Forthcoming Articles

Resolving a Paradox: Retail Trades Positively Predict Returns but Are Not Profitable

Brad M. Barber, Shengle Lin, and Terrance Odean

Retail order imbalance positively predicts returns, but on average, retail investor trades lose money. Why? Order imbalance tests equally weight stocks, but retail purchases concentrate in attention-grabbing stocks that subsequently underperform. Long-short strategies based on extreme quintiles of retail order imbalance earn dismal annualized returns of −15.3% among stocks with heavy retail trading but earn 6.8% among other stocks. Our results reconcile the literatures on the performance of retail investors, the predictive content of retail order imbalance, and attention-induced trading and returns. Smaller retail trades concentrate more in attention-grabbing stocks and perform worse.

The Downstream Impact of Upstream Tariffs: Evidence from Investment Decisions in Supply Chains

Thorsten Martin and Clemens A Otto

We study how U.S. manufacturing firms’ investment responds to tariff reductions in supplier industries. Our estimates, based on tariff reductions following multinational trade agreements, suggest that a hypothetical 10% reduction of all upstream tariffs would increase downstream investment by 4% to 6%. This estimate is not explained by decreasing uncertainty and stems from tariff reductions for homogeneous and low-R&D inputs, consistent with the investment response resulting from cost reductions rather than superior foreign technology embodied in imported inputs. Evidence from an instrumental variable estimation using the sudden increase in Chinese import penetration suggests that import competition also increases downstream investment.

The Valuation of Collateral in Bank Lending

Stephan Luck and Joao A. C. Santo

We study the valuation of collateral by comparing spreads on loans by the same bank, to the same borrower, at the same origination date, but backed by different types of collateral. Pledging collateral reduces borrowing costs by 23 basis points. The effect varies across different types of collateral, with cash being most valuable, and real estate, accounts receivables and inventory being more valuable than fixed assets and a blanket lien. The  rate reduction from pledging collateral is sensitive to the value of the collateral, and collateral is more valuable  for smaller and private firms and for loans with longer maturity.

Executive Partisanship and Corporate Investment

Anthony Baird Rice

I show that an alignment in partisan affiliation, between a firm’s management and the president, is associated with higher levels of investment. Using insider trading data, I find that managers become more optimistic about their companies’ prospects when their preferred party is in power. This optimism-driven increase in investment is amplified by herding and associated with both lower profitability and stock returns. Overall, managers’ political beliefs produce heterogeneous expectations about future cash flows and distort investment decisions.

Corporate Financial Frictions and Employee Mental Health

Daniel Karpati and Luc D. R. Renneboog

This paper argues that corporate financial frictions can have an adverse effect on employee mental health, an important determinant of employee productivity. To identify the causal effects of financial frictions, we exploit variation in firms’ need to refinance their long-term debt in 2008, a period when refinancing became more difficult due to the credit crunch. Using administrative microdata, we find that antidepressant use grows significantly more among employees of firms in higher need of debt refinancing. Much of this effect occurs at employees keeping their jobs, pointing to decreased perceptions of job security as a transmission channel.

Household Financial Decision-Making After Natural Disasters: Evidence from Hurricane Harvey

Alejandro del Valle, Therese Scharlemann and Stephen Shore
We study household credit responses to Hurricane Harvey using new, geographically granular data on credit cards, mortgages, and flooding. Estimates from a differences-in-differences design that exploits the flooding gradient show that affected households only borrow at low interest rates, often using promotional (zero interest) cards and that they quickly pay down balances. We also document that take-up of forbearance (borrowing by missing mortgage payments without penalty) increases with flooding. These results are attenuated in floodplains, particularly in structures subject by code to physical hardening. Our results indicate that credit acts as a substitute for the lack of physical hardening.

Is Carbon Risk Priced in the Cross-Section of Corporate Bond Returns?

Tinghua Duan, Frank Weikai Li, and Quan Wen
This paper examines the pricing of a firm’s carbon risk in the corporate bond market. Contrary to the “carbon risk premium” hypothesis, bonds of more carbon-intensive firms earn significantly lower returns. This effect cannot be explained by a comprehensive list of bond characteristics and exposure to known risk factors. Investigating sources of the low carbon alpha, we find the underperformance of bonds issued by carbon-intensive firms cannot be fully explained by divestment from institutional investors. Instead, our evidence is most consistent with investor underreaction to the predictability of carbon intensity for firm cash-flow news, creditworthiness, and environmental incidents.

Public Disclosure and Consumer Financial Protection

Yiwei Dou and Yongoh Roh
The U.S. Consumer Financial Protection Bureau has released a database of consumer complaints about banks’ financial products to the public since 2013. We find a greater reduction in mortgage applications to banks that receive more mortgage complaints in local markets after the disclosures. The effect is stronger in areas with more sophisticated consumers and higher credit competition, and for banks receiving more severe complaints. The number of monthly mortgage complaints per bank exhibits faster mean reversion after the publication of the database. These findings suggest that the public disclosure of mortgage complaints enhances product market discipline and consumer financial protection.