Forthcoming Articles

The Bond Pricing Implications of Rating-Based Capital Requirements

Scott Murray and Stanislava Nikolova

This paper demonstrates that rating-based capital requirements, through their impact on insurers’ investment demand, affect corporate bond prices. Consistent with insurers’ low demand for investment-grade (IG) bonds with a rating close to non-investment-grade, these bonds outperform. Consistent with insurers’ high (low) demand for IG bonds with high (low) systematic risk exposure, these bonds underperform (outperform). Insurer demand, measured by insurer holdings, explains most of these pricing effects. We identify rating-based capital requirements as the driver of insurer demand, and thus the pricing effects, by showing that the effects do not exist before these requirements’ implementation in 1993.

Underwriter Reputation, Issuer-Underwriter Matching, and SEO Performance

Charles W. Calomiris, Yehuda Izhakian, and Jaime F. Zender

The role of underwriters is altered in new seasoned equity offering deal types in which the offering follows quickly after its announcement. Controlling for the endogenous matching between issuing firms and underwriters, we find increased underwriter reputation mitigates the immediate price impact of announcing an accelerated bookbuilt offering, exacerbates the price impact of announcing a bought offering, and has no immediate price impact for fully marketed deals. In contrast, underwriter reputation positively affects price outcomes for fully marketed deals around the offer date. Reputation effects are not apparent in the absence of controlling for the endogenous matching.

Global Board Reforms and the Pricing of IPOs

Yangyang Chen, Abhinav Goyal, and Leon Zolotoy

We document that global board reforms are associated with a significant reduction in IPO underpricing. The effect is amplified for IPOs with greater agency problems and mitigated for IPOs certified by reputable intermediaries, IPOs with greater disclosure specificity, and IPOs in countries with better shareholder protection and stringent financial reporting regulations. Furthermore, global board reforms have led to an improvement in the long-term market performance, proceeds, and subscription level of IPOs, and have enhanced board independence in the issuing firms. Our findings suggest that global board reforms have strengthened board oversight in the issuing firms, leading to less underpriced IPOs.

Speculation Sentiment

Shaun William Davies

I exploit the leveraged exchange-traded funds’ (ETFs’) primary market to measure aggregate, uninformed, gambling-like demand, that is, speculation sentiment. The leveraged ETFs’ primary market is a novel setting that provides observable arbitrage activity attributed to correcting mispricing between ETFs’ shares and their underlying assets. The arbitrage activity proxies for the magnitude and direction of speculative demand shocks and I use it to form the Speculation Sentiment Index. The measure negatively relates to contemporaneous market returns (e.g., it is bullish in down markets) and negatively predicts returns. The results are consistent with speculation sentiment causing market-wide price distortions that later reverse.

Cultivating Self-Control in FinTech: Evidence from a Field Experiment on Online Consumer Borrowing

Di Bu, Tobin Hanspal, Yin Liao, and Yong Liu

We report the results of a longitudinal intervention with students across five universities in China designed to reduce online consumer debt. Our research design allocates individuals to a self-control training program, a placebo financial literacy treatment, or a zero-touch control group. The self-control program features detailed tracking of spending and borrowing, budgeting, and introspection about consumption choices. These sessions reduce online borrowing and delinquency charges, mainly driven by a reduction in entertainment-related spending. Financial literacy interventions improve test scores but only marginally affect borrowing. Our results suggest that cultivating self-regulation can largely improve borrowing behavior on e-commerce platforms.

Finance in the New U.S. Economy: Local Finance and Service Job Growth in the Post-Industrial Economy

Elizabeth Berger

I examine whether local bank finance facilitated the transition to a service-based economy in the United States. I identify a causal role for local finance in service job creation. I use county-level changes to alcohol laws as demand shocks to service employers across a subsample of U.S. counties. Counties with more local finance experience more service job creation. This leads to labor market transitions that reflect shifts in the broader economy. Information asymmetry and collateral constraints connect local finance to service sector employment. The findings identify a unique role for local finance in the evolution to a post-industrial service-based economy.

Hot-Stove Effects: The Impact of CEO Past Corporate Experiences on Dividend Policy

Matthew Faulkner and Luis García-Feijóo

The personal traits of CEOs have been found to influence corporate policy decisions. We examine the impact of CEO past corporate distress experiences on payout policy. CEOs who have experienced a distress event in their career, while working in a non-CEO position at a different firm, subsequently alter corporate payout policy once in the CEO position. They are less likely to pay dividends and repurchase shares, pay out lower levels of dividends, and are less likely to increase dividends. They further exhibit preference toward repurchases. Overall, we report that experience-driven conservatism affects payout policy, a novel finding in the literature.

Do Capital Requirements Make Banks Safer? Evidence from a Quasi-Natural Experiment

Denefa Bostandzic, Felix Irresberger, Ragnar Enger Juelsrud, and Gregor N. F. Weiss

We use the EBA capital exercise of 2011 as a quasi-natural experiment to investigate how capital requirements affect various measures of bank solvency risk. We show that, while regulatory measures of solvency improve, non-regulatory measures indicate a deterioration in bank solvency in response to higher capital requirements. The decline in bank solvency is driven by a permanent reduction in banks’ market value of equity. This finding is consistent with a reduction in bank profitability, rather than a repricing of bank equity due to a reduction of implicit and explicit too-big-too-fail guarantees. We then discuss alternative policies to improve bank solvency.