Forthcoming Articles

Global Liquidity Provision and Risk Sharing

Feng Jiao and Sergei Sarkissian

We examine liquidity-related characteristics of U.S. firms with cross-listed shares in 20 foreign markets in the 1950–2013 period. We find that firms after foreign market listing exhibit lower liquidity sensitivity, lower liquidity beta, and suffer less from transitory price shocks. These results are stronger when firms are listed on multiple exchanges, in larger and more liquid markets. The liquidity enhancement is associated with firms’ increased foreign ownership post-listing and is effective for firms with high levels of volatility, foreign income, foreign trading, and PIN. Our findings provide support for global markets providing liquidity and reducing liquidity risk to U.S. firms.

Governance Changes Through Shareholder Initiatives: The Case of Proxy Access

Tara Bhandari, Peter Iliev, and Jonathan Kalodimos

We study a regulatory change that led to over 300 shareholder proposals to instate proxy access and more than 250 firms adopting proxy access from 2012 to 2016. The firms expected to benefit most from proxy access have the most positive market reaction to receiving a proposal, but adoptions are not concentrated at these firms. We find that proposing and voting shareholders do not discriminate between firms that would or would not benefit, and that management resists proxy access at the firms that stand to benefit most. This process results in the concentration of adoptions at large, already well-governed firms.

Fiscal Deficits, Bank Credit Risk, and Loan Loss Provisions

Felipe Bastos Gurgel Silva

Fiscal deficits represent an important variable for banks’ aggregate credit risk, revealing governments’ ability to curb banks’ losses in bad states, either with direct cash infusions or with macroeconomic stabilization policies. Deteriorating deficits are associated with increasing financial distress of the banking sector and higher levels of loan loss provisions. The effect is more pronounced for banks with strong aversion to under-provisioning, and is robust to a battery of tests and to the identification of fiscal shocks using military spending data. This association represents an additional source of negative co-movement between provisions and economic conditions, with implications for financial stability.

Where Does the Predictability from Sorting on Returns of Economically Linked Firms Come From?

Aaron Burt and Christopher Hrdlicka

Cross-firm predictability among economically linked firms can arise when both firms exhibit own-momentum and their returns are contemporaneously correlated. We show that cross- firm predictability can last up to 10 years, which is hard to reconcile with an interpretation of slow information diffusion. However, it is consistent with the economically linked firms’ commonality in momentum. The contribution of each source can be found by decomposing leaders’ returns into the predictable (momentum) and news components. Sorting on each, we find that both sources contribute almost equally to 1-month predictability, while commonality in momentum is solely responsible for longer-horizon cross-firm predictability.

Does Local Capital Supply Matter for Public Firms’ Capital Structures?

Binay K. Adhikari, David C. Cicero, and Johan Sulaeman

Publicly listed firms respond to capital supply conditions shaped by local investing preferences. Public firms headquartered in areas with higher proportions of senior citizens and women use more debt financing. These demographics are associated with conservative investing, leading to a higher and more stable local supply of debt capital. The demographics-leverage relation is more pronounced for firms that cannot easily tap public bond markets, which is the majority of public firms. Changes in firms’ financing activities around exogenous shocks to credit supplies — including interstate banking deregulation and the 2008–2009 financial crisis — support the local capital supply hypothesis.

Overconfident Institutions and Their Self-Attribution Bias: Evidence from Earnings Announcements

Hsin-I Chou, Mingyi Li, Xiangkang Yin, and Jing Zhao

Institutional demand for a stock prior to its earnings announcement is negatively related to subsequent returns. The relationship is not attributable to the price pressure of institutional demand and is stronger for stocks with higher information asymmetry and/or greater valuation difficulty. These findings support the notion of overconfident institutions mispricing stocks. Following announcements, institutions’ behavior exhibits the outcome-dependent feature of self-attribution bias. Whether they become more overly confident and delay their mispricing correction depends on whether earnings news confirms their pre-announcement trades or not. This behavioral bias also offers a new explanation for the well-known anomaly of post-earnings-announcement drift.

Dynamic Liquidity Management by Corporate Bond Mutual Funds

Hao Jiang, Dan Li, and Ashley W. Wang

How do corporate bond mutual funds manage liquidity to meet investor redemptions? We show that, during tranquil market conditions, these funds tend to reduce liquid asset holdings to meet redemptions, temporarily increasing relative exposures to illiquid asset classes. When aggregate uncertainty rises, however, they tend to scale down their liquid and illiquid assets proportionally, to preserve portfolio liquidity. This fund-level dynamic management of liquidity appears to impact the broad financial market: redemptions from the corporate bond fund sector lead to more corporate bond selling during high-uncertainty periods, which generates price pressures and predicts strong return reversals.

Common Analysts: Method for Defining Peer Firms

Markku Kaustia and Ville Rantala

We develop a method for defining groups of peer firms on the basis of joint analyst coverage. Besides industry boundaries, analysts’ coverage choices reflect other aspects of firm relatedness such as business model. We find that the analyst-based method produces substantially more homogenous groups of firms compared to common industry classifications, and has a number of other desirable properties. The paper has two broader implications. First, it demonstrates the advantages of a self-organizing approach to classification, as opposed to a hierarchical system. Second, it illustrates a new positive information production externality generated by the institution of security market analysis.

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