Conference Agenda

Overview and details of the sessions of this conference. Please select a date or location to show only sessions at that day or location. Please select a single session for detailed view (with abstracts and downloads if available).

Session Overview
Date: Thursday, 25/Mar/2021
1:45pm - 2:00pmZoom Welcome Desk opens
2:00pm - 3:20pmRoom A: AP 1
Session Chair: Katie Moon, University of Colorado

Real-time Price Discovery via Verbal Communication: Method and Application to Fedspeak

Marco Grotteria, Roberto Gomez Cram

London Business School, United Kingdom

Discussant: John Kuong (INSEAD)

We advance the hypothesis and establish empirically that investors' expectations underreact to Central Banks' messages. From the videos of post-FOMC-meeting press conferences, we extract the words, and timestamp them at the millisecond. We align the transcripts with high-frequency data for several financial assets to provide granular evidence on the investors' expectations formation process. When the Chairman discusses the changes between current and previous policy statement, price volatility and trading volume spike dramatically, and prices move in the same direction as they did around the statement release. Our approach allows us to quantify in monetary terms the value of information rigidity.

Imprecise and Informative: Lessons from Market Reactions to Imprecise Disclosure

J. Anthony Cookson1, S. Katie Moon1, Joonki Noh2

1University of Colorado Boulder, United States of America; 2CaseWestern Reserve University, United States of America

Discussant: Giuliano Curatola (University of Siena)

Imprecise language in corporate disclosures can convey valuable information on firms’ fundamentals. We evaluate this idea by developing a linguistic imprecision measure based on sentences marked with the “weasel tag” on Wikipedia. In the 10 weeks after the 10-K disclosure, high linguistic imprecision predicts positive and non-reverting abnormal returns, improvements to stock liquidity, more insider and informed buying, and more positive news sentiment. These findings are driven by disclosures that are more forward-looking and use more R&D terms. Together, our results imply that imprecise language in 10-Ks contains new information on positive but yet immature prospects of future cash flows.

2:00pm - 3:20pmRoom B: FMG 1
Session Chair: Pascal Towbin, Swiss National Bank

Mortgage Prepayment, Race, and Monetary Policy

Kristopher Gerardi1, Paul Willen2, David Hao Zhang3

1Federal Reserve Bank of Atlanta, United States of America; 2Federal Reserve Bank of Boston, United States of America; 3Harvard Business School, United States of America

Discussant: Daniel Ruf (Goethe Universität Frankfurt am Main)

Black and Hispanic homeowners pay significantly higher mortgage interest rates than Non-Hispanic White homeowners. We decompose the racial rate gap into (1) higher rates charged to Black borrowers at origination and (2) racial disparities in the timing of originations. We show that the latter explains most of the gap and is driven by racial differences in mortgage prepayment behavior. Non-Hispanic White borrowers are more mobile and are more likely to exploit falling interest rates by refinancing their mortgages. Observable borrower and mortgage characteristics like income, credit scores, and loan-to-value ratios explain most of the differences in prepayment behavior by race. By driving down mortgage rates, monetary expansions such as the first quantitative easing program (QE1) exacerbates the racial rate gap by disproportionately benefiting Non-Hispanic White borrowers. Alternative mortgage contract designs to the standard fixed-rate mortgage with rate originated above mortgage-backed securities yields may have desirable distributional implications across racial groups.

Inferring Expectations from Observables: Evidence from the Housing Market

Itzhak Ben-David1,2, Pascal Towbin3, Sebastian Weber4

1Fisher College of Business, The Ohio State University, United States of America; 2National Bureau of Economic Research, United States of America; 3Swiss National Bank, Switzerland; 4International Monetary Fund, United States of America

Discussant: Kristian Blickle (FED New York)

We propose a new method to identify shifts in price expectations in the housing market through the accumulation of excess capacity. Expectations of future price increases (due to anticipated future demand) cause current supply to increase, creating a temporary vacancy. We implement this intuition in a structural vector autoregression with sign restrictions and explore the effects of price expectations in the U.S. housing market. We find that price expectation shocks were a prime factor explaining the 1996-2006 boom, particularly in the Sand States. Expectation shocks at the peak of boom reflected implausible growth expectations and reversed during the bust.

2:00pm - 3:20pmRoom C: BHF 1
Session Chair: Andreas Fuster, Swiss National Bank

Salience and Households' Flood Insurance Decisions

Zhongchen Hu

London School of Economics and Political Science, United Kingdom

Discussant: Benjamin Guin (Bank of England)

Flooding is the most costly natural disaster faced by US households, yet policymakers are puzzled by the low take-up rates for flood insurance. In this paper, I argue that households' insurance purchases are affected by the low salience of flood risk. Leveraging novel transaction-level data, I use two empirical strategies to support my hypothesis. First, I exploit a staggered campaign that publicizes already freely-available flood risk information across US counties. Insurance purchases increase by 30.6% in response, with the strongest effect in counties where the ex-ante salience of flood risk is low. Second, I exploit variation in salience induced by flood events shared through social media. Households purchase significantly more insurance after their geographically distant peers experience floods. My results suggest that behavioral frictions have a major impact on households' insurance decisions.

Know Thyself: Free Credit Reports and the Retail Mortgage Market

Amit Kumar

The Hong Kong University of Science and Technology, Hong Kong S.A.R. (China)

Discussant: Andreas Fuster (Swiss National Bank)

Under imprecise creditworthiness information, borrowers may make erroneous credit decisions. Credit reports—which record one’s creditworthiness—became free in the entire U.S. in 2005, while they already had been free in seven states. Exploiting this in a difference-in-differences setting, this paper shows that cheaper credit reports to consumers improved mortgage market outcomes. The applications, approvals and borrowing in high-creditworthy areas increased, and defaults and subprime population fraction decreased. Also, first-time homeowner proportion increased, and lenders’ financial performance improved. Additional findings, including increased interest rates, suggest a demand-driven improvement in applicant pool, as consumers receive precise creditworthiness signal from their reports.

