Forthcoming Articles

Recovery with Applications to Forecasting Equity Disaster Probability and Testing the Spanning Hypothesis in the Treasury Market

Gurdip S. Bakshi, Xiaohui Gao, and Jinming Xue

We investigate the implications of recovering real-world conditional expectation of return functions using options on the S&P 500 index and Treasury bond futures. First, we construct estimates of the probability of disasters, defined as higher than 6%, 5%, or 4% equity market declines over option expiration cycles. This measure of disaster probability forecasts realized disasters. Second, we employ options on the futures of the 10- and 30-year Treasury bonds to construct estimates for the expected return of bond futures. These measures display forecasting ability for subsequent futures returns beyond the level, slope, and curvature variables extracted from the yield curve.

Foreign Acquisition and Credit Risk: Evidence from the U.S. CDS Market

Umit Yilmaz

This paper empirically analyzes the effect of foreign block acquisitions on U.S. target firms’ credit risk as measured by their credit default swap (CDS) spreads. Foreign block purchases lead to a greater increase in the target firms’ CDS premia post-acquisition compared to domestic block purchases. This effect is stronger when foreign owners are geographically and culturally more distant, and when they obtain majority control. The findings are consistent with an asymmetric information hypothesis, in which foreign owners are less effective monitors due to information barriers.

Delegated Monitoring, Institutional Ownership, and Corporate Misconduct Spillovers

Ugur Lel, Gerald S. Martin, and Zhongling Qin

Upon the revelation of corporate misconduct by firms in their portfolios, institutional investors experience a significant discount in the market value of their portfolios, excluding misconduct firms, creating a short-term spillover that averages $92.7 billion losses per year. We examine an expansive set of channels under which this spillover to non-target firms can occur, and find that it reflects the loss of the embedded value of monitoring by a common institutional owner, enforcement wave activity, and industry peer and business relationships. Institutional investors also experience significant abnormal outflow of funds in the year following the misconduct event.

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.

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.

Do Capital Markets Punish Managerial Myopia? Evidence from Myopic R&D Cuts

Jamie Yixing Tong and Feida (Frank) Zhang

The extant literature provides conflicting arguments — and mixed results — on whether capital markets punish managerial myopia. Using managers’ cutting R&D to meet short-term earnings goals as a research setting, this study reveals that capital markets penalize managerial myopia, especially for firms with high investor sophistication. Moreover, the negative market reactions to managerial myopia are weaker for firms with overinvestment problems. Overall, the results support that security markets are not shortsighted. In a further analysis, we document that compensation, especially earnings-based compensation, could be among the reasons why managers behave myopically.


Fast-Moving Habit: Implications for Equity Returns

Anthony W Lynch and Oliver Randall

We find that the Campbell-Cochrane external-habit model can generate a value premium if the persistence of the consumption surplus is sufficiently low. Such low persistence is supported by micro evidence on consumption. If the mean and conditional volatility of consumption growth are highly persistent, as in the Bansal-Yaron long-run risk model, then fast-moving habit can also generate, without eroding the value premium: 1) empirically sensible long horizon return predictability; and, 2) a price-dividend ratio for market equity that exhibits the high autocorrelation found in the data. Fast-moving habit also delivers several empirical properties of market-dividend strips.