1,721,010 research outputs found
Investors' Horizons and the Amplification of Market Shocks
No full textThis paper shows that during episodes of market turmoil, 13F institutional investors with short trading horizons sell their stockholdings to a larger extent than 13F institutional investors with longer trading horizons. This creates price pressure for stocks held mostly by short-horizon investors, which, as a consequence, experience larger price drops, and subsequent reversals, than stocks held mostly by long-horizon investors. These findings, obtained after controlling for the withdrawals experienced by the investors, are not driven by other institutional investors' and firms' characteristics. Overall, the evidence indicates that investors with short horizons amplify the effects of market-wide negative shocks by demanding liquidity at times when other potential buyers'capital is scarce
Career Risk and Market Discipline in Asset Management
No full textWe establish that the labor market helps discipline asset managers via the impact of fund liquidations on their careers. Using hand-collected data on 1,948 professionals, we find that top managers working for funds liquidated after persistently poor relative performance suffer demotion coupled with a significant loss in imputed compensation. Scarring effects are absent when liquidations are preceded by normal relative performance or involve mid-level employees. Seen through the lens of a model with moral hazard and adverse selection, these scarring effects can be ascribed to a drop in asset managers’ reputation. The findings suggest that performance-induced liquidations supplement compensation-based incentives
IPO underpricing and after-market liquidity
No full textThe underpricing of initial public offerings (IPOs) is generally explained with asymmetric information and risk. We complement these traditional explanations with a new theory where investors worry also about the after-market illiquidity that may result from asymmetric information after the IPO. The less liquid the after-market is expected to be, and the less predictable its liquidity, the larger will be the IPO underpricing. Our model blends such liquidity concerns with adverse selection and risk as motives for underpricing. The model’s predictions are supported by evidence for 337 British IPOs effected between 1998 and 2000. Using various measures of liquidity, we find that expected after-market liquidity and liquidity risk are important determinants of IPO underpricing
Transparency, tax pressure and access to finance
No full textMore transparent firms enjoy better access to finance, and also enable closer scrutiny by tax authorities and thus face a heavier tax burden, insofar as they are required to report the same data to tax authorities and investors (book-tax conformity). We study this trade-off in a model with distortionary taxes and finance rationing, and test its predictions on an international dataset. As predicted, firms facing low corporate tax rates choose high transparency, particularly if they are not very dependent on external funding. This result is confirmed by the evidence from statutory tax reforms: reductions of corporate tax rates are followed by increases in firm transparency. Moreover, firms choose higher transparency in countries with high audit quality. Investment is positively correlated with transparency, especially for firms more dependent on external finance. Results are stronger in countries with book-tax conformity
Employment and Wage Insurance within Firms: Worldwide Evidence
No full textUsing a firm-level international panel dataset, we study if unemployment insurance
offered by the government and by firms are substitutes. We exploit cross-country and
time-series variation in public unemployment insurance as a shifter of workers’ demand
for insurance within firms, and family vs. non-family ownership as a shifter of firms’
supply of insurance. Our evidence supports the substitutability hypothesis: employment
stability in family firms is greater, and the wage discount larger, in countries and periods
with less generous public unemployment insurance, while no such substitutability
emerges for non-family firms
Mark-to-market accounting and systemic risk: evidence from the insurance industry
No full textOne of the most contentious issues raised during the recent crisis has been the potentially exacerbating role played by mark-to-market accounting. Many have proposed the use of historical cost accounting, promoting its ability to avoid the amplification of systemic risk. We caution against focusing on the accounting rule in isolation, and instead emphasize the interaction between accounting and the regulatory framework. First, historical cost accounting, through incentives that arise via interactions with complex capital adequacy regulation, does generate market distortions of its own. Second, while mark-to-market accounting may indeed generate fire sales during a crisis, forward-looking institutions that rationally internalize the probability of fire sales are incentivized to adopt a more prudent investment strategy during normal times which leads to a safer portfolio entering the crisis. Using detailed, position- and transaction-level data from the US insurance industry, we show that (a) market prices do serve as ‘early warning signals’, (b) insurers that employed historical cost accounting engaged in greater degrees of regulatory arbitrage before the crisis and limited loss recognition during the crisis, and (c) insurers facing mark-to-market accounting tend to be more prudent in their portfolio allocations. Our identification relies on the sharp difference in statutory accounting rules between life and P&C companies as well as the heterogeneity in implementation of these rules within each insurance type across US states. Our results indicate that regulatory simplicity may be preferred to the complexity of risk-weighted capital ratios that gives rise, through interactions with accounting rules, to distorted risk-taking incentives and potential build-up of systemic risk
Loan guarantees, bank lending and credit risk reallocation
No full textWe investigate whether government credit guarantee schemes, extensively used at the onset of the Covid-19 pandemic, led to substitution of non-guaranteed with guaranteed credit rather than fully adding to the supply of lending. We study this issue using a unique euro-area credit register data, matched with supervisory bank data, and establish two main findings. First, guaranteed loans were mostly extended to small but comparatively creditworthy firms in sectors severely affected by the pandemic, borrowing from large, liquid and well-capitalized banks. Second, guaranteed loans partially substitute pre-existing non-guaranteed debt. For firms borrowing from multiple banks, the substitution mainly arises from the lending behavior of the bank extending guaranteed loans. Substitution was highest for funding granted to riskier and smaller firms in sectors more affected by the pandemic, and borrowing from larger and stronger banks. Overall, the evidence indicates that government guarantees contributed to the continued extension of credit to relatively creditworthy firms hit by the pandemic, but also benefited banks’ balance sheets to some extent
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