2:00pm - 3:20pmRoom D: CFG 1
Session Chair: Philip Valta, University of Bern

New Products

Abhiroop Mukherjee1, Tomas Thornquist2, Alminas Zaldokas1

1The Hong Kong University of Science and Technology, Hong Kong S.A.R. (China); 2Shell Street Labs, Hong Kong S.A.R. (China)

Discussant: Philip Valta (University of Bern)

We introduce a new measure of innovation based on important product launches by public firms in the US. Our measure is based on stock-market reactions to media articles – classified by a convolutional neural network approach as referring to new product introductions – and has two distinct advantages. First, it covers the entire spectrum of industries and is not limited to products sold by retail firms. Second, we rely on collective wisdom about product value expressed through financial markets. This lends a forward-looking aspect to our measure, and helps avoid issues associated with valuing new types of output in a changing economy. Using our measure, we derive a few stylized facts. We show that product innovations are highly persistent, both at the firm- and at the industry-level. Firms that launch more new products are larger, and they typically operate in industries that are more competitive. New product introductions correlate with productivity measures at the aggregate level. However, most of these new products are launched in industries that are not among the largest employers; moreover, employment falls further following product launches.

Online Reputation and Debt Capacity

François Derrien1, Alexandre Garel2, Arthur Petit-Romec3, Jean-Philippe Weisskopf4

1HEC Paris, France; 2Audencia Business School, France; 3SKEMA Business School & Université Côte d'Azur, France; 4Ecole hôtelière de Lausanne, Switzerland

Discussant: Emilia Garcia-Appendini (University of Zurich)

This paper explores the effects of online customer ratings on debt capacity. Using a large sample of Parisian restaurants, we find a positive and economically significant relation between customer ratings and bank debt. We use the locally exogenous variation in customer ratings resulting from the rounding of scores in regression discontinuity tests to establish causality. Customer ratings have more impact on debt capacity when information asymmetry is higher. They affect financial policy through a reduction in cash flow risk and greater resilience to demand shocks. Restaurants with good ratings use their extra debt capacity to invest in tangible assets.

2:00pm - 3:20pmRoom E: FII 1
Session Chair: Karolin Kirschenmann, ZEW

Banks and Firms: Evidence of a legal reform giving more power to firms

Hans Degryse1, Olivier De Jonghe2, Nikolaos Karagiannis3

1KU Leuven, and CEPR; 2National Bank of Belgium, and Tilburg University; 3Alliance Manchester Business School, and KU Leuven

Discussant: Karolin Kirschenmann (ZEW)

Smaller firms are the weaker party when interacting with their banks. We study

a legal reform that improves small firms’ bargaining power. The new law gives small

firms the right to prepay loans against a contractually prespecified penalty and requires

banks to offer firms’ best-suited loan type. Using this quasi-natural experiment, we

show that, while the legal reform increased overall credit availability, banks dampen

the effect of the reform by tilting their credit supply to loans that are unaffected by the

legal change. Using bank-firm-credit data, we show that banks reduce the supply of

term loans by 0.7% while credit lines increase by 4%. This effect is more pronounced

for borrowers with longer relationships. Our results show that legal reforms may also

lead to unintended consequences when banks can undo part of the regulation.

Population aging and bank risk-taking

Sebastian Doerr2, Gazi Kabas1, Steven Ongena3

1University of Zurich & Swiss Finance Institute, Switzerland; 2Bank for International Settlements, Switzerland; 3University of Zurich & Swiss Finance Institute & KU Leuven & CEPR

Discussant: Andreas Barth (Goethe University Frankfurt)

The population aged 65 and older will grow at an unprecedented pace over the next decade in most advanced economies. But what does population aging imply for banking? Exploiting geographic variation in the change in senior population across U.S. counties, we show that the higher savings by seniors leads to a local increase in bank deposits. We then establish that banks more exposed to aging counties increase the supply of credit while relaxing their lending standards: witness the higher loan-to-income ratios, the lower application rejection rates, and the sharper rise in nonperforming loans during the Great Recession. Risk-taking is more pronounced among banks with lower capital ratios, in more competitive markets or where banks operate no branches. These findings are robust to the inclusion of bank and county controls and/or corresponding fixed effects, and to an instrumental variable strategy. Overall our results suggest that population aging affects financial stability.

3:40pm - 5:00pmRoom A: AP 2
Session Chair: Jens Dick-Nielsen, Copenhagen Business School

Deep Learning in Asset Pricing

Luyang Chen, Markus Pelger, Jason Zhu

Stanford University, United States of America

Discussant: Jens Dick-Nielsen (Copenhagen Business School)

We use deep neural networks to estimate an asset pricing model for individual stock returns that takes advantage of the vast amount of conditioning information, while keeping a fully flexible form and accounting for time-variation. The key innovations are to use the fundamental no-arbitrage condition as criterion function, to construct the most informative test assets with an adversarial approach and to extract the states of the economy from many macroeconomic time series. Our asset pricing model outperforms out-of-sample all benchmark approaches in terms of Sharpe ratio, explained variation and pricing errors and identifies the key factors that drive asset prices.

