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 409

Full-Text Articles in Business

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 ...


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 ...


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 ...


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 ...


Non-Exclusive Dynamic Contracts, Competition, And The Limits Of Insurance, Laurence Ales, Pricila Maziero Nov 2016

Non-Exclusive Dynamic Contracts, Competition, And The Limits Of Insurance, Laurence Ales, Pricila Maziero

Finance Papers

We study how the presence of non-exclusive contracts limits the amount of insurance provided in a decentralized economy. We consider a dynamic Mirrleesian economy in which agents are privately informed about idiosyncratic labor productivity shocks. Agents sign privately observable insurance contracts with multiple firms (i.e., they are non-exclusive). Contracts specify both labor and savings requirements. Firms have no restriction on the contracts they can offer and interact strategically. In equilibrium, contrary to the case with exclusive contracts, a standard Euler equation holds, and the marginal rate of substitution between consumption and leisure is equated to the worker's marginal ...


Risk Premia And Volatilities In A Nonlinear Term Structure Model, Peter Feldhütter, Christian Heyersahl-Larsen, Philipp Karl Illeditsch Oct 2016

Risk Premia And Volatilities In A Nonlinear Term Structure Model, Peter Feldhütter, Christian Heyersahl-Larsen, Philipp Karl Illeditsch

Finance Papers

We introduce a reduced-form term structure model with closed-form solutions for yields where the short rate and market prices of risk are nonlinear functions of Gaussian state variables. The nonlinear model with three factors matches the time-variation in expected excess returns and yield volatilities of US Treasury bonds from 1961 to 2014. Yields and their variances depend on only three factors, yet the model exhibits features consistent with Unspanned Risk Premia (URP) and Unspanned Stochastic Volatility (USV).


Notes On Bonds: Illiquidity Feedback During The Financial Crisis, David K. Musto, Greg Nini, Krista Schwarz Sep 2016

Notes On Bonds: Illiquidity Feedback During The Financial Crisis, David K. Musto, Greg Nini, Krista Schwarz

Finance Papers

This paper traces the evolution of extreme illiquidity discounts among Treasury securities during the financial crisis; bonds fell more than six percent below more-liquid but otherwise identical notes. Using high-resolution data on market quality and trader identities and characteristics, we find that the discounts amplify through feedback loops, where cheaper, less-liquid securities flow to investors with longer horizons, thereby increasing their illiquidity and thus their appeal to these investors. The effect of the widened liquidity gap on transactions costs is further amplified by a surge in the price liquidity providers charged for access to their balance sheets in the crisis.


Partial Adjustment To Public Information In The Pricing Of Ipos, Einar Bakke, Tore E. Leite, Karin S. Thorburn Sep 2016

Partial Adjustment To Public Information In The Pricing Of Ipos, Einar Bakke, Tore E. Leite, Karin S. Thorburn

Finance Papers

Extant literature shows that IPO first-day returns are correlated with market returns preceding the issue. We propose a rational explanation for this puzzling predictability by adding a public signal to Benveniste and Spindt (1989)’s information-based framework. A novel result of our model is that the compensation required by investors to truthfully reveal their information decreases with the public signal. This “incentive effect” receives strong empirical support in a sample of 6300 IPOs in 1983–2012. Controlling for the incentive effect, the positive relation between initial returns and pre-issue market returns disappears for top-tier underwriters, where the order book is ...


Firm Size And Corporate Investment, Vito Gala, Brandon Julio Sep 2016

Firm Size And Corporate Investment, Vito Gala, Brandon Julio

Finance Papers

We provide robust empirical evidence of size effects in corporate investments. Small firms have significantly higher investment rates than large firms, even after controlling for standard empirical proxies of firm real investment opportunities and financial status, including Tobin’s Q and cash flow. Firm size is at least as important as Tobin’s Q and cash flow, both economically and statistically, in explaining variation in corporate investments. Unlike the cash flow effect, however, the size effect is robust to measurement error in Tobin’s Q. Contrary to common wisdom, the empirical evidence suggests that firm size improves the measurement of ...


Asymmetric Information And Intermediation Chains, Vincent Glode, Christian C. Opp Sep 2016

Asymmetric Information And Intermediation Chains, Vincent Glode, Christian C. Opp

Finance Papers

We propose a parsimonious model of bilateral trade under asymmetric information to shed light on the prevalence of intermediation chains that stand between buyers and sellers in many decentralized markets. Our model features a classic problem in economics where an agent uses his market power to inefficiently screen a privately informed counterparty. Paradoxically, involving moderately informed intermediaries also endowed with market power can improve trade efficiency. Long intermediation chains in which each trader's information set is similar to those of his direct counterparties limit traders' incentives to post prices that reduce trade volume and jeopardize gains to trade.


Quickest Online Selection Of An Increasing Subsequence Of Specified Size, Alessandro Arlotto, Elchanan Mossel, J. Michael Steele Sep 2016

Quickest Online Selection Of An Increasing Subsequence Of Specified Size, Alessandro Arlotto, Elchanan Mossel, J. Michael Steele

Finance Papers

Given a sequence of independent random variables with a common continuous distribution, we consider the online decision problem where one seeks to minimize the expected value of the time that is needed to complete the selection of a monotone increasing subsequence of a prespecified length n. This problem is dual to some online decision problems that have been considered earlier, and this dual problem has some notable advantages. In particular, the recursions and equations of optimality lead with relative ease to asymptotic formulas for mean and variance of the minimal selection time.