Forthcoming Articles

Standing Out from the Crowd via CSR Engagement: Evidence from Non-Fundamental-Driven Price Pressure

Lei Gao, Jie (Jack) He, and Juan (Julie) Wu

We test the signaling view of corporate social responsibility (CSR) engagement using two complementary quasi-natural experiments that impose exogenous negative pressure on stock prices. Firms under such adverse price pressure increase CSR activities compared to otherwise similar firms. This effect concentrates among firms with stronger signaling incentives, namely, those facing greater information asymmetry, more product market competition, higher shareholder litigation risk, and higher stock price crash risk. Firms under the exogenous negative price pressure mainly improve CSR strengths, including costly environmental investments. We also find that CSR engagement attracts socially responsible investors and lowers cost of capital for signaling firms.

Initial Public Offerings Chinese Style

Yiming Qian, Jay R. Ritter, and Xinjian Shao

This paper provides a survey of China’s IPO market, focusing on IPO pricing, bids and allocation, and aftermarket trading. We show that strict regulations result in suppressed IPO offer prices and high initial returns, causing a high cost of going public. Investors treat IPOs as lotteries with extremely high short-term returns, with little attention to the long-term. The auction selling method, however, works in the way it is supposed to. Mutual funds bid in a more informative way than other investors, and their advantages are unlikely to be due to underwriters’ preferential treatment. We also discuss the latest registration-system reform.

Trader Competition in Fragmented Markets: Liquidity Supply Versus Picking-Off Risk

Alejandro Bernales, Nicolas Garrido, Satchit Sagade, Marcela Valenzuela, and Christian Westheide

By employing a dynamic model with two limit order books, we show that fragmentation is associated with reduced competition among liquidity suppliers and lower picking-off risk of limit orders. Due to these countervailing channels, the impact of fragmentation on liquidity and welfare differs with asset volatility: when volatility is high (low), liquidity and aggregate welfare in a fragmented market are higher (lower) than in a single market. However, fragmentation always shifts welfare away from agents with exogenous trading motives and towards intermediaries. We empirically corroborate our model’s predictions about liquidity. Our model reconciles the mixed results in the empirical literature.

Central Counterparty Default Waterfalls and Systemic Loss

Samim Ghamami, Mark Endel Paddrik, and Simpson Zhang

Central counterparty default waterfalls act as the last lines of defense in over-the-counter markets by managing and allocating resources to cover payment defaults. This paper examines the impact of variations in waterfall design on financial system losses in the presence of payment network dependencies and frictions in the cleared and non-cleared portion of the system. Through the development of a structural model, we draw several theoretical conclusions about the effectiveness of CCP default waterfalls under severe payment stress. These findings are empirically quantified by testing the model using supervisory data for the U.S. credit default swap market.

Cash Induced Demand

Huaizhi Chen

I show that cash distributions through cash mergers, dividend payments, and stock buybacks are, in principle, similar to investor fund flows in generating demand for investable assets. Abnormal returns on certain assets can be forecasted because delegated investors predictably reinvest cash returns toward certain holdings. Novel measures of stock-level demand constructed using proportional reinvestments by mutual funds predict abnormal returns and issuances in non-cash-paying stocks. These results highlight an alternative and substantial source of price fluctuations in the cross section of equities.

Short Squeezes and Their Consequences

Paul Schultz

A short squeeze occurs if borrowed shares are recalled and the short seller is unable to find another source of shares. This forces the short seller to terminate a position early. For most stocks the probability of a short squeeze is very low. Short squeezes, however, are not unusual for the hardest to borrow stocks. For these stocks, trading costs from squeezes are high, and have a significant impact on the returns to short selling. For hard-to-borrow stocks, short sellers also miss out on significant abnormal returns because squeezes force them to close positions.

A Liberalization Spillover: From Equities to Loans

Xin Liu, Shang-Jin Wei, and Yifan Zhou

The opening of equity markets to foreign investment by developing countries appears to generate an enormously large positive growth effect (Bekaert, Harvey, and Lundblad (2005)) despite a relatively small role of such markets for financing investment in most economies. We propose a spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China’s introduction of the Qualified Foreign Institutional Investors (QFII) program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium in loans is an important mechanism.

Labor and Finance: The Effect of Bank Relationships

Patrick Behr, Lars Norden, and Raquel de Freitas Oliveira

We investigate whether firms’ number of credit relationships with financial institutions affects labor market outcomes. Using 5 million observations on matched credit and labor panel data from Brazil, we estimate IV regressions, employing exogenous variation in firm-lender relationships due to nationwide bank M&A activity. Firms with more relationships employ more workers and pay higher wage bills. Credit availability, cost of credit, and financial institution heterogeneity are economic channels. The firm-level results translate into positive macroeconomic effects in municipalities and states. The evidence is novel and indicates positive effects of multiple relationships on labor market outcomes in an emerging economy.

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