Single-step Portfolio Construction through Reinforcement Learning and Interpretable AI

Lin William Cong1, Ke Tang2, Jingyuan Wang3, Yang Zhang3

1Cornell University, United States of America; 2Tsinghua University, China; 3Beihang University, China

Discussant: Gianluca De Nard (University of Zurich / New York University)

We directly optimize investors' objectives via reinforcement learning---an alternative to conventional supervised-learning-based portfolio-management paradigms that typically entail a first step estimation of return distributions, pricing kernels, or risk premia. Building upon breakthroughs in AI, we develop multi-sequence neural network models tailored to distinguishing features of economic and financial data, while allowing training without labels and potential market interactions. The resulting AlphaPortfolio yields stellar out-of-sample performances (e.g., Sharpe ratio above two and over 13% risk-adjusted alpha with monthly re-balancing) that are robust under various economic restrictions and market conditions (e.g., exclusion of small stocks and short-selling). Moreover, we project AlphaPortfolio onto simpler modeling spaces (using polynomial-feature-sensitivity and textual-factor analyses) to uncover key drivers of investment performance, including their rotation and nonlinearity. More generally, we highlight the utility of deep reinforcement learning in finance and provide "economic distillation" procedures for interpreting AI and big data models.

3:40pm - 5:00pmRoom B: FMG 2
Session Chair: Thomas Gehrig, University of Vienna

Increasing Corporate Bond Liquidity Premium and Post-Crisis Regulations

Botao Wu

New York University, Stern School of Business, United States of America

Discussant: Fabian Hollstein (Leibniz University Hannover)

I employ corporate bond liquidity premium to understand the important changes in corporate bond market liquidity in the recent periods. I show that while the commonly-used transaction cost measures such as the bid-ask spread have been declining, corporate bond liquidity premium has actually increased since the financial crisis. For speculative bonds, about 30% of their yield spread is now compensation for illiquidity. To demonstrate that this increasing liquidity premium is due to investors facing longer trading delays as dealers have become less willing to provide immediacy, I develop an estimation of the latent trading delays implied by the size of the liquidity premium, and show that bonds that took less than one day to sell before the financial crisis now take weeks to trade. Finally, I establish a causal relationship between the major post-crisis regulations and the variations in the corporate bond liquidity premium. I show that Basel II.5 contributed the most to the increasing liquidity premium out of all regulatory changes over the sample period. The evidence is consistent with practitioners' description of the post-crisis market situation and corroborates the relevance of using liquidity premium to understand corporate bond market liquidity.

The Design of a Central Counterparty

Vincent Maurin1, John Kuong2

1Stockholm School of Economics, France; 2INSEAD, France

Discussant: Thomas Gehrig (University of Vienna)

This paper studies the benefits of central clearing and the design of a central counterparty (CCP) with an optimal contracting approach. Investors sign contracts to hedge an underlying exposure. There is counterparty risk because investors can default on the contract due to idiosyncratic shocks and moral hazard. Mutualization of losses can thus hedge against counterparty risk but demands collateral for preventing moral hazard. The optimal contract involves loss mutualization, which requires central clearing, only when the cost of collateral is intermediate. Furthermore, as loss mutualization dilutes investors’ incentives to monitor their counterparties, a third-party CCP can emerge as a centralized monitor and is given a first-loss, equity tranche as incentive compensation. Our results endogenize key features of the default resolution process, known as “default waterfall”, in a CCP. Finally, we show that larger user base of a contract favors central clearing (over bilateral trading) and clearing with third-party CCP (over member-owned CCP).

3:40pm - 5:00pmRoom C: BHF 2
Session Chair: Arna Olafsson, Copenhagen Business School (CBS)

Necessary Evidence For A Risk Factor’s Relevance

Alex Chinco, Samuel Hartzmark, Abigail Sussman

University of Chicago, United States of America

Discussant: Michael Ungeheuer (Aalto University)

Textbook finance theory assumes that investors strategically try to insure themselves against bad future states of the world when forming portfolios. This is a testable assumption, surveys are ideally suited to test it, and we develop a framework for doing so. Our framework combines survey experiments with field data to test this assumption as it pertains to any candidate risk factor. We study consumption growth to demonstrate the approach. While participants strategically respond to changes in the mean and volatility of stock returns when forming their portfolios, there is no evidence that investors view this canonical risk factor as relevant.

Beliefs About the Stock Market and Investment Choices: Evidence from a Field Experiment

Christine Laudenbach1, Annika Weber2, Johannes Wohlfart3

1University of Bonn, Germany; 2Goethe University Frankfurt am Main, Germany; 3University of Copenhagen, Denmark

Discussant: Arna Olafsson (Copenhagen Business School (CBS))

We survey investors at a German online bank on their beliefs about how the return of the German stock market did historically depend on its past 12-month return. Respondents' elicited processes of belief formation strongly correlate with their past trading patterns. A random information treatment educating individuals about the historically low predictive power of recent past returns shifts individuals' beliefs about the autocorrelation of stock returns and moves 1-year ahead expectations towards the long-run historical mean return.

3:40pm - 5:00pmRoom D: CFG 2
Session Chair: Thomas Schmid, University of Hong Kong

The Advisory and Monitoring Roles of the Board: Evidence from Disruptive Events

Ettore Croci1, Gerard Hertig2, Layla Khoja3, Luh Luh Lan4

1Università Cattolica del Sacro Cuore, Italy; 2ETH Zurich, Switzerland; 3Singapore-ETH Centre, Switzerland; 4National University of Singapore, Singapore

Discussant: Thomas Schmid (University of Hong Kong)

We study the contribution of directors to firm resilience by assessing the relative importance of their advisory and monitoring roles at times of crisis. Based on manually collected US data, we document that four bord-related variables affect market reactions around disruptive events. Board independence and the presence of directors with industry expertise exacerbate the negative share price effect, whereas the converse is true for director busyness and board size. These reactions imply that, in times of crisis, advice-oriented boards fare better than monitoring-oriented boards.

