Forthcoming Articles

Discounting Restricted Securities

Tarik Umar, Emmanuel Yimfor, and Rustam Zufarov

We examine the costs of trading restrictions by exploiting an SEC rule change eliminating an ~80-day restriction period in private placements for small issuers. Using a difference-in-differences specification, we find that the restriction is binding, as dollar volume increases 19 percentage points vis-a-vis proceeds, and costly, as offering discounts fall by eight percentage points. Discounts fall more for issuers with higher information asymmetry or longer restriction periods. We account for endogenous responses to the rule change. Overall, our findings suggest that trading restrictions are costly and have large effects on firms’ cost of capital.


The Economics of Supranational Bank Supervision

This paper examines the effectiveness of cooperation among bank supervisors using novel data on supranational agreements signed by 93 countries. Exploiting that globally operating banks are differently covered by these agreements, we show that supervisory cooperation generally improves bank stability. The magnitude of the effect is higher for smaller global banks, and when supervisors are more stringent and have access to higher quality information. We also show that actual supervisory cooperation varies across countries consistent with differences in economic costs and benefits to cooperation. This suggests that cooperation is not always desirable, despite being effective in reducing bank risk.

Thorsten Beck, Consuelo Silva-Buston, and Wolf Wagner

Business Cycle Variation in Short Selling Strategies: Picking During Expansions and Timing During Recessions

We present evidence that short sellers pick stocks during expansions and market-time during recessions. First, firm-level short interest is a stronger negative predictor of the cross-section of stock returns during expansions than recessions. High short interest also only predicts negative future earnings announcement returns during expansions. We attribute these findings to short sellers collecting firm-specific signals. Second, short sellers appear to make factor bets more so during recessions than expansions. These bets tend to pay off as we observe a strong negative relation between the betas of highly shorted stocks and future stock market returns, but only during recessions.

Peter N. Dixon and Eric K. Kelley

Flattening the Illiquidity Curve: Retail Trading During the COVID-19 Lockdown

Gideon Ozik, Ronnie Sadka, and Siyi Shen

This paper studies the impact of retail investors on stock liquidity during the Coronavirus pandemic lockdown in Spring 2020. Retail trading exhibits a sharp increase, especially among stocks with high COVID-19-related media coverage. Retail trading attenuated the rise in illiquidity by roughly 40%, but less so for high-media-attention stocks. Causality is addressed utilizing the staggered implementation of stay-at-home advisory across US states. The results highlight that access to financial markets facilitated by fintech innovations to trading platforms, along with ample free time, are significant determinants of retail-investor stock-market participation.

Hedging Commodity Price Risk

Hamid Ghoddusi, Sheridan Titman, and Stathis Tompaidis

We present an equilibrium model of hedging for commodity processing firms. We show the optimal hedge ratio depends on the convexity of the firm’s cost function and the elasticity of the supply of the input and the demand for the output. Our calibrated model suggests that hedging tends to be ineffective. When uncertainty comes exclusively from either the supply or from the demand side, updating the hedge dynamically, and using non-linear contracts improves hedging effectiveness. However, with both supply and demand uncertainty, hedging effectiveness can be low even with option-based and dynamic hedging strategies.

The Role of Corporate Culture in Bad Times: Evidence from the COVID-19 Pandemic

Kai Li, Xing Liu, Feng Mai, and Tengfei Zhang

After fitting a topic model to 40,927 COVID-19-related paragraphs in 3,581 earnings calls over the period January 22 to April 30, 2020, we obtain firm-level measures of exposure and response related to COVID-19 for 2,894 U.S. firms. We show that despite the large negative impact of COVID-19 on their operations, firms with a strong corporate culture outperform their peers without a strong culture. Moreover, these firms are more likely to support their community, embrace digital transformation, and develop new products than those peers. We conclude that corporate culture is an intangible asset designed to meet unforeseen contingencies as they arise.

How Do Board Reforms Affect Debt Financing Costs Around the World?

Chen Lin, Lai Wei, and Hui Zhao

In this study, we examine the effect of worldwide board reforms on the cost of debt financing. We document an increase of loan spread after a country initiates the reform. The increase is larger among firms that are more exposed to shareholder-debtholder conflicts. The results suggest that board reforms empower shareholders at the cost of debtholders. However, we also find that, while the reform component related to board independence leads to the increase in the cost of debt, the component related to audit committee independence helps decrease the cost.

Exporting Uncertainty: The Impact of Brexit on Corporate America

Murillo Campello, Gustavo S. Cortes, Fabricio d’Almeida, and Gaurav Kankanhalli

We show that the 2016 Brexit Referendum had multi-faceted consequences for corporate America, shaping employment, investment, divestitures, R&D, and savings. The unexpected vote outcome led US firms to cut jobs and investment within US borders. Using establishment-level data, we document that these effects were modulated by the reversibility of capital and labor. American-based job destruction was particularly pronounced in industries with less skilled and more unionized workers. UK-exposed firms with less redeployable capital and high input-offshoring dependence cut investment the most. Our results demonstrate how foreign-born political uncertainty is transmitted across international borders, shaping domestic capital formation, and labor allocation.