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The best decisions are not the best advice: making adherence-aware recommendations
Get PDFMany high-stake decisions follow an expert-in-loop structure in that a human operator receives recommendations from an algorithm but is the ultimate decision maker. Hence, the algorithm’s recommendation may differ from the actual decision implemented in practice. However, most algorithmic recommendations are obtained by solving an optimization problem that assumes recommendations will be perfectly implemented. We propose an adherence-aware optimization framework to capture the dichotomy between the recommended and the implemented policy and analyze the impact of partial adherence on the optimal recommendation. Our framework provides useful tools to analyze the structure and to compute optimal recommendation policies that are naturally immune against such human deviations and are guaranteed to improve upon the baseline policy
Fiscal Consequences of Missing an Inflation Target
No full textThe European Central Bank is unique in setting monetary policy for several sovereign states with heterogeneous debt levels and different maturity structures. The monetary–fiscal nexus is central to the functioning of the euro area. We focus on one particular aspect of that nexus, the effect of the reliability of the European Central Bank monetary policy on public debt burdens. We show that when the ECB misses its inflation target this has large heterogeneous fiscal consequences for Euro Area countries
Using Social Media to Identify the Effects of Congressional Viewpoints on Asset Prices
No full textWe use a high-frequency identification approach to document that individual politicians affect asset prices. We exploit the regular flow of viewpoints contained in Congress members’ tweets. Supportive (critical) tweets increase (decrease) the stock prices of the targeted firm and the corresponding industry in minutes around the tweet. The bulk of the stock price effects is concentrated in the tweets revealing news about future legislative action. The effects are amplified around committee meeting days, especially when the tweet originates from committee members and influential politicians. Overall, we show that Congress members’ social media accounts are an important source of political news. (JEL D72, G14
The Global Impact of Brexit Uncertainty
Get PDFWe propose a text-based method for measuring the cross-border propagation of large shocks at the firm level. We apply this method to estimate the expected costs, benefits, and risks of Brexit and find widespread reverberations in listed firms in 81 countries. International (i.e., non-UK) firms most exposed to Brexit uncertainty (the second moment) lost significant market value and reduced hiring and investment. International firms also overwhelmingly expected negative first-moment impacts from the UK's decision to leave the EU, particularly related to regulation, asset prices, and labor market impacts of Brexit
Comparing Factor Models with Price-Impact Costs
Get PDFWe propose a formal statistical test to compare asset-pricing models in the presence of price impact. In contrast to the case without trading costs, we show that in the presence of price-impact costs different models may be best at spanning the investment opportunities of different investors depending on their absolute risk aversion. Empirically, we find that the five-factor model of Hou et al. (2021), the six-factor model of Fama and French (2018) with cash-based operating profitability, and a high-dimensional model are best at spanning the investment opportunities of investors with high, medium, and low absolute risk aversion, respectively
Corporate Bonds and the Credit Premium: A Distinct Asset Class with a Long History
No full textThis article presents and interprets long-run evidence on corporate bonds since the 1860s for both the United States and United Kingdom. Even very high-quality corporate bonds have provided a significant credit risk premium, and the reward from buying high-yield (or junk) bonds is appreciably higher. Yield spreads of corporates over government bonds incorporate this premium but are not a measure of the expected premium because they also encapsulate expected default losses. This study reports on default and recovery rates over the long haul and reviews the determinants of yield spreads and default rates. The authors present evidence showing that corporate bonds are a distinct asset class. Finally, it examines whether factors and other return regularities can help boost corporate bond returns and provide positive premia
Faking it with the boss’s jokes? Leader humor quantity, follower surface acting, and power distance
Get PDFMost scholarly work concludes that leader humor positively affects emotional outcomes for followers. However, two interrelated issues with past research make this view incomplete: (1) studies often conflate the act of expressing humor with the humor’s effectiveness, and (2) existing research overlooks follower emotion regulation. In addressing these issues, we generate and test new theory that challenges the theoretical consensus, highlighting why and when leader humor expression has emotional costs for followers. Specifically, we theorize that leader humor quantity, irrespective of its quality, puts pressure on followers to engage in surface acting to fake or exaggerate positive emotions. We further propose that these surface acting responses are more likely to occur when followers hold high power distance values, such that followers more willingly comply with expectations to display positive emotions in response to leader humor expression. This increase in surface acting then leads to more emotional exhaustion and less job satisfaction for followers. Results from three studies—including a field experiment, a laboratory experiment, and a multi-wave field study—provide support for these hypotheses. We close with a discussion of how our findings provide a unique counterpoint regarding the effects of leader humor on follower emotional outcomes
Perceived Firm-Specific Human Capital: Mobility Constraint or Enhancer?
Get PDFWe explore the relationship between workers’ perceptions of firm-specific human capital (“FSHC”) and turnover. The belief that actual FSHC constrains mobility undergirds its critical role in resource-based theory. However, this rests on a strong assumption of information efficiency that market actors correctly assess how specific an individual’s skills are, and price it appropriately. Emerging theoretical viewpoints dispute this, pointing out labor market imperfections and substantial difficulty in observing FSHC. We therefore develop theory about how perceived FSHC may relate positively to mobility by articulating a role for well-known supply-side mechanisms such as job satisfaction, embeddedness and preference for job autonomy. Using two archival surveys and two primary surveys collected in very different contexts (South Korea and the U.S.), we found support for our theory. Perceptions of firm-specific human capital were associated with increased mobility and this effect was partially mediated by job satisfaction and job embeddedness. The effect was augmented for workers who value autonomy in their jobs (more likely to exit if they perceived their skills as FSHC). Since the effect of perceived FSHC is quite different from extant theory focused on actual FSHC, we explore implications for resource-based and human-capital theories