The economic costs of climate change

Claudia Custodio2, Miguel Ferreira3, Emilia Garcia-Appendini1, Adrian Lam2

1University of Zurich, Switzerland; 2Imperial College Business School, United Kingdom; 3Nova School of Business and Economics, Portugal

Discussant: Emirhan Ilhan (Frankfurt School of Finance and Management)

We estimate the economic costs of climate change by exploiting production networks. Specifically, we estimate the impact of changes in local temperature by comparing sales of intermediate goods across suppliers located in different regions that are selling to the same client. We find that a 1°C increase in average daily temperature leads to a reduction in supplier sales of about 2%. The effect is more pronounced among suppliers in manufacturing and heat-sensitive industries, which is consistent with reduced labor supply when temperatures are higher. Financially constrained and small firms are more affected, which suggests that these firms have difficulties to adapt to changes in temperatures. We also find that episodes of extremely hot and cold weather lead to significantly stronger reductions in sales. Our results suggest that the supply-side effects of climate change are large.

3:40pm - 5:00pmRoom E: FII 2
Session Chair: Tobias Berg, Frankfurt School of Finance & Management

How Important Is Moral Hazard For Distressed Banks?

Itzhak Ben-David1,3, Ajay Palvia2, René Stulz1,3

1Fisher College of Business, The Ohio State University, United States of America; 2The Federal Deposit Insurance Corporation, United States of America; 3National Bureau of Economic Research (NBER), United States of America

Discussant: Tobias Berg (Frankfurt School of Finance & Management)

The moral hazard incentives of the bank safety net predict that distressed banks take on more risk and higher leverage. Since many factors reduce these incentives, including charter value, regulation, and managerial incentives, the net economic effect of these incentives is an empirical question. We provide evidence on this question using two distinct periods that include financial crises and are subject to different regulatory regimes (1985–1994, 2005–2014). We find that distressed banks reduce their leverage and decrease observable measures of riskiness, which is inconsistent with the view that, on average, moral hazard incentives dominate distressed bank leverage and risk-taking policies.

The Myth of the Lead Arranger’s Share

Kristian Blickle1, Quirin Fleckenstein2, Sebastian Hillenbrand2, Tony Saunders2

1FED New York, United States of America; 2New York University, Stern School of Business

Discussant: Sotirios Kokas (University of Essex)

We make use of SNC data to examine syndicated loans in which the lead arranger retains no stake. We find that the lead arranger sells its entire stake in 27 percent of term loans and 48 percent of Term B loans, typically shortly after syndication. In contrast to existing asymmetric information theories on the role of the lead share, we find that loans, which are sold, are less likely to become non-performing in the future. This result is robust to several different measures of loan performance and reflected in subsequent secondary market prices. We explore syndicated loan underwriting risk as an alternative theory that may help explain this result.

5:15pm - 6:30pmKeynote Session (Chair: Martin Brown)
  • Announcement Best Paper Award
  • Keynote Speech by Prof. Thorsten Hens (University of Zurich and Swiss Finance Institute), "Evolutionary Portfolio Theory"

Date: Friday, 26/Mar/2021
1:45pm - 2:00pmZoom Welcome Desk opens
2:00pm - 3:20pmRoom A: AP 3
Session Chair: Loriana Pelizzon, SAFE Goethe University Frankfurt

Issuance and Valuation of Corporate Bonds with Quantitative Easing

Stefano Pegoraro1, Mattia Montagna2

1University of Notre Dame, United States of America; 2University of Toronto, Canada

Discussant: Loriana Pelizzon (SAFE Goethe University Frankfurt)

After the announcement of the corporate quantitative easing program by the European Central Bank, nonfinancial corporations timed the corporate bond market by shifting their issuance toward bonds that were eligible for the program. However, issuers of eligible bonds did not increase total issuance relative to other issuers, nor did they experience different real economic outcomes. Instead, we find evidence of substantial spillover effects, as the valuation of eligible corporate bonds did not change relative to ineligible bonds. Moreover, the announcement increased investors' appetite for aggregate credit risk, both in the corporate bond market and in the CDS market. Firms timed the increase in investors' risk appetite by substituting toward riskier bond types. Using a novel and comprehensive dataset of corporate bonds in the euro area, we document how firms substituted across bond characteristics, and we find evidence of their intention to time the market. To interpret our results, we provide a model in which the market timing activity of firms is instrumental for the effects of quantitative easing to spill over from eligible bonds into the wider market.

Predicting bond return predictability

Daniel Borup1, Jonas Nygaard Eriksen1, Mads Markvart Kjær1, Martin Thyrsgaard2

1Aarhus University, Denmark; 2Kellogg School of Management, Northwestern University, United States of America

Discussant: Vitaly Orlov (University of St.Gallen)

This paper provides empirical evidence on predictable time variations in the degree of bond return predictability. Bond returns are predictable in high (low) economic activity (uncertainty) states, which suggests that the expectations hypothesis of the term structure holds periodically. These state-dependencies in predictability, established by introducing a new multivariate test for equal conditional predictive ability, can be used in real-time to improve out-of-sample bond risk premia estimates and investors’ economic utility through a novel dynamic forecast combination scheme. Dynamically combined forecasts exhibit strong countercyclical behavior and peak during recessions. The empirical findings are supported by a non-linear term structure model.

