Open Access. Powered by Scholars. Published by Universities.®

Business Commons

Open Access. Powered by Scholars. Published by Universities.®

Finance Papers

Discipline
Keyword
Publication Year

Articles 1 - 30 of 418

Full-Text Articles in Business

Advising Shareholders In Takeovers, Doron Levit Dec 2017

Advising Shareholders In Takeovers, Doron Levit

Finance Papers

This paper studies the advisory role of the board of directors in takeovers. I develop a model in which the takeover premium and the ability of the target board to resist the takeover are endogenous. The analysis relates the influence of the board on target shareholders and the reaction of the market to its recommendations to various characteristics of the acquirer and the target. I also show that the expected target shareholder value can decrease with the expertise of the board and it is maximized when the board is biased against the takeover. Generally, uninformative and ignored recommendations are not ...


Matching Capital And Labor, Jonathan B. Berk, Jules H. Van Binsbergen, Binying Liu Aug 2017

Matching Capital And Labor, Jonathan B. Berk, Jules H. Van Binsbergen, Binying Liu

Finance Papers

We establish an important role for the firm by studying capital reallocation decisions of mutual fund firms. The firm's decision to reallocate capital among its mutual fund managers adds at least $474,000 a month, which amounts to over 30% of the total value added of the industry. We provide evidence that this additional value added results from the firm's private information about the skill of its managers. The firm captures this value because investors reward the firm following a capital reallocation decision by allocating additional capital to the firm's funds.


Corporate Control Activism, Adrian Aycan Corum, Doron Levit Aug 2017

Corporate Control Activism, Adrian Aycan Corum, Doron Levit

Finance Papers

We identify a commitment problem that prevents bidders from unseating resisting and entrenched incumbent directors of target companies through proxy fights. We discuss potential remedies and argue that activist investors are more resilient to this commitment problem and can mitigate the resulting inefficiencies by putting such companies into play. This result holds even if bidders and activists have similar expertise and can use similar techniques to challenge the incumbents, and it is consistent with the evidence that most proxy fights are launched by activists, not by bidders. Building on this insight, we study the implications of activist interventions on the ...


Omnichannel Retail Operations With Buy-Online-And-Pick-Up-In-Store, Fei Gao, Xuanming Su Aug 2017

Omnichannel Retail Operations With Buy-Online-And-Pick-Up-In-Store, Fei Gao, Xuanming Su

Finance Papers

Many retailers have recently started to offer customers the option to buy online and pick up in store (BOPS). We study the impact of the BOPS initiative on store operations. We build a stylized model where a retailer operates both online and offline channels. Customers strategically make channel choices. The BOPS option affects customer choice in two ways: by providing real-time information about inventory availability and by reducing the hassle cost of shopping. We obtain three findings. First, not all products are well suited for in-store pickup; specifically, it may not be profitable to implement BOPS on products that sell ...


Do Funds Make More When They Trade More?, Ľuboš Pástor, Robert F. Stambaugh, Lucian A. Taylor Aug 2017

Do Funds Make More When They Trade More?, Ľuboš Pástor, Robert F. Stambaugh, Lucian A. Taylor

Finance Papers

We model fund turnover in the presence of time-varying profit opportunities. Our model predicts a positive relation between an active fund's turnover and its subsequent benchmark-adjusted return. We find such a relation for equity mutual funds. This time-series relation between turnover and performance is stronger than the cross-sectional relation, as the model predicts. Also as predicted, the turnover-performance relation is stronger for funds trading less-liquid stocks and funds likely to possess greater skill. Turnover is correlated across funds. The common component of turnover is positively correlated with proxies for stock mispricing. Turnover of similar funds helps predict a fund ...


The Consequences Of Reit Index Membership For Return Patterns, Tatiana I. Pavlova-Coleman, Eva Steiner, Susan Wachter Jun 2017

The Consequences Of Reit Index Membership For Return Patterns, Tatiana I. Pavlova-Coleman, Eva Steiner, Susan Wachter

Finance Papers

The impact of stock market index membership on Real Estate Investment Trust (REIT) stock returns is unclear. Returns may become more like those of other indexed stocks and less like those of their underlying properties. Taking advantage of the inclusion of REITs in major S&P indexes starting in 2001, we find that shared index membership significantly increases the correlation between REIT returns. However, index membership also enhances the link between REIT returns and the underlying real estate, consistent with improved pricing efficiency.


