Forthcoming Articles

Maturity Clienteles and Corporate Bond Maturities

Alexander W. Butler, Xiang Gao, and Cihan Uzmanoglu

The average maturity of newly issued corporate bonds has declined substantially over the past 40 years, and the traditional determinants of debt maturity fail to explain this decline fully.  We show that the changing composition of investors in the corporate bond market influences bond maturities. The results of a Granger causality test, an instrumental variable approach, and a natural experiment suggest that a decline in the insurance companies’ — which prefer long-term bonds — ownership share in the corporate bond market explains a significant part of the unexplained maturity decline. These findings illustrate how investor preferences can have real effects on corporations.

Does Finance Make Us Less Social?

Henrik Cronqvist, Mitch Warachka, and Fang (Frank) Yu

Informal risk sharing within social networks and formal financial contracts both enable households to manage risk. We find that financial contracting reduces participation in social networks. Specifically, increased crop insurance usage decreased local religious adherence and congregation membership in agricultural communities. Our identification utilizes the Federal Crop Insurance Reform Act of 1994 that doubled crop insurance usage nationally within a year, although changes in usage varied across counties. Difference-in-Difference and Spatial First Difference tests confirm that households substituted insurance for religiosity. This substitution was associated with reductions in crop diversification and crop yields, indicating an increase in moral hazard.

Selection Bias in Mutual Fund Fire Sales

Elizabeth A. Berger

Liquidity trading following mutual fund outflows creates a potentially powerful empirical setting in which stock price variation is unrelated to changes in firm fundamentals. Instrumental variables (IV) drawn from this setting impose an additional assumption that managers sell firms in proportion to portfolio weights. I show that this assumption causes selection bias in these IVs. It misallocates large price impacts to poorly performing, illiquid firms with lower growth — firms that managers systematically avoid selling. Simulations show that selection bias doubles the magnitude of regression coefficients and precludes potential fixes. Numerous recent studies exploiting these IVs should be re-evaluated.

FIEs and the Transmission of Global Financial Uncertainty: Evidence from China

Shujie Wu and Haichun Ye

This paper provides micro-level evidence for the role of foreign-invested enterprises (FIEs) in the cross-border transmission of global financial uncertainty shocks. Using Chinese firm-level data, we find that rising uncertainty has a significantly larger contractionary effect on real investment for FIEs than their local counterparts. This effect is more pronounced for firms faced with greater investment irreversibility or financial constraints. The contractionary effect is mainly driven by downside uncertainty, while upside uncertainty is modestly expansionary. Similar effects are found for other firm-level performances. There is also a spillover effect to local private firms with FIEs concentrated in downstream sectors.

Trust and Debt Contracting: Evidence from the Backdating Scandal

Veljko Fotak, Feng (Jack) Jiang, Haekwon Lee, and Erik Lie

We study the effect of trust on debt contracting. We find that, after the revelation of option backdating, borrowers that likely backdated their previous option grants pay higher interest rates on loans. This adverse effect is mitigated by CEO replacements. Results are similar for public debt, but only if a third party identified the backdaters. After the backdating revelation, firms that engaged in backdating increase their reliance on public debt, and those without access to the public debt market experience capital constraints.

Regulating Commission-Based Financial Advice: Evidence from a Natural Experiment

Stanislav Sokolinski

Do limitations on commissions paid to financial advisers reduce prices of financial products and stimulate investment? I examine these questions by estimating the causal effects of regulating commissions for mutual fund distribution. I exploit the unique institutional setting in Israel and the 2013 policy change when the government reduced commissions differently for different fund types. The reform led to a major decline in fund expense ratios and a consequent increase in fund flows. Funds with price-sensitive investors experienced a 35% larger inflows. I interpret these results as investor response to price competition fostered by a reduction in distribution costs.

Shareholder Litigation Risk and Firms’ Choice of External Growth

Chenchen Huang, Neslihan Ozkan, and Fangming Xu

We provide novel evidence showing that shareholder litigation risk influences firms’ choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk, low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms’ choices of boundary-expanding transactions.

Collateral Constraints, Financial Constraints, and Risk Management: Evidence from Anti-Recharacterization Laws

Douglas (DJ) Fairhurst and Yoonsoo Nam

We use the staggered enactment of anti-recharacterization laws as a plausibly exogenous shock to the value of securitizing collateral through Special Purpose Vehicles (SPVs) and test how collateral values impact corporate risk management. Following the laws’ enactment, we find increases in commodity, foreign exchange, and interest rate hedging, especially for firms with exposure to these risks and that rely on SPVs. Supporting the collateral constraints literature, the effect is weaker for firms that likely need the collateral for external financing, such as financially constrained firms. Our findings highlight fluctuations in collateral values as an important consideration in risk management decisions.