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Market-Based Solutions to Vital Economic Issues

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Market-Based Solutions to Vital Economic Issues

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We use detailed establishment-level data to understand whether and how the composition of the US stock market differs from the composition of US firms as a whole. Although the locational composition of employment in public firms is similar to that of all US firms, we find certain industries significantly overrepresented. Further, the gap between the industrial composition of publicly traded firms and all US firms has grown over the last thirty years.

We propose a method for decomposing private fund portfolio performance into effects from timing, strategy selection, geographic focus, sizing of fund allocation, and fund selection attributes.

We conduct an experiment designed to understand how social preferences affect investment decisions by observing subjects’ stock allocations and probability assessments. Key to the design is that subjects’ investment outcomes are treated by neutral, negative or positive payoff externalities on social causes. Our findings of asymmetric responses in probability perceptions and allocations suggest negative, but not positive, responsible investment (RI) externalities have significant effects.

Angel investor tax credits are commonly used around the world to spur entrepreneurship. Exploiting the staggered implementation of these tax credits in 31 U.S. states, we find that while they increase angel investment, marginal investments flow to relatively low-growth firms. 

The Small Business Investor Alliance surveyed the small business portfolios of Small Business Investment Companies to measure the impact the pandemic is having on their operations and employment. Small businesses are facing extreme cash flow concerns. Small businesses are already laying off a substantial number of employees and without a significant change in trajectory, layoffs are anticipated to increase tremendously. Data analysis provided by the Kenan Institute of Private Enterprise.

What is the impact of higher technological volatility on asset prices and macroeconomic aggregates? I find the answer hinges on its sectoral origin. Volatility that originates from the consumption (investment) sector drops (raises) macroeconomic growth rates and stock prices.

We examine realized spreads and price impact in clock and trade time following each trade in all common stocks from 2010 to 2017. The term structure of realized spreads (price impact) is sharply downward (upward) sloping, implying that (a) market maker profitability is sensitive to speed, and (b) the choice of the horizon of measurement is critical when drawing inferences from spread decompositions.

Governments often subsidize startups with the goal of spurring entrepreneurship using tax incentives. Exploiting the staggered implementation of angel investor tax credits in 31 U.S. states from 1988 to 2018, we find that these programs increase the number of angel investments and average investment size.

We directly test the reliability and relevance of investee fair values reported by listed private equity funds (LPEs). In our setting, disaggregated fair value measurements are observable for funds’ investees; and investee accounting fundamentals are also publicly disclosed. We find that LPE fair value measurements reflect equity book value and net income in a manner consistent with stock market pricing of listed companies.

This study finds that greater asymmetric timeliness of earnings in reflecting good and bad news is associated with slower resolution of investor disagreement and uncertainty at earnings announcements. These findings indicate that a potential cost of asymmetric timeliness is added complexity from requiring investors to disaggregate earnings into good and bad news components to assess the implications of the earnings announcement for their investment decisions.

A detailed treatment of aggregation and capital heterogeneity substantially improves the performance of the investment CAPM. Firm-level predicted returns are constructed from firm-level accounting variables and aggregated to the portfolio level to match with portfolio-level stock returns. Working capital forms a separate productive input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums simultaneously and partially explains positive stock-fundamental return correlations, the procyclical and short-term dynamics of the momentum and profitability premiums, as well as the countercyclical and long-term dynamics of the value and investment premiums. However, the model falls short in explaining momentum crashes.

Motivated by challenges faced by firms entering an unknown market, we study a strategic investment problem in a duopoly setting. The favorableness of the market is unknown to both firms, but firms have prior information about it. A leader invests first by choosing its investment size. Then, in a continuous-time Bayesian setting, a competitive follower dynamically learns about whether the market is favorable or not by observing the leader’s earnings, and chooses its investment size and timing. In this setting, we characterize equilibrium strategies of firms.