Forthcoming Articles

The Fragility of Organization Capital

Oliver Boguth, David Newton, and Mikhail Simutin

Firms with high levels of organization capital, a firm-specific production factor provided by key employees, are known to be risky and earn high stock returns. We argue that fragility of organization capital – its sensitivity to disruptions – is an independently important dimension of this risk. We proxy for fragility by the size of the top management team and show that firms with small teams outperform by 5% annually. The return spread increases with organization capital and correlates with outside options of top executives. Further supporting our interpretation, shocks to team composition from unexpected CEO deaths cause larger losses in smaller teams.

Does Government Spending Crowd Out R&D Investment? Evidence from Government-Dependent Firms and Their Peers

Phong T. H. Ngo, and Jared Stanfield

We provide evidence that managerial incentives to manipulate real activities can influence the effectiveness of fiscal policy. Increases in federal spending lead government-dependent firms to expand R&D investment whereas industry-peer firms contract. The net result is a reduction in industry-level R&D investment. We find evidence of a novel mechanism for the crowding out of peer-firm investment: peer-firm managers respond to falling relative performance by cutting R&D to manage current earnings upward. We show that these differential responses manifest in firm value. These findings are robust to endogeneity and selection concerns as well as a battery of alternative explanations.

The Exploratory Mindset and Corporate Innovation

Zhaozhao He and David Hirshleifer

We propose that CEO exploratory mindset – inherent desire to search for novel ideas and long-term orientation – promotes innovation. Firms with PhD CEOs produce more exploratory patents with greater novelty, generality, and originality. PhD CEOs engage less in managing earnings and stock prices, invest more in R&D and alliances, generate higher long-term value of patents, and experience more positive market reactions to R&D alliances. Their firms achieve superior long-run operating performance. They tend to be hired by research-intensive firms with poor financial performance. Evidence from managerial incentive shocks and turnovers suggests that these effects do not derive solely from CEO-firm matching.

Cash Holdings, Capital Structure, and Financing Risk

Qi Sun and Junjie Xia

This paper quantifies a new motive of holding cash through the channel of financing risk. We show that if the access to future credit is risky, firms may issue long-term debt now and save funds in cash to secure the current credit capacity for the future. We structurally estimate the model and find that this motive explains about 24% to 30% of cash holdings in the data. Counterfactual experiments indicate that the value of holding cash is around 8% of shareholder value.

Maturity Driven Mispricing of Options

Assaf Eisdorer, Ronnie Sadka, and Alexei Zhdanov

This paper documents that short-term options achieve significantly lower returns during months with four versus five weeks between expiration dates. The average return differential ranges from 16 to 29 basis points per week, for delta-hedged portfolios, and from 101 to 187 basis points per week, for straddles, over 1996–2017. Evidence based on earnings announcements and institutional holdings suggests that investor inattention to exact expiration date rather than underlying risk exposures or transaction costs can explain the mispricing. Market makers seem to adjust prices accordingly, and tend to over-trade mispriced options against less sophisticated investors.

Does Corporate Investment Respond to the Time-Varying Cost of Capital? Empirical Evidence

Yongjin Kim

I examine whether the time-varying cost of capital is considered in firms’ capital budgeting decisions. For this test, I measure the conditional cost of equity, using individual equity option prices. I find that corporate investment responds negatively to fluctuations in the option-implied cost of equity and the weighted average costs of capital. Furthermore, through decomposing marginal q, I reveal that cost-of-capital elasticity of empirical investment is almost identical to its productivity elasticity, as theory predicts. These findings suggest that firms’ discount rates are updated accurately in practice despite the failure of conventional frameworks, such as factor-based models, in this regard.

Inferring Stock Durations Around FOMC Surprises: Estimates and Implications

Zhanhui Chen

Discount rates affect stock prices directly via the discount-rate channel or indirectly via the cash-flow channel because expected future cash-flow growth varies with the discount rates. The traditional Macaulay duration captures the effect from the discount-rate channel. I propose a novel duration measure, the effective equity duration, to capture the effects from both channels. I estimate it around unexpected policies in the federal funds rates. I find that the equity yield curve is hump-shaped because expected future cash flow growth increases with the discount rates. The effective equity duration captures information other than monetary policy risk.

Do Private Equity Managers Have Superior Information on Public Markets?

Oleg R. Gredil

Using cash flows from a large sample of buyout and venture funds, I show that private equity (PE) distributions predict returns in the industries of funds’ specialization. My tests distinguish timing skill from reactions to market conditions and spillover effects of PE activity. Fund managers foresee comparable public firms’ earnings but sell at the industry peaks only if they have performance fees to harvest. These results have implications for manager selection and improve understanding of PE fund returns and PE role in capital markets.