Over 1960 to 2017, we show that a positive risk premium from holding high-beta stocks (versus low-beta stocks) and small-cap stocks (versus large-cap stocks) is reliably earned only after the expected stock-market volatility breaches an approximate top-quintile threshold. The high conditional average returns with this nonlinear risk-return phenomenon are persistently evident over months t+1 to t+6 following a volatility-threshold breach in month t-1.
Puerto Rico’s unique characteristics as a U.S. territory allow us to examine the channels through which (sub)sovereign default risk can have real effects on the macroeconomy. Post-2012, during the period of increased default probabilities, the cointegrating relationship between real activity in Puerto Rico and the U.S. mainland breaks down and Puerto Rico spirals into a significant decline. We exploit the cross-industry variation in default risk exposure to identify the impact of changes in default risk on employment. The evidence suggests that there are significantly higher employment growth declines in government demand and external finance dependent industries. An additional real effect of default anticipation is that heightened default risk Granger causes Puerto Rico’s austerity measures. An event study analysis using government bond yields and stock returns confirms that news of increased default risk increases the cost of capital for the Puerto Rican government and for publicly traded Puerto Rican firms.
On October 27, 2017 the Frank H. Kenan Institute of Private Enterprise (Kenan Institute) hosted The Business of Healthcare: Adapting to an Aging Economy at UNC Kenan-Flagler Business School in Chapel Hill, North Carolina. The conference brought together more than 100 attendees representing the diverse interests and perspectives of health care and elder care organizations, medical and pharmaceutical companies, patient advocacy organizations, government agencies and the academic research sector.
We construct a comprehensive panel of trading venue-level short sales and examine where short sellers exploit their information advantage. We examine the tradeoff that informed traders weigh between transaction costs and execution probability posited by Hendershott and Mendelson (2000), Ye (2011), and Zhu (2014), and find that short sales comprise a greater proportion of exchange trading than of dark pool trading. Furthermore, exchange short sales are more informative than dark pool short sales about future price moves. We find evidence of increased exchange short sales and exchange short sale informativeness prior to corporate news events. Finally, we examine the relationship between several market design characteristics and informed trade. The results provide direct evidence that dark pools attract less informed trade than exchanges do, particularly when information is short lived.
Focusing on a key CEO characteristic, materialism, we investigate how the prevalence of materialistic CEOs in the banking sector has evolved over time, and how risk management policies, the behavior of non-CEO executives and bank tail risk vary with CEO materialism.
Focusing on the ten countries with the most-traded currencies, we provide novel empirical evidence about the existence of significant heterogenous exposure to global growth news shocks.
Focusing on U.S. data, we show the existence of a significant positive link between uncertainty and reallocation of resources from private R&D-intensive firms to both tangible private capital and government capital.
Using hand-collected data on succession planning disclosures, we study how having a formal succession plan affects the efficiency of CEO turnovers. We find that firms with succession plans have a lower likelihood of forced CEO turnovers and non-CEO executive team resignations.
By considering banks as portfolios of assets in different locations, we study how real estate shocks get amplified across bank’s business areas while controlling for local demand shocks and bank location–specific factors.
We take up Cochrane’s (2011) challenge to identify the firm characteristics that provide independent information about average U.S. monthly stock returns by simultaneously including 94 characteristics in Fama-MacBeth regressions that avoid overweighting microcaps and adjust for data snooping bias.
Hospital emergency departments (EDs) provide around-the-clock medical care and as such are generally modeled as nonterminating queues. However, from the care provider’s point of view, ED care is not a never-ending process, but rather occurs in discrete work shifts and may require passing unfinished work to the next care provider at the end of the shift.
FoodCon is a daylong event focused on the business of sustainable food with a goal of bringing together a diverse audience of students, community members, and business professionals who have a shared interest in the sustainable food industry. UNC Kenan-Flagler MBA Net Impact students (Elisa Elkind and Brianne Abramowicz, both MBA ’15) had an idea in 2014 to host a conference to talk about the business of sustainable food. Since then, their idea has grown to include partner schools, who each take a turn to co-host the event, Duke University and NC State. This event is a collaborative effort between the three schools that surpasses ‘Tobacco Road’ rivalries. The 2017 event came back to UNC Kenan-Flagler with a theme of ‘Good For All: Sustainable. Profitable. Accessible.’
This study provides evidence that nonbank institutional investors that participate in loan syndicates value inside information obtained through lending agreements with bellwether borrowers. The private information nonbank institutional investors obtain from lending relationships with bellwether firms can help identify trading opportunities in other public market securities. Thus, we predict and find that institutional investors compensate bellwether firms by charging a lower loan spread.
We study complexity in the market for securitized products, a market at the heart of the financial crisis of 2007–9. The complexity of these products rose substantially in the years preceding the financial crisis. We find that securities in more complex deals default more and have lower realized returns.
