Pumping Money
SEC scrutiny shopping
Paul Calluzzo, Wei Wang & Serena Wu
Journal of Corporate Finance, forthcoming
Abstract:
We examine whether firms exploit enforcement heterogeneity in response to heightened risk of investigation by regional Securities and Exchange Commission (SEC) enforcement offices. We find that firms facing high SEC scrutiny risk are more likely to relocate outside the jurisdiction of the SEC regional office. The likelihood of out-of-SEC relocation becomes at least two times higher after exogenous shocks to local SEC enforcement. High scrutiny-risk firms tend to migrate to regions with weaker SEC enforcement history and regions with more peers engaging in misbehavior. Scrutiny shopping is more salient for firms with lower costs of relocation.
Corporate Governance and the Feminization of Capital
Sarah Haan
Washington and Lee University Working Paper, December 2020
Abstract:
Between 1900 and 1956, women increased from a small proportion of public company stockholders in the U.S. to the majority. In fact, by the 1929 stock market crash, women stockholders outnumbered men at some of America’s largest and most influential public companies, including AT&T, General Electric, and the Pennsylvania Railroad. This Article makes an original contribution to corporate law, business history, women’s history, socio-economics, and the study of capitalism by synthesizing information from a range of historical sources to reveal a forgotten and overlooked narrative of history, the feminization of capital -- the transformation of American public company stockholders from majority-male to majority-female in the first half of the twentieth century, before the rise of institutional investing obscured the gender politics of corporate control. Corporate law scholarship has never before acknowledged that the early decades of the twentieth century, a transformational era in corporate law and theory, coincided with a major change in the gender of the stockholder class. Scholars have not considered the possibility that the sex of common stockholders, which was being tracked internally at companies, disclosed in annual reports, and publicly reported in the financial press, might have influenced business leaders’ views about corporate organization and governance. This Article considers the implications of this history for some of the most important ideas in corporate law theory, including the “separation of ownership and control,” shareholder “passivity,” stakeholderism, and board representation. It argues that early-twentieth-century gender politics helped shape foundational ideas of corporate governance theory, especially ideas concerning the role of shareholders. Outlining a research agenda where history intersects with corporate law’s most vital present-day problems, the Article lays out the evidence and invites the corporate law discipline to begin a conversation about gender, power, and the evolution of corporate law.
Zero-Commission Individual Investors, High Frequency Traders, and Stock Market Quality
Gregory Eaton et al.
Oklahoma State University Working Paper, January 2021
Abstract:
Contrasting with recent evidence that retail traders are informed, we find that Robinhood ownership changes are unrelated with future returns, suggesting that zero-commission investors behave as noise traders. We exploit Robinhood platform outages to identify the causal effects of commission-free traders on financial markets. Exogenous negative shocks to Robinhood participation are associated with increased market liquidity and lower return volatility among stocks favored by Robinhood investors, as proxied by WallStreetBets mentions. Platform outages are also associated with reduced high frequency trader (HFT) activity, indicative of payments for order flow. However, outages have the strongest effect on stocks neglected by HFTs, suggesting that zero-commission traders have direct negative effects on market quality.
Macroeconomic Expectations and Credit Card Spending
Misha Galashin, Martin Kanz & Ricardo Perez-Truglia
NBER Working Paper, December 2020
Abstract:
How do macroeconomic expectations affect consumer decisions? We examine this question using a natural field experiment with 2,872 credit card customers from a large commercial bank. We conduct a survey to measure consumer expectations about future inflation and the nominal exchange rate and combine this with an information-provision experiment that generates exogenous variation in these expectations. We merge the survey and experimental data with detailed administrative data on the subjects' credit card transactions and balances. The experiment is designed to test three standard predictions from models of intertemporal consumption choice: inflation expectations should affect spending on durables; exchange rate expectations should affect spending on tradables; and, holding constant the nominal interest rate, inflation expectations should affect borrowing. We find that the information provided to participants strongly affects subjective expectations. However, we do not find any significant effects on actual consumer behavior (as measured in administrative data) or self-reported consumption plans (as measured in survey data). Our preferred interpretation is that consumers are not sophisticated enough to factor inflation and exchange rate expectations into their consumption decisions. The absence of a link between consumer expectations and behavior has potentially important implications for macroeconomic policies such as forward guidance.
What accounts for racial and ethnic differences in credit use?
Ryan Goodstein et al.