2:00pm - 3:20pmRoom B: AP 4
Session Chair: Chi-Yang Tsou, Hong Kong University of Science and Technology

Learning and the Anatomy of the Profitability Premium

Chi-Yang Tsou

Hong Kong University of Science and Technology, Hong Kong S.A.R. (China)

Discussant: Jiri Knesl (Said Business School, University of Oxford)

I introduce imperfect information and learning for unobservable long-run productivity into a dynamic asset pricing model and provide an explanation for the profitability premium. Firms with high profitability have higher information precision and face higher exposure to updated long-run productivity shocks through the learning mechanism. Deviating from the existing models without learning, my framework provides a unified explanation for a wide set of empirical facts: firms with high cash-based operating profitability (1) have higher information precision and capital allocation efficiency; (2) are more exposed to aggregate productivity shocks and, hence, earn higher expected returns; and (3) carry shorter cash-flow duration.

Momentum? What Momentum?

Can Yilanci, Erik Theissen

University of Mannheim, Germany

Discussant: Marco Grotteria (London Business School)

Risk-adjusted momentum returns are usually estimated by sorting stocks into a regularly rebalanced long-short portfolio based on their prior return and then running a full-sample regression of the portfolio returns on a set of factors (portfolio-level risk adjustment). This approach implicitly assumes constant factor exposure of the momentum portfolio. However, momentum portfolios are characterized by high turnover and time-varying factor exposure. We propose to estimate the risk exposure at the stock-level. The risk-adjusted return of the momentum portfolio in month t then is the actual return minus the weighted average of the expected returns of the component stocks (stock-level risk adjustment). Based on evidence from the universe of CRSP stocks, from sub-periods and size-based sub-samples, from volatility-scaled momentum strategies (Barroso and Santa-Clara 2015) and from an international sample covering 20 developed countries, we conclude that the momentum effect may be much weaker than previously thought.

2:00pm - 3:20pmRoom C: BHF 3
Session Chair: Matthias Weber, University of St.Gallen

Inflation and Investors’ Behavior: Evidence from the German Hyperinflation

Fabio Braggion1, Felix von Meyerinck2, Nic Schaub3

1Tilburg University; 2University of St. Gallen; 3WHU - Otto Beisheim School of Management, Germany

Discussant: Oliver Spalt (University of Mannheim)

Inflation risk represents one of the most important economic risks faced by investors. In this study, we analyze how investors respond to inflation. We introduce a unique dataset containing security portfolios of more than 2,000 clients of a German bank between 1920 and 1924, covering the famous German hyperinflation. In a within-person setting and controlling for the overall time trend, we find that investors buy less (sell more) stocks in times of rising local prices. This effect is more pronounced for less sophisticated investors. Our findings are consistent with investors being subject to money illusion.

Waiting for the gain to come: How variance and skewness shape retail investors’ trading behavior

Sabine Bernard1, Benjamin Loos2, Martin Weber3

1University of Mannheim & Leibniz-Institut für Finanzmarktforschung SAFE, Germany; 2Technical University of Munich, Germany; 3University of Mannheim

Discussant: Matthias Weber (University of St.Gallen)

We demonstrate that investors’ selling behavior is strongly affected by an asset’s past year variance and skewness. Using a private investor trading data, we show that investors have opposed selling behaviors in high-variance-high-skewness (HVHS) and low-variance-low-skewness stocks (LVLS): Investors are 41 (54) percent more (less) likely to sell a HVHS asset trading at a gain (loss) relative to a LVLS asset trading at a gain (loss). This translates into a high disposition effect for the former and an almost insignificant disposition effect for the latter assets. Our result holds across asset classes and can be linked to realization utility.

2:00pm - 3:20pmRoom D: CFG 3
Session Chair: Sebastian Gryglewicz, Erasmus University Rotterdam

Personal Taxes and Corporate Cash Holdings

Jens Dick-Nielsen, Kristian Miltersen, Ramona Westermann

Copenhagen Business School, Denmark

Discussant: Sebastian Gryglewicz (Erasmus University Rotterdam)

Dividends are taxed at the personal level, but injecting funds into firms does not offer the symmetric tax bene t. Hence, there is a personal tax saving incentive to retain cash in the firm. We develop a corporate finance model of liquidity management, in which the firm's liquidity policy trades off precaution and saved personal taxes against agency and corporate tax costs. The model implies that the tax saving motive is substantial and increasing with the dividend tax rate. Consistent with the model, we show empirically that, after the 2003 dividend tax cut, firms with taxable investors reduced their cash accumulation.

Direct democracy, corporate political strategy, and firm value

Ruediger Fahlenbrach1,2, Alexei Ovtchinnikov3, Philip Valta4

1Ecole Polytechnique Fédérale de Lausanne; 2Swiss Finance Institute; 3HEC Paris; 4University of Bern

Discussant: Felix Meschke (University of Kansas)

We analyze a novel data set of corporate contributions to ballot initiatives and referendums at the U.S. state level between 2003 and 2018. Ballot initiatives and referendums allow citizens of 26 U.S. states to vote directly on legislation. Firms make significant contributions to ballot measure committees in favor of or against specific initiatives that exceed on average their political action committee contributions. Firms that contribute to successful (failed) direct initiated state initiatives generate positive (negative) CARs of 0.32% (-0.21%) on average around the election. They also experience significant sales growth in the two years surrounding successful ballot measure campaigns.

2:00pm - 3:20pmRoom E: FII 3
Session Chair: Falko Fecht, Frankfurt School of Finance & Management

Banks, Maturity Transformation, and Monetary Policy

Pascal Paul

Federal Reserve Bank of San Francisco, United States of America

Discussant: Falko Fecht (Frankfurt School of Finance & Management)

Banks engage in maturity transformation and the term premium compensates them for bearing the associated interest rate risk. Consistent with this view, I show that banks’ net interest margins and term premia have comoved in the United States over the last decades. On monetary policy announcement days, banks’ stock prices fall in response to an increase in expected future short-term interest rates but rise if term premia increase. These effects are muted for nonbank equity, amplified for banks with a larger maturity mismatch, and reflected in bank cash-flows. The results reveal that banks are not immune to interest rate risk.