We characterize the equilibrium of a complete markets economy with multiple agents featuring a preference for the timing of the resolution of uncertainty. Utilities are defined over an aggregate of two goods.
We develop a theory of innovation waves, investor sentiment, and merger activity based on uncertainty aversion. Investors must typically decide whether to fund an innovative project with very limited knowledge of the odds of success, a situation best described as "Knightian uncertainty."
We provide an innovative methodological contribution to the measurement of returns on infrequently traded assets using a novel approach to repeat-sales regression estimation. The model for price indices we propose allows for correlation with other markets, typically with higher liquidity and high frequency trading.
We revisit the spillover effects to non-financial, corporate borrowers from a systemic event in which a number of large, important banks simultaneously become imperiled. To shed light on this question, we build a novel, comprehensive dataset, covering both firms’ borrowing activities through bank loans, revolvers, corporate bonds, and commercial paper and the particular institutions to which they are connected. We demonstrate that while there are over one thousand financial institutions active in facilitating the borrowing activity of non-financial firms before the financial crisis, roughly 80% is facilitated by a group of large, central institutions.
Financial markets reveal information through which firm managers increase the value of equity, e.g., by improving investment decisions. With debt, however, such decisions are not necessarily socially efficient. We demonstrate that investors’ endogenous information acquisition, acting through this feedback channel, attenuates risk-shifting but amplifies debt overhang.
We develop a model to analyze the optimality of allowing firms to disclose various kinds of information prior to initial public offerings (IPOs) and seasoned equity offerings (SEOs), and of alternative rules to govern private securities litigation.
We model a dynamic economy with strategic complementarity among investors and study how endogenous government interventions mitigate coordination failures. We establish equilibrium existence and uniqueness, and we show that one intervention can affect another through altering the public information structure.
This unique Companion provides a comprehensive overview and critical evaluation of existing conceptualizations and new developments in innovation research.
Innovation has long been seen as the engine of economic growth. But as barriers to innovation such as patent thickets and patent litigation have risen dramatically in recent years, firms are beginning to examine the role that patents play in driving innovation. We examine how shifts in a firm’s intellectual property (IP) strategy can affect future innovation.
Behavioral Theory highlights the crucial role of social comparisons in attention allocation in adaptive aspirations. Yet, both the specification of social reference points and the dynamics of attention allocation have received little scholarly examination. We address performance feedback from two social reference points relative to divisions in multidivisional firms: economic reference point and political reference point.
We use unique data on employee decisions in the employee stock purchase plans (ESPPs) of U.S. public firms to measure the influence of networks on investment decisions. Comparing only employees within a firm during the same election window and controlling for a metro area fixed effect, we find that the local choices of coworkers to participate in the firm’s ESPP exert a significant influence on employees’ own decisions to participate.
We develop a conceptual understanding of when and how organizations respond to normative pressures. More precisely, we examine two main factors underlying the willingness and ability of organizations to respond to an issue: (1) issue salience, and (2) the cost-benefit analysis of resource mobilization.
Voting outcomes can differ from underlying preferences due to strategic selection into voting. One explanation for such selection effects is lower participation of shareholders with popular preferences (free-rider effect) relative to those with unpopular preferences (underdog effect). We illustrate these effects in a rational choice model in which the voting participation decision depends on the probability of being pivotal and the costs and benefits of voting.
Using unique data on employee ownership plans sponsored by U.S. public companies, we find that large negative market shocks lead to active changes in portfolio choices among inexperienced and previously inattentive investors. We use employee ownership plans to identify a set of inexperienced investors who did not actively select to participate in the market and who are confronted with a difficult financial decision.
We consider a manufacturer serving a retailer that sells its product to customers over two periods. Each firm determines its unit price. The retailer orders the product from the manufacturer prior to the beginning of the selling periods.
Using unique data on employee ownership plans sponsored by U.S. public companies, we find that large negative market shocks lead to active changes in portfolio choices among inexperienced and previously inattentive investors. We use employee ownership plans to identify a set of inexperienced investors who did not actively select to participate in the market and who are confronted with a difficult financial decision.
As firms use advertising to gain product market advantages and increase their valuation in financial markets, disclosures of their advertising spending are influential — whether they erode organizational competitive advantages in product markets or signal quality in financial markets.
In this invited note, we provide a historical context and a brief review of tax research published in the Journal of Accounting Research over the past decade. We also describe five areas within tax research that are relatively poorly understood or sparsely researched, but have potential for significant advancement in the future.
The prevailing view of implied volatility comovements, IVC, defined as the correlation between a firm’s implied volatility and the market’s implied volatility, is that they indicate the presence of systematic volatility risk to the firm’s investors. We take a different stance and conjecture that implied volatility comovements can also indicate expected information arrival for both the firm and aggregate equity markets, and we find evidence supporting this view.