Journal of Consumer Affairs, forthcoming
Abstract:
Racial and ethnic differences across U.S. households in use of bank credit (e.g., credit cards) and nonbank credit (e.g., payday loans) are striking. We examine whether household characteristics and residential location can explain these differences. We use a novel dataset with information on previously unexplored factors, including income volatility, subjective attitudes about banks, geographic proximity to financial providers, and neighborhood population characteristics. We find that much of the raw disparities in credit use are attributable to observable household characteristics. Accounting for neighborhood population characteristics meaningfully reduces the disparities further. However, the residual racial and ethnic disparities remain large in magnitude. We show these disparities are not likely attributable to unobserved differences in households' family background, financial literacy, subjective attitudes, or credit scores. Instead, they are most likely attributable to unobserved supply‐side factors, such as racial and ethnic differences in households' exposure to marketing. We conclude with implications for policy.
Simplifying Complex Disclosures: Evidence from Disclosure Regulation in the Mortgage Markets
Patrick Kielty, Philip Wang & Diana Weng
University of Florida Working Paper, November 2020
Abstract:
Complex disclosures have been recognized as a major source of borrowers’ poor understanding of mortgages. We examine the effect of simplifying mortgage disclosures on loan outcomes in a difference-in-differences design by exploiting a significant regulatory change of mortgage disclosures in 2015. Using loan-level data from Fannie Mae and Freddie Mac, we find that inexperienced borrowers pay significantly lower interest rates after the disclosure regulation relative to experienced borrowers, suggesting that simplifying these disclosures reduces borrowing costs. In addition, we find that the effect of disclosure simplification is stronger for loans originated by lenders disciplined by regulators and for loans originated in states with more registered originators, suggesting that simplifying disclosures lowers borrowing costs by curbing predatory lending and facilitating borrower shopping. We further find that disadvantaged borrowers benefit more from simplified disclosures. Last, we do not find that simplifying disclosures affects loan performance.
In the Red: Overdrafts, Payday Lending and the Underbanked
Marco Di Maggio, Angela Ma & Emily Williams
NBER Working Paper, December 2020
Abstract:
The reordering of transactions from "high-to-low" is a controversial bank practice thought to maximize fees paid by low-income customers on overdrawn accounts. We exploit multiple class-action lawsuits resulting in mandatory changes to this practice, coupled with payday lending data, to show that after banks cease high-to-low reordering, low-income individuals reduce borrowing from alternative lenders. These consumers increase consumption, experience long-term improvements in overall financial health, and gain access to lower-cost loans in the traditional system. These findings highlight that aggressive bank practices create a demand for alternative financial services, highlighting an important link between the traditional and alternative financial systems.
Political Bias in the Media’s Coverage of Firms’ Earnings Announcements
Lynn Rees & Brady Twedt
Accounting Review, forthcoming
Abstract:
This study examines whether firms’ political activism induces bias in the media’s coverage of earnings announcements and how such coverage impacts markets. We infer firm political ideology based on employee political contributions, and identify firm and manager characteristics associated with distinct ideologies. We find that media outlets negatively slant their coverage of earnings announcements when the political leanings of the outlet are incongruent with the political ideology of the firm. Consistent with slanted coverage affecting market outcomes, we provide evidence that the price reaction to good (bad) earnings news is decreasing (increasing) in the percent of incongruent media outlets covering the earnings announcement. In addition, trading volume and returns volatility are decreasing for good earnings news with the percent of incongruent media outlets. Our results suggest that the prevalent bias across some media outlets in their coverage of political news also affects their coverage of corporate financial events.
Wall street analysts as investor relations officers
Ole-Kristian Hope, Zhongwei Huang & Rucsandra Moldovan
Journal of Corporate Finance, forthcoming
Abstract:
This paper examines the practice of hiring financial analysts as investor relations officers (IRO). We posit that analysts-turned-IROs (AIROs) have a competitive advantage in communicating with investors, thereby lowering the effort expended by the investment community to process corporate disclosures. Using a unique manually-collected dataset on the employment history of IROs (compiled from LinkedIn, Capital IQ, RelationshipScience.com, and appointment press releases), we show that disclosure readability in 8-K and 10-K filings improves and that companies are more likely to host analyst/investor days after hiring former analysts as IROs. Most importantly, we find increases in analyst following, institutional investors, and stock liquidity after hiring a former analyst as IRO. We conclude that both a disclosure and a network channel are at play in the relation between AIROs and increased interest from the investment community. Overall, our findings suggest that firms benefit from hiring Wall Street analysts as IROs.