Bank Liquidity Provision Across the Firm Size Distribution

Olivier Darmouni1, Gabriel Chodorow-Reich2, Stephan Luck3, Matthew Plosser3

1Columbia University, United States of America; 2Harvard University, United States of America; 3Federal Reserve Bank of New York

Discussant: Felix Noth (Leibniz-Institut für Wirtschaftsforschung Halle)

Using loan-level data covering two-thirds all C&I loans from U.S. banks, we document that SMEs (i) obtain much shorter maturity credit lines than large firms; (ii) have less active maturity management and therefore frequently have expiring credit; (iii) post more collateral on both credit lines and term loans; (iv) have higher utilization rates in normal times; and (v) pay higher spreads, even conditional on other firm characteristics. We present a theory of loan terms that rationalizes these facts as the equilibrium outcome of a trade-off between commitment and discretion. Finally, we test the model's prediction that small firms may be unable to access liquidity when large shocks arrive using data on drawdowns in the COVID recession. Consistent with the theory, the increase in bank credit in 2020Q1 and 2020Q2 came almost entirely from drawdowns by large firms on pre-committed lines of credit. We further show that large firms exhibited much higher sensitivity of drawdown rates to industry-level measures of exposure to the COVID recession than did small firms, suggesting that differences in demand for liquidity cannot fully explain the differences in observed drawdown rates across the firm size distribution. Finally, we show that recipients of PPP loans repaid existing credit lines in 2020Q2, suggesting that government-sponsored liquidity can overcome credit constraints.

3:30pm - 4:30pmRoom A: PHD1

Presentations of 20 minutes at: 3:30pm, 3:50pm, 4:10pm


Bond Implied Risks Around Macroeconomic Announcements

Xinyang Li

Boston University, United States of America

Using a large panel of Treasury futures and options, I construct model-free measures of bond uncertainty and tail risk across different tenors from 2000 to 2019, finding that bond tail risk sheds additional light on the financial market because 1) Bond tail risk negatively correlates with the stock counterpart; 2) It enlarged dramatically before the 2008 Financial Crisis to reflect the substantial possibility of disaster in the interest rate markets; 3) And it has become much smaller in recent years under zero-lower-bound and forward guidance. Also, I document three novel findings regarding the movement of bond uncertainty risk around announcements by the US Federal Reserve: First, bond uncertainty increases three and two days prior to the announcements and reverts back upon release. Second, the pre-FOMC announcement drift also prevails in Treasury

bonds, such that yields of the 5, 10, and 30 years shrink 1 bp on the day before the announcement, the movement of which is from the change in the expected rate rather than term premia. Third, an increase in uncertainty predicts the positive bond yield change, so that the 2-day uncertainty upsurge cannot rationalize the following pre-FOMC announcement drift due to its opposite effect. As for the announcements of economic indicators, the release of the unemployment rate reduces the bond uncertainty risk.

3:30pm - 4:30pmRoom B: PHD2

Presentations of 20 minutes at: 3:30pm, 3:50pm, 4:10pm


Do media follow up?

Sasan Mansouri

Goethe University Frankfurt am Main, Germany

In this study, using a comprehensive dataset on (business) media coverage and analyzing the contents of Q&A sessions between the S&P500 firms’ senior management and the participants in their quarterly earnings conference calls, we show that firms whose management fail to satisfy the demand for information, ceteris paribus, receive less media coverage. Poor information environment hurts the information-creation capacity of the media, while such an environment does not show a similar association with the media’s information-dissemination role. Furthermore, this association is more prominent for the professional business media, compared to their non-professional counterparts such as blogs and alternative articles. Our results add nuance to the literature on media coverage bias by showing that the coverage of the firms is mainly driven by the supply-side factors, i.e. the factors affecting the suppliers of the coverage, rather than being demand-driven.

3:30pm - 4:30pmRoom C: PHD3

Presentations of 20 minutes at: 3:30pm, 3:50pm, 4:10pm


Firm life-cycle in merges and acquisitions

Tina Oreski

Swiss Finance Institute and USI Lugano, Switzerland

Using textual analysis and the firm life-cycle theory to proxy for a company's competitive strategy, this paper empirically examines the strategic similarity theory. The findings show that merger and acquisition transactions are more likely between firms with the same strategy. Moreover, when the acquirer and the target firm compete based on one strategy, the deal yields higher stock returns and stronger future asset growth. Overall, the results reveal that synergies obtained from the overlapping strategies constitute an important determinant of public merger and acquisition deals.

3:30pm - 4:30pmRoom D: PHD4

Presentations of 20 minutes at: 3:30pm; 3:50pm; 4:10pm


CEO Turnover and Director Reputation

Felix von Meyerinck, Jonas Romer, Markus Schmid

University of St.Gallen (HSG), Switzerland

This paper analyzes the reputational effects of forced CEO turnovers on outside directors. We find that outside directors interlocked to a forced CEO turnover experience a large and persistent increase in withheld votes at subsequent board re-elections relative to non-turnover-interlocked directors. Increases in withheld votes are confined to departures without a successor in place, performance-induced turnovers, and turnovers that occur during the most productive time within a CEO's tenure. Reputational losses are larger for board committee members responsible for hiring and monitoring the ousted CEO and for directors affiliated with the CEO. Involvement in a forced CEO turnover is not associated with a long-term loss in directorships, but lost directorships are replaced by directorships at smaller firms. Our results imply that forced CEO turnovers signal a governance failure at the board level and that investors rely on salient actions to update their beliefs about directors' hidden qualities.