We study complexity in the market for securitized products, a market at the heart of the financial crisis of 2007-2009. The complexity of these products rose substantially in the years preceding the financial crisis. We find that securities in more complex deals default more and have lower realized returns. The worse performance is economically meaningful: a one standard deviation increase in complexity represents an 18% increase in default on AAA securities. However, yields of more complex securities are not higher indicating that investors did not perceive them as riskier. Our results are consistent with complexity obfuscating security quality.
We show that individuals’ macroeconomic expectations are influenced by their socioeconomic status (SES). Individuals with higher income or higher education levels are more optimistic about future macroeconomic developments, including business conditions, the national unemployment rate, and stock market returns.
This study examines the effect of the Jumpstart Our Business Startups Act (JOBS Act) on information uncertainty in IPO firms. The JOBS Act creates a new category of issuer, the Emerging Growth Company (EGC), and exempts EGCs from several disclosures required for non-EGCs. Our findings are consistent with proprietary cost concerns motivating EGCs to eliminate some of the previously mandatory disclosures, which increases information uncertainty in the IPO market, attracts investors who rely more on private information, and leads EGCs to provide additional post-IPO disclosures to mitigate the increased information uncertainty.
We document marked trends in 10-K disclosure over the period 1996–2013, with increases in length, boilerplate, stickiness, and redundancy and decreases in specificity, readability, and the relative amount of hard information. We use Latent Dirichlet Allocation (LDA) to examine specific topics and find that new FASB and SEC requirements explain most of the increase in length and that 3 of the 150 topics—fair value, internal controls, and risk factor disclosures—account for virtually all of the increase. These three disclosures also play a major role in explaining the trends in the remaining textual characteristics.
Shareholder activists remain an important force in the boardroom. More than 60 activist campaigns were initiated against S&P 1500 companies in 2016. And although activist hedge funds have under‐performed the broad market since 2013, activists’ assets under management are still nearly double their level of four years ago, and announcements of their campaigns continue to be met with increases in the target companies’ stock prices.
Corporate restructurings accomplished through spinoffs have long been a key tool for management to unlock shareholder value. In 2016, global spinoff volume reached $117 billion, and spinoff activity continues to unfold at a similar pace in 2017, with Hilton, Xerox, Alcoa, Johnson Controls, and Danaher all recently completing major transactions.
The goal of this paper is to conduct a survival analysis to determine the causal impact of federal R&D subsidies on firms’ long-term survival.
There is no theory in strategic management and other related fields for identifying decision problems that cannot be solved by organizations using rational analytical technologies of the type typically taught in MBA programs.
This research takes a new perspective on the longstanding mystery of personality in negotiation, which has been met with decades of null and inconsistent findings. Grounded in interactionist theories of personality, the investigation had two complementary phases.
How long do nascent industries take to become commercially viable? This paper applies historical methods to the two contemporaneous cases of emergence of the airlines and insulin industry in the early 1900s.
We demonstrate the need to view in a dynamic context any decision based on limited information. We focus on the use of product costs in selecting the product portfolio. We show how ex post data regarding the actual costs from implementing the decision leads to updating of product cost estimates and potentially trigger a revision of the initial decision. We model this updating process as a discrete dynamical system (DDS). We define a decision as informationally consistent if it is a fixed-point solution to the DDS.
Entrepreneurs are turning to crowdfunding as a way to finance their creative ideas. Crowdfunding involves relatively small contributions of many consumer-investors over a fixed time period (generally a few weeks). The purpose of this paper is to add to our empirical understanding of backer dynamics over the project funding cycle.
While call centers have recently invested in callback technology, the impact of this innovation on callers’ behavior and call center performance has been less clearly understood. Using call center data from a US commercial bank, we perform an empirical study of callers’ decisionmaking process in the presence of a callback option.
Financial regulators and investors have expressed concerns about high pay inequality within firms. Using a proprietary data set of public and private firms, this paper shows that firms with higher pay inequality—relative wage differentials between top- and bottom-level jobs—are larger and have higher valuations and stronger operating performance. Moreover, firms with higher pay inequality exhibit larger equity returns and greater earnings surprises, suggesting that pay inequality is not fully priced by the market. Our results support the notion that differences in pay inequality across firms are a reflection of differences in managerial talent.
We introduce the concept of chronotype diversity to the team diversity literature. Chronotype diversity is defined as the extent to which team members differ in their biological predispositions towards the optimal timing of daily periods of activity and rest. To explain the effects of chronotype diversity on team outcomes, we develop a theory of team energetic asynchrony.
Over the 1990 to 2014 period, we show that the macroeconomic-uncertainty index of Jurado, Ludvigson, and Ng (2015) is a powerful determinant of the slope in Treasury forward interest rates over the 10- to 30-year term-structure segment.