What moves stock prices around credit rating changes?
Omri Even-Tov & Naim Bugra Ozel
Review of Accounting Studies, forthcoming
Abstract:
Using monthly and multi-day return windows, research shows that credit rating downgrades often reveal new information and lead to significant stock price reactions but that upgrades do not. Using intraday data, we revisit these findings and extend them by examining the possibility of informed trading ahead of the announcement of credit rating changes. Credit rating agencies delay public announcements of rating changes to provide issuers with time to review and respond to rating reports, which opens the door for informed trading in advance of credit rating changes. Using data on rating changes from S&P, Moody’s, and Fitch, we find a more modest price reaction to rating downgrades than documented elsewhere and show that stock prices respond to changes in long-term issuer ratings but not to changes in ratings of a single instrument or a subset of instruments. Most interestingly, we find that prices start moving before a downgrade announcement, controlling for other news and investor anticipation. These pre-announcement movements are concentrated among observations where credit analysts are motivated to disclose private information to advance their careers. The beneficiaries of these disclosures appear to be institutional investors.
Bragging rights: Does corporate boasting imply value creation?
Pratik Kothari, Don Chance & Stephen Ferris
Journal of Corporate Finance, forthcoming
Abstract:
We examine S&P 500 firms over 1999-2014 that characterize their annual performance with extreme positive language. Only 18% of such firms increase shareholder value, while over 80% have either negative or insignificant abnormal returns. Our evidence suggests that firms often base their claims of extreme positive performance on high raw returns or strong relative accounting performance. In comparison to firms that generate positive abnormal returns without boasting, our sample firms tend to have superior accounting performance. We conclude that boasting about performance is rarely associated with value creation and is more consistent with an emphasis on accounting metrics.
Annual report readability and the cost of equity capital
Hatem Rjiba et al.
Journal of Corporate Finance, forthcoming
Abstract:
Using a large panel of U.S. public firms, we examine the relation between annual report readability and cost of equity capital. We hypothesize that complex textual reporting deters investors' ability to process and interpret annual reports, leading to higher information risk, and thus higher cost of equity financing. Consistent with our prediction, we find that greater textual complexity is associated with higher cost of equity capital. Our results are robust to a battery of sensitivity checks, including use of multiple estimation methods, alternative proxies of annual report readability and cost of equity capital measures, and potential endogeneity concerns. In addition, we hypothesize and test whether the nature of the relation between readability and cost of capital depends on the tone of 10-K filings. Our results show that the effect of annual report complexity on cost of equity is greater when disclosure tone is more negative or more ambiguous. We also find that the effect of annual report readability on cost of equity capital depends on the degree of stock market competition, level of institutional investors' ownership, and analyst coverage.
Cater to Thy Client: Analyst Responsiveness to Institutional Investor Attention
Peng-Chia Chiu et al.
Management Science, forthcoming
Abstract:
We study how institutional investor attention to a firm affects the timeliness of analysts’ forecasts for that firm. We measure abnormal institutional attention (AIA) using Bloomberg news search activity for the firm on earnings announcement days. We find that analysts issue more timely forecasts when AIA is high on the earnings announcement day. Analyst responsiveness to AIA is stronger when analysts have more resources and experience and weaker when the AIA of other covered firms is high. Analysts who respond more to AIA are more likely to be named all-star analysts and less likely to be demoted to a smaller brokerage. We address endogeneity concerns using a measure of expected AIA that is unaffected by concurrent information. Our findings suggest that responsiveness to institutional attention influences the production of analyst research and analysts’ career outcomes.
Calendar rotations: A new approach for studying the impact of timing using earnings announcements
Suzie Noh, Eric So & Rodrigo Verdi
Journal of Financial Economics, forthcoming
Abstract:
We develop a novel methodology for studying the causal impact of announcement timing. Our methodology uses firms’ earnings announcements and leverages quasi-exogenous variation attributable to the specific day-of-week on which a calendar month begins. We refer to the resulting variation in announcement timing as “calendar rotations,” which are uncorrelated with proxies for announcement content. In applying our methodology, we show announcements moved forward by calendar rotations receive heightened media and investor attention, and experience greater earnings announcement premia. Taken together, our study details a method for studying how the timing of information flows impacts outcomes of interest to financial economists.