Is Operating Flexibility Harmful Under Debt?, Dan A. Lancu, Nikolaos Trichakis, Gerry Tsoukalas Jun 2017

Is Operating Flexibility Harmful Under Debt?, Dan A. Lancu, Nikolaos Trichakis, Gerry Tsoukalas

Finance Papers

We study the inefficiencies stemming from a firm’s operating flexibility under debt. We find that flexibility in replenishing or liquidating inventory, by providing risk-shifting incentives, could lead to borrowing costs that erase more than one-third of the firm’s value. In this context, we examine the effectiveness of practical and widely used covenants in restoring firm value by limiting such risk-shifting behavior. We find that simple financial covenants can fully restore value for a firm that possesses a midseason inventory liquidation option. In the presence of added flexibility in replenishing or partially liquidating inventory, financial covenants fail, but simple ...


Pricing Theater Seats: The Value Of Price Commitment And Monotone Discounting, Necati Tereyagoglu, Peter S. Fader, Senthil K. Veeraraghavan Jun 2017

Pricing Theater Seats: The Value Of Price Commitment And Monotone Discounting, Necati Tereyagoglu, Peter S. Fader, Senthil K. Veeraraghavan

Finance Papers

We examine the value of price commitment in a non-profit organization using individual-level purchases over a series of concert performances. To decide on a pricing policy, the performing arts organization must be able to accurately measure when each ticket will be sold and what type of audience will purchase the tickets for each performance. We use a competing hazards framework to model the timing of ticket purchases when customer segments differ in their valuations and arrival times. We show that the customer purchase likelihoods change based on the prices observed earlier in the season. Hence, price commitment can aid in ...


Soft Shareholder Activism, Doron Levit May 2017

Soft Shareholder Activism, Doron Levit

Finance Papers

This paper studies communications between investors and firms as a form of corporate governance. The main premise is that activist investors cannot force their ideas on companies; they must persuade the board or other shareholders that implementing these ideas is in the best interest of the firm. In this framework, I show that voice (launching a public campaign) and exit (selling shares) enhance the ability of activists to govern through communication. The analysis identifies the factors that contribute to successful dialogues between investors and firms. It also shows that public communications are likely to be ineffective, justifying the prevalence of ...


Mispricing Factors, Robert F. Stambaugh, Yu Yuan Apr 2017

Mispricing Factors, Robert F. Stambaugh, Yu Yuan

Finance Papers

A four-factor model with two “mispricing” factors, in addition to market and size factors, accommodates a large set of anomalies better than notable four- and five-factor alternative models. Moreover, our size factor reveals a small-firm premium nearly twice usual estimates. The mispricing factors aggregate information across 11 prominent anomalies by averaging rankings within two clusters exhibiting the greatest return co-movement. Investor sentiment predicts the mispricing factors, especially their short legs, consistent with a mispricing interpretation and the asymmetry in ease of buying versus shorting. A three-factor model with a single mispricing factor also performs well, especially in Bayesian model comparisons.


The Innovation Premium, Amora Elsaify Feb 2017

The Innovation Premium, Amora Elsaify

Finance Papers

Firms that engage in innovative product development, as measured by the fraction of their investment that goes to Research and Development (R&D) activities, earn higher risk-adjusted equity returns. A portfolio that goes long the most innovative and shorts the least innovative firms earns a risk-adjusted return in excess of 7% per annum. R&D-intensive firms also tend to charge higher price markups. Combining insights from industrial organization with a production-based asset pricing framework, I propose a model in which heterogeneous firms produce vertically differentiated goods and market them to heterogeneous consumers. Firms are subject to aggregate demand and supply ...


When Words Speak Louder Without Actions, Doron Levit Feb 2017

When Words Speak Louder Without Actions, Doron Levit

Finance Papers

This paper studies communication and intervention as mechanisms of corporate governance. I develop a model in which a privately informed principal can intervene in the decisions of the agent if the latter disobeys her instructions. The main result shows that intervention can prompt disobedience because it tempts the agent to challenge the principal to back her words with actions. This result provides a novel argument as to why a commitment not to intervene (and therefore, relying solely on communication) can be optimal. In this respect, words do speak louder without actions. The model is applied to managerial leadership, corporate boards ...