3:30pm - 4:30pmRoom E: PHD5

Presentations of 20 minutes at: 3:30pm, 3:50pm, 4:10pm


Does Working from Home Decrease Profitability and Productivity? Evidence from the Mutual Fund Industry

Han Xiao

Pennsylvania State University, United States of America

This paper studies the effect of remote working on actively managed equity mutual fund returns and managerial skills. We use the staggered state-level stay-at-home orders in the U.S. as the difference-in-differences strategy. After working from home, fund daily net excess returns over market returns decrease by 90 basis points per day, corresponding to a 6-million-dollar economic loss per day than investing in market portfolios. The findings are relevant to decline in managerial skills, especially for funds managed by teams, in a family, or with multitasking arrangement. These results are robust under recent policy changes.

4:40pm - 6:00pmRoom A: AP 5
Session Chair: Christian Schlag, Goethe University Frankfurt am Main

Uncertainty trends and asset prices

Federico Bandi1, Lorenzo Bretscher2, Andrea Tamoni3

1Johns Hopkins University, United States of America; 2London Business School, United Kingdom; 3Rutgers University, United States of America

Discussant: Christian Schlag (Goethe University Frankfurt am Main)

Even after being orthogonalized with respect to the dividend price ratio, the volatility of total factor productivity (TFP volatility) is shown to have similar long-run predictive ability for excess market returns as the dividend price ratio itself. When seen through an asset pricing lens, this finding implies that TFP volatility should also predict real cash flows and/or real in- terest rates: it is found to mainly predict real cash flows through inflation rates. A model with endogenous growth, Epstein-Zin preferences and nominal price rigidities is shown to reconcile both uncertainty-driven long-run predictability and its real implications. Relying on the model, we justify why alternative notions of uncertainty (like market variance or economic policy un- certainty) have the same predictive ability as TFP volatility provided their priced low-frequency signal is extracted.

Optimistic & pessimistic disagreement and the cross section of stock returns

Giuliano Curatola1,4, Ilya Dergunov3, Christian Schlag2,4

1University of Siena, Italy; 2Goethe University Frankfurt am Main, Germany; 3Australian National University, Australia; 4Leibniz Institute for Financial Research SAFE, Germany

Discussant: Darya Yuferova (Norwegian School of Economics)

We propose to decompose total disagreement of processional forecasters into the disagreement among optimists (i.e., among forecasters whose forecast exceeds a certain threshold) and pessimists. Empirically, both disagreement measures are priced and command different risk premia, with a negative (positive) premium for pessimistic (optimistic) disagreement. Total disagreement loses its significance when optimistic and pessimistic disagreement are included in the same regression. Overall, pessimistic disagreement turns out to be the most robust variable across a variety of empirical specifications and sets of test assets. As we show in a theoretical model, the risk premia of optimistic and pessimistic disagreement depend in a non-trivial way on forecasters' beliefs, risk aversion, and the fractions of wealth held in equilibrium.

4:40pm - 6:00pmRoom B: AP 6
Session Chair: Andrea Barbon, University of St.Gallen

Automation and the Displacement of Labor by Capital: Asset Pricing Theory and Empirical Evidence

Jiri Knesl

Said Business School, University of Oxford, United Kingdom

Discussant: Chi-Yang Tsou (Hong Kong University of Science and Technology)

I examine the asset pricing implications of technological innovations that allow capital to displace labor: automation. I develop a theory in which firms with displaceable labor are negatively exposed to such technology shocks. In the model, fi rms optimally adopt technology to gain competitive advantage but in equilibrium competition erodes profits and decreases firm value. Empirically, I find that fi rms with high share of displaceable labor have negative exposure to technology shocks. A long-short portfolio sorted on this variable mimics macroeconomic measures of technology shocks. Negatively exposed firms earn a 4% annual return premium consistent with displacement risk from technological progress.

Building Trust Takes Time: Limits to Arbitrage in Blockchain-Based Markets

Stefan Voigt1, Nikolaus Hautsch2, Christoph Scheuch3

1University of Copenhagen and Danish Finance Institute, Denmark; 2University of Vienna, Vienna Graduate School of Finance, Data Science at Uni Vienna, Austria; 3wikifolio Financial Technologies, Austria

Discussant: Andrea Barbon (University of St.Gallen)

Distributed ledger technologies replace central counterparties with time-consuming

consensus protocols to record the transfer of ownership. This settlement latency

slows down cross-market trading and exposes arbitrageurs to price risk. We theoretically

derive arbitrage bounds induced by settlement latency. Using Bitcoin

orderbook and network data, we estimate average arbitrage bounds of 121 basis

points, explaining 91% of the cross-market price differences, and demonstrate that

asset flows chase arbitrage opportunities. Controlling for inventory holdings as a

measure of trust in exchanges does not affect our main results. Blockchain-based

settlement without trusted intermediation thus introduces a non-trivial friction

that impedes arbitrage activity.

4:40pm - 6:00pmRoom C: BHF 4
Session Chair: Christoph Merkle, Aarhus University

Are Investors Sensitive to Impact?

