Forthcoming Articles

Financial Costs of Judicial Inexperience: Evidence from Corporate Bankruptcies

Benjamin Iverson, Joshua Madsen, Wei Wang, and Qiping Xu

Exploiting the random assignment of judges to corporate bankruptcy filings, we estimate financial costs of judicial inexperience. Despite new judges’ prior legal experience, formal education, and rigorous hiring process, their public Chapter 11 cases spend 19% more time in bankruptcy, realize 31% higher legal and professional fees, and 21% lower creditor recovery rates. Examining possible mechanisms, we find that new judges take longer to rule on motions and cases assigned to these judges file more plans of reorganization. Conservative estimates suggest that minor policy adjustments could increase creditor recoveries by approximately $16.8 billion for the public firms in our sample.

The Response to Share Mispricing by Issuing Firms and Short Sellers

Paul Schultz

Short sale constrained stocks are overpriced on average. I show that firms exploit mispricing by selling shares when their stock is short sale constrained and repurchasing shares when their stock is easily shorted. Stocks underperform following SEOs if and only the stock is difficult to short. This suggests that some SEOs are motivated by mispricing while others are not. Short selling costs make it difficult for investors to profit from the poor performance following SEOs. Short selling and SEOs are alternative ways to supply shares to investors and firms become the low cost share provider when short selling is costly.

Synthetic Options and Implied Volatility for the Corporate Bond Market

Steven Shu-Hsiu Chen, Hitesh Doshi, and Sang Byung Seo

We synthetically create option contracts on a corporate bond index using CDX swaptions, overcoming the limitations that stem from the lack of traded corporate bond options. Our approach allows us to estimate forward-looking moments concerning the corporate bond market in a model-free manner. By constructing an aggregate volatility measure and the associated variance risk premium, we examine the role of volatility risk in the corporate bond market. We highlight that the ex ante conditional second and higher moments we estimate from synthetic corporate bond options carry important implications for credit risk models, providing an extra basis for testing their validity.

Inter-Firm Inventor Collaboration and Path-Breaking Innovation: Evidence from Inventor Teams Post-Merger

Kai Li and Jin Wang

Using a large and unique data set tracking inventors’ career paths following mergers and acquisitions over the period 1981–2012, we show that collaboration between acquirer and target inventors post-merger is associated with more path-breaking patents than those filed by either acquirer or target inventor-only teams. We further show that such collaboration is more important in improving acquirers’ innovation capabilities than hiring target inventors and knowledge spillovers. Finally, we show that recombining tacit knowledge embodied in the human capital of acquirer and target inventors is likely the mechanism. We conclude that inter-firm inventor collaboration is one key means for achieving synergies.

Crises as Opportunities for Growth: The Strategic Value of Business Group Affiliation

Ronald W. Masulis, Peter Kien Pham, Jason Zein, and Alvin E. S. Ang

We document a novel strategic motive for family business groups to utilize their internal capital markets (ICMs) during financial crises. We find that crisis-period group ICM activity is targeted toward exerting product market dominance over standalone rivals. Groups make significant post-crisis gains in market share that are concentrated among affiliates (and industry segments within affiliates) operating in highly competitive product markets, where capturing such gains is difficult in normal times. These patterns are observed only in emerging markets, suggesting that ICMs enable groups to exploit crises to realize long-term competitive advantages only when rivals face chronic financing frictions.

Earnings Growth and Acquisition Returns: Do Investors Gamble in the Takeover Market?

Tingting Liu and Danni Tu

We document a strong positive initial market reaction to merger announcements from bidders with either large earnings growth or significant earnings decline, relative to those with neutral earnings change, reflecting a U-shaped pattern between bidders’ earnings growth and announcement returns. However, the higher initial returns for bidders with earnings decline subsequently reverse, while the higher returns for bidders with high growth do not. We further show that the return patterns are driven by a tendency for retail investors to gamble that mergers and acquisition (M&A) deals initiated by poorly performing bidders will generate high synergies.

Zeroing in on the Expected Returns of Anomalies

Andrew Y. Chen and Mihail Velikov

We zero in on the expected returns of long-short portfolios based on 204 stock market anomalies by accounting for (1) effective bid-ask spreads, (2) post-publication effects, and (3) the modern era of trading technology that began in the early 2000s. Net of these effects, the average anomaly’s expected return is a measly 4 bps per month. The strongest anomalies net, at best, 10 bps after controlling for data-mining. Several methods for combining anomalies net around 20 bps. Expected returns are negligible despite cost mitigations that produce impressive net returns in-sample and the omission of additional trading costs, like price impact.

Market Return Around the Clock: A Puzzle

Oleg Bondarenko and Dmitriy Muravyev

We study how the market return depends on the time of the day using E-mini S&P 500 futures actively traded around the clock. Strikingly, four hours around European open account for the entire average market return. This period’s returns have a 1.6 Sharpe ratio and remain high after transaction costs. Average returns are a noisy zero during the remaining 20 hours. High returns are consistent with European investors processing information accumulated overnight and thus resolving uncertainty. Indeed, uncertainty reflected by VIX futures prices rises overnight and falls around European open. The results are stronger during the 2020 COVID crisis.