Mind The Gap: Disentangling Credit And Liquidity In Risk Spreads, Krista Schwarz Feb 2017

Mind The Gap: Disentangling Credit And Liquidity In Risk Spreads, Krista Schwarz

Finance Papers

Wide and volatile interest rate spreads in the 2007-2009 financial crisis could represent concerns over asset liquidity or issuer solvency. To precisely identify the contribution of these two effects on sovereign bond and interbank spreads, I propose a model-free measure of euro-area market liquidity that captures all liquidity information impounded in bond yields. I find that credit and liquidity are independently important in risk spreads; the role of liquidity dominates in the interbank market, while its relative importance in sovereign bond spreads varies substantially by country. I exploit variation in sovereign bond returns over countries, maturities and time to directly ...


Volatility And Venture Capital, Ryan Heath Peters Jan 2017

Volatility And Venture Capital, Ryan Heath Peters

Finance Papers

The performance of venture capital (VC) investments load positively on shocks to aggregate return volatility. I document this novel source of risk at the asset-class, fund, and portfolio-company levels. The positive relation between VC performance and volatility is driven by the option-like structure of VC investments, especially by VCs’ contractual option to reinvest. At the asset-class level, shocks to aggregate volatility explain a substantial fraction of VC returns. At the fund level, consistent with the reinvestment channel, this exposure is concentrated in years two through four of fund life and in early-stage VC funds, which have more embedded reinvestment options ...


Asset Pricing Implications Of Hiring Demographics, Mete Kilic Jan 2017

Asset Pricing Implications Of Hiring Demographics, Mete Kilic

Finance Papers

This paper documents that U.S. industries that shift their skilled workforce toward young employees exhibit higher expected equity returns. The young-minus-old (YMO) hiring return spread comoves negatively with value-minus-growth while being significantly positive on average. Exposure to the YMO spread accounts for a significant portion of annual momentum profits at the industry level. I find that an adjustment of the skilled workforce toward young employees is associated with greater productivity in new capital inputs of an industry. This motivates a risk-based explanation for the YMO spread, and its interaction with value and momentum. A model of investment and hiring ...


The Role Of Surge Pricing On A Service Platform With Self-Scheduling Capacity, Gerard. P. Cachon, Kaitlin M. Daniels, Ruben Lobel Jan 2017

The Role Of Surge Pricing On A Service Platform With Self-Scheduling Capacity, Gerard. P. Cachon, Kaitlin M. Daniels, Ruben Lobel

Finance Papers

Recent platforms, like Uber and Lyft, offer service to consumers via “self-scheduling” providers who decide for themselves how often to work. These platforms may charge consumers prices and pay providers wages that both adjust based on prevailing demand conditions. For example, Uber uses a “surge pricing” policy, which pays providers a fixed commission of its dynamic price. With a stylized model that yields analytical and numerical results, we study several pricing schemes that could be implemented on a service platform, including surge pricing. We find that the optimal contract substantially increases the platform’s profit relative to contracts that have ...


Online And Offline Information For Omnichannel Retailing, Fei Gao, Xuanming Su Jan 2017

Online And Offline Information For Omnichannel Retailing, Fei Gao, Xuanming Su

Finance Papers

This paper studies how retailers can effectively deliver online and offline information to omnichannel consumers who strategically choose whether to gather information online or offline and whether to buy products online or offline. Information resolves two types of uncertainty: product value uncertainty (i.e., consumers realize valuations when they inspect the product in store, but may end up returning the product when they purchase online) and availability uncertainty (i.e., store visits are futile when consumers encounter stockouts). We consider three information mechanisms: physical showrooms allow consumers to learn valuations anytime they visit the store, even during stockouts; virtual showrooms ...


Are Stock-Financed Takeovers Opportunistic?, B. Espen Eckbo, Tanakorn Makaew, Karin S. Thorburn Jan 2017

Are Stock-Financed Takeovers Opportunistic?, B. Espen Eckbo, Tanakorn Makaew, Karin S. Thorburn

Finance Papers

The more the target knows about the bidder, the more difficult it is to pay with overpriced shares. Thus, under bidder opportunism, the fraction of stock in the deal payment is lower with better informed targets. We test this simple prediction using information proxies reflecting industry relatedness and geographic location specific to the merging firms. We find instead that public bidders systematically use more stock in the payment when the target knows more about the bidder. While inconsistent with opportunism, this is as predicted when bidders are primarily concerned with adverse selection on the target side of the deal. Moreover ...