Florian Heeb1, Julian F. Kölbel1,2, Falko Paetzold3,1, Stefan Zeisberger4,1

1University of Zürich, Switzerland; 2MIT Sloan School of Management, United States of America; 3EBS University of Business and Law, Germany; 4Radboud University Institute for Management Research, The Netherlands

Discussant: Christoph Merkle (Aarhus University)

In a framed field experiment, we assess how investors’ willingness-to-pay (WTP) for a sustainable investment responds to the investment’s impact in the form of CO2 emission savings. We find that, although investors have a substantial WTP for sustainable investments, they do not pay more for an investment with more impact. This finding also holds for a unique sample of dedicated impact investors. We further show that investors’ WTP responds to impact when they can directly compare several investment options. Yet, the response is far from being proportional to the level of investments’ impact. Our findings indicate that the WTP for sustainable investments depends strongly on the presented choice set and the emotional experience of choosing a sustainable option. Further, our findings suggest that investors do not optimize the impact of their investments but instead optimize the “warm glow” they gain from investing sustainably, which has important implications for modeling the overall impact of sustainable investing on the economy.

Sea Level Rise and Portfolio Choice

Emirhan Ilhan

Frankfurt School of Finance and Management, Germany

Discussant: Francois Koulischer (University of Luxembourg)

Economic theory suggests that the presence of undiversifiable background risks influences household portfolio choices. Households face significant location-specific background risks due to sea level rise (SLR). Using detailed local variation in SLR exposure and disaggregated geographic information on households in the United States, I show that SLR exposed homeowners are less likely to participate in the stock market and invest a smaller share of their financial wealth in risky assets, compared to unexposed homeowners in the same neighborhood. Differences in risk preferences and endogenous location choices are unable to explain this effect. Using plausibly exogenous variation stemming from the adoption of state-level climate change adaptation plans that reduced households’ SLR risks, I provide causal evidence of the effect of SLR risks on portfolio allocation decisions. Following the adoption of such climate adaptation plans, SLR exposed households increase their stock market participation and hold a larger risky share in their financial wealth.

4:40pm - 6:00pmRoom D: CFG 4
Session Chair: Daniel Metzger, Erasmus University Rotterdam

Endogenous Operating Leverage: Foreign Labor Regulations and Firm Boundaries

Katie Moon2, Giorgo Sertsios1

1Universidad de los Andes, Chile; 2University of Colorado Boulder, United States of America

Discussant: Daniel Metzger (Erasmus University Rotterdam)

How do firms manage their operational leverage? We study this question in the context of U.S. multinationals facing changes to foreign labor protection laws. We find that U.S. firms facing higher labor protection in foreign countries are more likely to replace their integrated business relations with arm's-length relations in those nations. This is consistent with the idea that when firms find it harder to terminate their workers in integrated operations, they change their operating model to one where it is easier to replace or discontinue business partners instead of employees. We also find that when foreign labor protection increases, firms face increased competition in foreign countries and reduce their overall capital expenditures. However, they do not adjust their financial leverage in response. Our findings showcase that firms offset the inflexibility from rigid labor market regulations by restructuring their real-side operations.

Pirates without Borders: the Propagation of Cyberattacks through Firms’ Supply Chains

Matteo Crosignani1, Marco Macchiavelli2, Andre Silva3

1Federal Reserve Bank of New York, United States of America; 2Board of Governors of the Federal Reserve System, United States of America; 3Board of Governors of the Federal Reserve System, United States of America

Discussant: Andreas Milidonis (University of Cyprus)

We document the propagation through supply chains of the most damaging cyberattack in history and the important role of banks in mitigating its impact. Customers of directly hit firms saw reductions in revenues, profitability, and trade credit relative to similar firms. The losses were larger for customers with fewer alternative suppliers and suppliers producing high-speci city inputs. Internal liquidity buffers and increased borrowing, mainly through bank credit lines, helped affected customers maintain investment and employment. However, the shock led to persisting adjustments to the supply chain network.

4:40pm - 6:00pmRoom E: FII 4
Session Chair: Alexander Braun, University of St.Gallen

Life insurance convexity

Christian Kubitza1, Nicolaus Grochola2, Helmut Gründl2

1University of Bonn, Germany; 2Goethe University Frankfurt am Main, Germany

Discussant: Hato Schmeiser (University of St.Gallen)

Life insurers massively sell savings policies that guarantee minimum withdrawal payouts. When market interest rates increase, these guarantees become in-the-money. Hence, an increase in interest rates leads to more withdrawals of life insurance policies. We document this effect by exploiting partly hand-collected insurer-level data covering more than two decades. A one-standard deviation increase in interest rates relates to an increase in withdrawal rates by roughly 0.35 standard deviations. As a result, the duration of life insurance policies decreases with higher interest rates. A reduction in duration implies that life insurers may be forced to sell assets when interest rates rise. We build a granular model of life insurers' cash flows to estimate the resulting price impact and fire sale costs. Under plausible assumptions, the model predicts that forced sales reduce asset prices by up to 1% and reduce insurers' equity capital by up to 15bps. Forced sales are primarily driven by insurers' long-dated assets investments, which slow down an increase in policy returns when interest rates rise.

Internal Models, Make Believe Prices, and Bond Market Cornering

Ishita Sen1, Varun Sharma2

1Harvard Business School, United States of America; 2London Business School, United Kingdom

Discussant: Alexander Braun (University of St.Gallen)

Exploiting position-level heterogeneity in regulatory incentives to misreport and novel data on regulators, we document that U.S. life insurers inflate the values of corporate bonds using internal models. We estimate an additional $9-$18 billion decline in regulatory capital during the 2008 crisis, i.e., a 30% greater decline than what was reported. Supervision helps dissuade misreporting, but only when close pricing benchmarks exist. Insurers, in response, strategically shift asset selection toward bonds where price verification is harder, and corner small bonds. Our findings have consequences for assessing the fragility of financial institutions and for understanding the price discovery of corporate bonds.