Forthcoming Articles

Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy

Jin Cao and Valeriya Dinger

Exploring bank-level data from a small open economy, we present evidence that global funding conditions limit the effectiveness of domestic monetary policy in terms of shaping both the volume and the riskiness of bank lending. We show that more favorable global funding conditions associated with a local currency appreciation encourage banks to increase lending, leverage up, take more risks, and thus insulate themselves from lean-against-the-wind domestic monetary policy. These results support the existence of a risk-taking channel of currency appreciation (Bruno and Shin ((2015a), (2015b)) at the bank level.

The Informational Role of Ownership Networks in Bank Lending

Haoyu Gao, Hong Ru, and Xiaoguang Yang

This paper documents novel large-sample evidence on the informational role of interfirm ownership networks in bank lending. Using comprehensive loan-level data in China, we find that banks’ internal loan ratings at issuance predict subsequent delinquent events more accurately when borrowers are connected to banks’ existing customers via ownership networks. In post-issuance monitoring for delinquent loans, banks with access to ownership networks manage to downgrade their initial ratings before late payments. These findings suggest that ownership networks facilitate the transmission of private information for bank lending. Moreover, ownership networks are more important for transmitting information related to small and medium enterprises.

Political Uncertainty and Household Stock Market Participation

Vikas Agarwal, Hadiye Aslan, Lixin Huang, and Honglin Ren

Using micro-level panel data and a difference-in-differences identification strategy, we study the effect of political uncertainty on household stock market participation. We find that households significantly reduce their participation and reallocate funds to safer assets during periods of increased political uncertainty prior to gubernatorial elections. The decline in participation is related to households’ response to elevated asset risk and their incentive to hedge increased labor income risk. In situations where uncertainty remains high after elections, pre-election reduction in participation is only partially reversed.

Capital Inflows and Property Prices: Ethnicity, Education, and Spillovers

Yuk Ying Chang and Sudipto Dasgupta

China has experienced significant capital flight over the last two decades. Despite anecdotal evidence that some of this capital has been invested in foreign residential markets, not much is known from academic research about its destination and impact. We examine the effects of capital inflows from China on residential property prices and the real economy in the U.S. and global metropolitan areas. We show that inflows had significant effects on residential property markets and employment in regions that (a) have strong ethnic ties to China and (b) are destinations of Chinese students. We document spillover effects to other regions.

Agency Costs of Debt in ConglomerateÿFirms

Michela Altieri

I use an accounting reform to assess the agency cost of debt in diversified firms. Those firms that switch from single to multiple segments following the reform suffer a 12% increase in their bond spread when compared to their stand-alone peers. Consistent with lenders anticipating under-investment and asset substitution incentives, diversified firms with high cash-flow volatility across divisions suffer the highest increase in borrowing costs. I employ a novel approach that allows abstracting from unobservable characteristics that would otherwise influence the pricing of diversified firms’ debt.

Forward-Looking Policy Rules and Currency Premia

Ilias Filippou and Mark P. Taylor

We evaluate the cross-sectional predictive ability of forward-looking monetary policy reaction functions, or Taylor rules, in both statistical and economic terms. We find that investors require a premium for holding currency portfolios with high implied interest rates while currency portfolios with low implied rates offer negative excess returns. Our forward-looking Taylor rule signals are orthogonal to current nominal interest rates and disconnected from carry trade and other currency investment strategies. The profitability of the Taylor rule strategy is mainly driven by inflation forecasts rather than the output gap and is robust to data snooping and a battery of robustness checks.

Unintended Consequences of the Dodd-Frank Act on Credit Rating Risk and Corporate Finance

Bina Sharma, Binay K. Adhikari, Anup Agrawal, Bruno R. Arthur, and Monika K. Rabarison

Prior research finds that Dodd-Frank Act’s regulations on credit rating agencies (CRAs) increase rated firms’ risk of rating downgrades, regardless of their credit quality (see Dimitrov, Palia, and Tang (2015)). Our difference-in-differences estimates suggest that after Dodd-Frank, low-rated firms, which face steep costs from a further downgrade, significantly reduce their debt issuance and investments compared to similar unrated firms. Our results are not driven by credit supply or the financial crisis. They reveal an unintended consequence of Dodd-Frank: Greater regulatory pressure on CRAs leads to negative spillover effects on firms concerned about credit ratings, regardless of their credit quality.

Private Funds for Ordinary People: Fees, Flows & Performance

Timothy J. Riddiough and Jonathan A. Wiley

We study private funds available to retail investors of modest wealth. Our sample covers unlisted REITs for superior cash flow and fee data. Fee structures are skewed toward performance-insensitive components of the compensation contract, particularly front-end loads. The average unlisted REIT underperforms the listed benchmark by 6.5% per year, 5% of which is attributable to fees. Unlisted REITs underperform institutional-grade private equity real estate funds. Fees paid to investment advisors explain fundraising success, while past realized performance does not. The underperformance is consistent with the consequences of managerial conflicts of interest, inadequate governance mechanisms, opaque disclosure, and poor investment advice.

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