Should Governments Invest More In Nudging?, Shlomo Benartzi, John Beshears, Katherine L. Milkman, Richard H. Thaler, Maya Shankar, Will Tucker-Ray, William J. Congdon, Steven Galing Jan 2017

Should Governments Invest More In Nudging?, Shlomo Benartzi, John Beshears, Katherine L. Milkman, Richard H. Thaler, Maya Shankar, Will Tucker-Ray, William J. Congdon, Steven Galing

Finance Papers

Governments are increasingly adopting behavioral science techniques for changing individual behavior in pursuit of policy objectives. The types of “nudge” interventions that governments are now adopting alter people’s decisions without coercion or significant changes to economic incentives. We calculated ratios of impact to cost for nudge interventions and for traditional policy tools, such as tax incentives and other financial inducements, and we found that nudge interventions often compare favorably with traditional interventions. We conclude that nudging is a valuable approach that should be used more often in conjunction with traditional policies, but more calculations are needed to determine the ...


Power Posing: P-Curving The Evidence, Joseph P. Simmons, Uri Simonsohn Jan 2017

Power Posing: P-Curving The Evidence, Joseph P. Simmons, Uri Simonsohn

Finance Papers

In a well-known article, Carney, Cuddy, and Yap (2010) documented the benefits of “power posing”. In their study, participants (N=42) who were randomly assigned to briefly adopt expansive, powerful postures sought more risk, had higher testosterone levels, and had lower cortisol levels than those assigned to adopt contractive, powerless postures. In their response to a failed replication by Ranehill et al. (2015), Carney, Cuddy, and Yap (2015) reviewed 33 successful studies investigating the effects of expansive vs. contractive posing, focusing on differences between these studies and the failed replication, to identify possible moderators that future studies could explore. But ...


Differences Of Opinion And International Equity Markets, Bernard Dumas, Karen K. Lewis, Emilio Osambela Jan 2017

Differences Of Opinion And International Equity Markets, Bernard Dumas, Karen K. Lewis, Emilio Osambela

Finance Papers

We develop an international financial market model in which domestic and foreign residents differ in their beliefs about the information content in public signals. We determine how informational advantages of domestic investors in the interpretation of home public signals affect equity markets. We evaluate the ability of our model to generate four international-finance anomalies: (i) the co-movement of returns and capital flows, (ii) home-equity preference, (iii) the dependence of firm returns on home and foreign factors, and (iv) abnormal returns around foreign firm cross-listing in the home market. Their relationships with empirical differences-of-opinion proxies are consistent with the model.


Homeownership And Nontraditional And Subprime Mortgages, Arthur Acolin, Xudong An, Raphael W. Bostic, Susan Wachter Jan 2017

Homeownership And Nontraditional And Subprime Mortgages, Arthur Acolin, Xudong An, Raphael W. Bostic, Susan Wachter

Finance Papers

This article documents the growth and geographic distribution of nontraditional mortgages (NTMs) and subprime mortgages during 2000-2006, and examines the association between these products and homeownership at the county level between 2000 and 2012. It finds a significant relationship between the origination of NTM and subprime mortgages during the boom and changes in the number of homeowners (positive during the 2000-2006 period and negative during the 2006-2012 period) but no significant relationship with the change in the homeownership rate. Looking at specific categories of the population, the results indicate a positive relationship between the presence of NTMs and subprime mortgages ...


Sticky Leverage, Joao F. Gomes, Urban J. Jermann, Lukas Schmid Dec 2016

Sticky Leverage, Joao F. Gomes, Urban J. Jermann, Lukas Schmid

Finance Papers

We develop a tractable general equilibrium model that captures the interplay between nominal long-term corporate debt, inflation, and real aggregates. We show that unanticipated inflation changes the real burden of debt and, more significantly, leads to a debt overhang that distorts future investment and production decisions. For these effects to be both large and very persistent, it is essential that debt maturity exceeds one period. We also show that interest rate rules can help stabilize our economy.


Blind Queues: The Impact Of Consumer Beliefs On Revenues And Congestion, Shiliang Cui, Senthil K. Veeraraghavan Dec 2016

Blind Queues: The Impact Of Consumer Beliefs On Revenues And Congestion, Shiliang Cui, Senthil K. Veeraraghavan

Finance Papers

In many service settings, customers have to join the queue without being fully aware of the parameters of the service provider (e.g., customers at checkout counters may not know the true service rate before joining). In such “blind queues,” customers make their joining/balking decisions based on limited information about the service provider’s operational parameters (from past service experiences, reviews, etc.) and queue lengths. We analyze a firm serving customers making decisions under arbitrary beliefs about the service parameters in an observable queue for a service with a known price. By proposing an ordering for the balking threshold ...


