from supply constraints or a worsening of credit constraints. Cognitive load affected primarily the optimality of the chosen policy rules and degraded the ability of the standard economic model to describe consumption behavior, but less so for college-educated subjects.
   

• June 1, 2023 / 12 noon - 1:00 pm / D3.0.225
  Karin Thorburn (NHH Norwegian School of Economics)
  “Bank Compensation for the Penalty-Free Loan-Prepayment Option: Theory and Tests” (joint work with B. Espen Eckbo and Xunhua Su)
  
  Abstract: Commercial and industrial bank loans typically include an option to prepay the loan without penalty (zero cancellation fee). We present a first analysis of how banks must be compensated for this option. Borrowers use the loan to fund investment projects and subsequently receive non-contractible information about project payoff. As high-quality borrowers self-select to prepay, the credit-quality of the bank’s borrower pool deteriorates. Hence, to avoid credit rationing, the bank must be compensated upfront with a minimum upfront fee combined with a lower loan spread. The upfront fee dominates the alternative of a cancellation fee as the latter gives rise to opportunistic ex post bargaining with the bank’s preferred clients. Large-sample tests, which include exogenous industry-level variation in loan prepayment risk, confirm that upfront fees increase with prepayment risk and are lower in credit lines and loans with performance-sensitive pricing, as predicted.
   

• May 10, 2023 / 12:30 – 13:30 pm / TC.3.05
  Martijn Boons (Tilburg University)
  "On the Determinants of Stock Return Forecasts: Causal Evidence from Macro Shocks" 
  
  Preliminary abstract:  Recent literature argues that subjective forecasts of professionals and non-professionals are anomalous. In particular, there is a lively debate whether forecasts of stock returns are pro-, a-, or countercyclical. This debate revolves around standard predictive regressions, which yield little insight into the model that is used by forecasters. For instance, a high price-to-dividend ratio may result from low risk or high sentiment. We contribute to this literature by studying how subjective forecasts respond to three well-identified macroeconomic shocks: business cycle shocks, tfp news, and oil supply shocks. We find that the response of professional forecasts is strong relative to non-professionals and countercyclical. Furthermore, the shocks explain a large fraction of the historical variation in the difference between the professional forecast and an objective forecast. Finally, we show that the response of professional forecasts is consistent with the response of realized returns, which suggests that professionals believe returns are about as sensitive to fundamentals as they have turned out to be ex post. We conclude that financial market participants should turn to professionals to receive an early estimate of the stock market impact of large shocks.
   

• April 12, 2023 / 12 noon - 1:00 pm / D3.0.225
  Andras Danis / Paul Voss (Central European University)
  "Decoupling Voting and Cash Flow Rights", by Andras Danis, Andre Speit and Paul Voss
  
  Abstract: The equity lending and option markets allow investors to decouple cash flow claims and voting rights of shares. Empirical studies show that the implied prices of voting rights differ substantially across these two markets. This paper provides a theoretical explanation for this puzzling finding: The price differential arises because the equity lending market allows activist investors to exploit coordination failures among shareholders more than the option market. Still, we show that activist investors may buy voting rights in both markets, despite endogenously lower prices in the equity lending market. Our results apply to any financial instrument used for decoupling.
   

• March 23, 2023 / 1:00 - 2:00 pm / D3.0.225
  Sebastian Doerr (BIS (Bank of International Settlements))
  “Privacy regulation and fintech lending” with L. Gambacorta, L. Guiso and M. Sanchez del Villar
  
  Abstract: This paper studies how the California Consumer Privacy Act (CCPA), a privacy law that grants users control their data and assuages concerns over sharing it, affects lending markets. To guide our empirical analysis we build a model with banks and a fintech that use data to screen applicants. The fintech has a superior screening technology, but applicants dislike sharing their data with it. The model predicts that privacy regulation makes applicants more willing to share their data, so loan applications with the fintech increase. More data allow for better screening and enable the fintech to offer lower interest rates. We empirically show that the introduction of the CCPA increases mortgage applications with fintechs relative to banks in California. Consistent with applicants’ greater willingness to share data, fintechs make greater use of non-traditional data to improve screening. In turn, they deny more applications and offer more favourable rates.
   

• March 16, 2023 / 1:00 - 2:00 pm / D3.0.225
  Stefano Carattini (Andrew Young School of Policy Studies, Georgia State University)

  “Climate policy uncertainty and firms’ and investors’ behavior”  

  Abstract: Climate change mitigation requires transitioning from a high- to a low-carbon economy. Over the last three decades, this transition has been far from linear, with periods of progress and setbacks. While climate policies have been the object of careful policy evaluation, firms and investors may need to react more often to climate policy uncertainty than actual climate policy. We develop a new index of climate policy uncertainty, covering the United States with monthly-level variation between 1990 and 2019. We analyze the relationship between climate policy uncertainty and firm-level outcomes such as stock returns, share price volatility, investment in research and development as well as patenting, capital expenditures, and employment for all publicly listed firms in the country. We find that climate policy uncertainty tends to considerably affect these outcomes, and often more so than existing indices of economic policy uncertainty. The direction of the uncertainty matters as well, as measured by sub-indices capturing whether the uncertainty reflects potential acceleration or deceleration in climate policymaking.