Forthcoming Articles

Political Uncertainty and Household Stock Market Participation

Vikas Agarwal, Hadiye Aslan, Lixin Huang, and Honglin Ren

Using micro-level panel data and a difference-in-differences identification strategy, we study the effect of political uncertainty on household stock market participation. We find that households significantly reduce their participation and reallocate funds to safer assets during periods of increased political uncertainty prior to gubernatorial elections. The decline in participation is related to households’ response to elevated asset risk and their incentive to hedge increased labor income risk. In situations where uncertainty remains high after elections, pre-election reduction in participation is only partially reversed.

Capital Inflows and Property Prices: Ethnicity, Education, and Spillovers

Yuk Ying Chang and Sudipto Dasgupta

China has experienced significant capital flight over the last two decades. Despite anecdotal evidence that some of this capital has been invested in foreign residential markets, not much is known from academic research about its destination and impact. We examine the effects of capital inflows from China on residential property prices and the real economy in the U.S. and global metropolitan areas. We show that inflows had significant effects on residential property markets and employment in regions that (a) have strong ethnic ties to China and (b) are destinations of Chinese students. We document spillover effects to other regions.

Agency Costs of Debt in Conglomerate Firms

Michela Altieri

I use an accounting reform to assess the agency cost of debt in diversified firms. Those firms that switch from single to multiple segments following the reform suffer a 12% increase in their bond spread when compared to their stand-alone peers. Consistent with lenders anticipating under-investment and asset substitution incentives, diversified firms with high cash-flow volatility across divisions suffer the highest increase in borrowing costs. I employ a novel approach that allows abstracting from unobservable characteristics that would otherwise influence the pricing of diversified firms’ debt.

Forward-Looking Policy Rules and Currency Premia

Ilias Filippou and Mark P. Taylor

We evaluate the cross-sectional predictive ability of forward-looking monetary policy reaction functions, or Taylor rules, in both statistical and economic terms. We find that investors require a premium for holding currency portfolios with high implied interest rates while currency portfolios with low implied rates offer negative excess returns. Our forward-looking Taylor rule signals are orthogonal to current nominal interest rates and disconnected from carry trade and other currency investment strategies. The profitability of the Taylor rule strategy is mainly driven by inflation forecasts rather than the output gap and is robust to data snooping and a battery of robustness checks.

Private Funds for Ordinary People: Fees, Flows & Performance

Timothy J. Riddiough and Jonathan A. Wiley

We study private funds available to retail investors of modest wealth. Our sample covers unlisted REITs for superior cash flow and fee data. Fee structures are skewed toward performance-insensitive components of the compensation contract, particularly front-end loads. The average unlisted REIT underperforms the listed benchmark by 6.5% per year, 5% of which is attributable to fees. Unlisted REITs underperform institutional-grade private equity real estate funds. Fees paid to investment advisors explain fundraising success, while past realized performance does not. The underperformance is consistent with the consequences of managerial conflicts of interest, inadequate governance mechanisms, opaque disclosure, and poor investment advice.

Do Natural Disaster Experiences Limit Stock Market Participation?

Sreedhar T. Bharath and DuckKi Cho

We examine whether natural disaster experiences affect households’ portfolio choice decisions. Using data from the National Longitudinal Survey of Youth 1979, we find that adversely affected households are less likely to participate in risky asset markets. After a disaster shock, households become more risk-averse and lower their expectations on future stock market returns. Such conservative portfolio choices persist even after households relocate to less disaster-prone areas, consistent with risk preferences being altered by disaster experiences. Overall, our evidence suggests that transient but salient experiences can be an important factor in explaining the limited participation puzzle.

Political Uncertainty and Firm Investment: Project-Level Evidence from M&A Activity

Zhenhua Chen, Mehmet Cihan, Candace E. Jens, and T. Beau Page

We study how firms alter investment projects to mitigate exposure to political uncertainty. We examine deal-level merger data and find that, in addition to delaying and forgoing merger announcements, acquirers: shift merger announcements earlier in time to avoid the period between announcement and effective dates overlapping an election, shift targets geographically away from election states, decrease the size of election-year deals, and shift from equity to cash financing for election-year deals. These results are stronger for acquirers with tighter financial constraints and deals more likely to be financed with equity and show financing matters to firms’ responses to election uncertainty.

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.