Large-Scale Loan Portfolio Selection, Justin A. Srignano, Gerry Tsoukalas, Kay Giesecke Dec 2016

Large-Scale Loan Portfolio Selection, Justin A. Srignano, Gerry Tsoukalas, Kay Giesecke

Finance Papers

We consider the problem of optimally selecting a large portfolio of risky loans, such as mortgages, credit cards, auto loans, student loans, or business loans. Examples include loan portfolios held by financial institutions and fixed-income investors as well as pools of loans backing mortgage- and asset-backed securities. The size of these portfolios can range from the thousands to even hundreds of thousands. Optimal portfolio selection requires the solution of a high-dimensional nonlinear integer program and is extremely computationally challenging. For larger portfolios, this optimization problem is intractable. We propose an approximate optimization approach that yields an asymptotically optimal portfolio for ...


Residual Inflation Risk, Philipp Karl Illeditsch Dec 2016

Residual Inflation Risk, Philipp Karl Illeditsch

Finance Papers

I decompose inflation risk into (i) a component that is correlated with factors that determine investor’s preferences and investment opportunities and real returns on real assets with risky cash flows (stocks, corporate bonds, real estate, commodities, etc.), and (ii) a residual inflation risk component. In equilibrium, only the first component earns a risk premium. Therefore investors should avoid exposure to the residual component. All nominal bonds, including the money-market account, have constant nominal cash flows and thus their real returns are equally exposed to residual inflation risk. In contrast, inflation-protected bonds provide a means to avoid cash flow and ...


Why Do Firms Issue Callable Bonds?, Amora Elsaify, Nikolai Roussanov Nov 2016

Why Do Firms Issue Callable Bonds?, Amora Elsaify, Nikolai Roussanov

Finance Papers

Corporations in the US have significantly increased their usage of callable bonds in the past 10-15 years. Whereas callable debt was issued in the past for interest rate hedging motives, the vast majority of callable bonds issued today have call options that will enver be "in the money". This feature implies that previous explanations for the issuance of callable debt no longer rationalize the current pattern. We present evidence on the types of firms issuing these bonds and their usage of the proceeds, which motivates a new theory for why firms desire these eternally "out of the money" call options ...


Compensating Financial Experts, Vincent Glode, Richard Lowery Nov 2016

Compensating Financial Experts, Vincent Glode, Richard Lowery

Finance Papers

We propose a labor market model in which financial firms compete for a scarce supply of workers who can be employed as either bankers or traders. While hiring bankers helps create a surplus that can be split between a firm and its trading counterparties, hiring traders helps the firm appropriate a greater share of that surplus away from its counterparties. Firms bid defensively for workers bound to become traders, who then earn more than bankers. As counterparties employ more traders, the benefit of employing bankers decreases. The model sheds light on the historical evolution of compensation in finance.


Motivating Process Compliance Through Individual Electronic Monitoring: An Empirical Examination Of Hand Hygiene In Healthcare, Bradley Staats, Hengchen Dai, David Hofmann, Katherine L. Milkman Nov 2016

Motivating Process Compliance Through Individual Electronic Monitoring: An Empirical Examination Of Hand Hygiene In Healthcare, Bradley Staats, Hengchen Dai, David Hofmann, Katherine L. Milkman

Finance Papers

The design and use of standard processes are foundational recommendations in many operations practices. Yet, given the demonstrated performance benefits of standardized processes, it is surprising that they are often not followed consistently. One way to ensure greater compliance is by electronically monitoring the activities of individuals, although such aggressive monitoring poses the risk of inducing backlash. In the setting of hand hygiene in healthcare, a context where compliance with standard processes is frequently less than 50% and where this lack of compliance can result in negative consequences, we investigated the effectiveness of electronic monitoring. We did so using a ...


Mad And Misleading: Incidental Anger Promotes Deception, Jeremy A. Yip, Maurice E. Schweitzer Nov 2016

Mad And Misleading: Incidental Anger Promotes Deception, Jeremy A. Yip, Maurice E. Schweitzer

Finance Papers

Emotions influence ethical behavior. Across four studies, we demonstrate that incidental anger, anger triggered by an unrelated situation, promotes the use of deception. In Study 1, participants who felt incidental anger were more likely to deceive their counterpart than those who felt neutral emotion. In Study 2, we demonstrate that empathy mediates the relationship between anger and deception. In Study 3, we contrast anger with another negative-valence emotion, sadness. We find that participants who felt incidental anger were more likely to use deception than were participants who felt incidental sadness or neutral emotion. In Study 4, we show that incentives ...