Forthcoming Articles

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.

Investor Attention and Stock Returns

Jian Chen, Guohao Tang, Jiaquan Yao, and Guofu Zhou

We find that investor attention proxies proposed in the literature collectively have a common component that has significant power in predicting stock market risk premium, both in-sample and out-of-sample. This common component is well extracted by using partial least squares, scaled principal component analysis, and principal component analysis approaches. Moreover, this component can deliver sizable economic gains for mean-variance investors in asset allocation. The predictive power of investor attention for the aggregate stock market primarily stems from the reversal of temporary price pressure and from the stronger forecasting ability for high-variance stocks.

Housing Wealth as Precautionary Savings: Evidence from Urban China

Gary Painter, Xi Yang, and Ninghua Zhong

This paper provides new evidence on the housing wealth effect on consumption using household panel data. A key advantage in studying the Chinese housing market is the absence of the collateral channel, as households are prohibited from withdrawing housing equity. The results show that for every 1% increase in housing wealth, household consumption increases by 0.14%, suggesting an implied marginal propensity to consume out of housing wealth of 0.023. Further, we find that this marginal propensity to consume is the largest among employees who face greater income uncertainty, suggesting that precautionary saving motives are driving the results.

Proactive Capital Structure Adjustments: Evidence from Corporate Filings

Arthur G Korteweg, Michael Schwert, and Ilya A Strebulaev

We use new hand-collected data from corporate filings to study the drivers of corporate capital structure adjustment. Classifying firms by their adjustment frequencies, we reveal previously unknown patterns in their reasons for financing and financial instruments used. Some are consistent with existing theory, while others are understudied. Many leverage changes are outside of the firm’s control (e.g., executive option exercise) or incur negligible adjustment costs (e.g., credit line usage). This implies a lower frequency of proactive leverage adjustments than indicated by prior research using accounting data, suggesting that costs of adjustment are higher, or the benefits lower, than previously thought.

Minimum Wage and Corporate Investment: Evidence from Manufacturing Firms in China

Heng (Griffin) Geng, Yi Huang, Chen Lin, and Sibo Liu

This paper studies how minimum wage policies affect capital investment using the industrial census of manufacturing firms in China, where minimum wage policies vary across counties. Exploiting minimum wage policy discontinuities at county borders, we find that minimum wages increase capital investment. The investment response to minimum wages is stronger for firms that are labor-intensive, that have more room for technological improvement, and that cannot sufficiently pass on labor costs to consumers. A natural experiment based on county jurisdictional changes further assures the causal relationship.

Why Are Bidder Termination Provisions Included in Takeovers?

Zhiyao (Nicholas) Chen, Hamed Mahmudi, Aazam Virani, and Xiaofei Zhao

We present a rationale for bidder termination provisions that considers their effect on bidders’ and targets’ joint takeover gains. The provision’s inclusion can create value because it enables termination when the target becomes less valuable to the bidder than on its own, but creates a trade-off because termination may also occur when the target is more valuable to the bidder than on its own. This explains why the provision is included only in some deals, and explains variation in termination fees. Inclusion of the provision is associated with larger combined announcement returns, provided that the termination fee is priced appropriately.

Local, Regional, or Global Asset Pricing?

Fabian Hollstein

Analyzing several Developed and Emerging international markets, I test the ability of global, regional, and local models to explain a large set of 134 cross-sectional anomalies. My main finding is that both global and regional factor models create substantially larger average absolute alphas than local factor models. Annual (absolute) anomaly portfolio alphas are on average 1.7 and 1.1 percentage points higher, respectively, with global and regional than with local factor models. Even for the most recent period, there is no evidence of a catch-up of global and regional factor models. There is substantial potential for international diversification of anomaly strategies.