Finance and Financial Management Commons^™

A Cross-Country And Country-Specific Modelling Of Stock Market Performance, Bank Development And Global Equity Index In Emerging Market Economies: A Case Of Brics Countries, Ebere Ume Kalu, Augustine C. Arize

Faculty Publications

This study investigated in cross-country and panel form the interactions of bank development, stock market development and global equity index, focusing on the BRICS countries covering the period 1990 to 2018. We found a bidirectional causation between bank development (CPSGDP) and stock market performance as proxied by the depth of the markets (MCAPGDP) in the BRICS countries. Cointegration was also found using the panel cointegration framework and the bounds test for the ARDL estimators. This largely proves that a long-run relationship of both direct and reverse nature exists between bank development and stock market performance. For the bank development and …

Testing For Complete Pass-Through Of Ex Ass-Through Of Exchange Ra Ange Rate Without Trade Barriers, Tengfei Zhang, Tianxiang Li, Tomas Baležentis

Faculty Publications

The objective of this paper is to test whether the complete pass-through of exchange rate exists when there are almost no transaction costs and in the environment of competitive market. In general, the literature claims that the pass-through of exchange rate is incomplete due to imperfect market, i.e. the presence of transaction costs and imperfect competition. The quasi-experimental case of the food import to Hong Kong from Mainland China is considered in the analysis. The results show that the pass-through of the exchange rate of Chinese RMB against to US dollar to Hong Kong's food import price is complete in …

Financial Costs Of Judicial Inexperience: Evidence From Corporate Bankruptcies, Benjamin Iverson, Joshua Madsen, Wei Wang, Qiping Xu

Faculty Publications

Exploiting the random assignment of judges to corporate bankruptcy filings, we estimate financial costs of judicial inexperience. Despite new judges’ prior legal experience, formal education, and rigorous hiring process, their public Chapter 11 cases spend 19% more time in bankruptcy, realize 31% higher legal and professional fees, and 21% lower creditor recovery rates. Examining possible mechanisms, we find that new judges take longer to rule on motions and cases assigned to these judges file more plans of reorganization. Conservative estimates suggest that minor policy adjustments could increase creditor recoveries by approximately $16.8 billion for the public firms in our sample.

Building Emergency Savings Through Employer-Sponsored Rainy-Day Savings Accounts, John Beshears, James J. Choi, Mark Iwry, David John, David Laibson, Brigitte C. Madrian

Faculty Publications

Many Americans live paycheck to paycheck, carry revolving credit balances, and have little liquidity to absorb financial shocks. One consequence of this financial vulnerability is that many individuals use a portion of their retirement savings during their working years. For every $1 that flows into 401(k)s and similar accounts, between 30¢ and 40¢ leaks out before retirement (Argento, Bryant, and Sabelhaus 2015). We explore the practical considerations and challenges associated with helping households accumulate liquid savings that can be deployed when urgent pre-retirement needs arise. Automatically enrolling workers into an employer-sponsored “rainy- day” or “emergency” savings account—terms that we use …

Budget Habits Of College Students: An Empirical Analysis Of Expectations And Realizations, James C. Brau, Marshall Ringwood, Jessica West

Faculty Publications

Using a sample of more than 500 college students from a large, private university, this study seeks to analyze spending expectations of students, their realized habits, and the dispersion between the two. We first ask the students to project what they think their monthly budget will be throughout the semester. We then ask them to track their expenses for three months. The students do the same for income they receive. The students then report their actual spending habits and answer various questions related to their demography, family, and life experience. We use simple univariate correlation methods to explain factors that …

Overselling Winners And Losers: How Mutual Fund Managers' Trading Behavior Affects Asset Prices, Li An, Bronson Argyle

Faculty Publications

We link a seemingly biased trading behavior to equilibrium asset prices. U.S. equity mutual fund managers tend to sell both their big winners and big losers. This selling pressure pushes down current prices and leads to higher future returns; aggregating across funds, we find that securities for which investors have large unrealized gains and losses outperform in the subsequent month. Funds with larger turnover, shorter holding period, and higher expense ratios, are significantly more likely to manifest this trading pattern, and unrealized profits from such funds have stronger return predictability. This cross-sectional return predictability is difficult to reconcile with alternative …

Real Effects Of Search Frictions In Consumer Credit Markets, Bronson Argyle, Taylor Nadauld, Christopher Palmer

Faculty Publications

We establish two underappreciated facts about costly search. First, unless demand is perfectly inelastic, search frictions can result in significant deadweight loss by decreasing consumption. Second, whenever cross-price elasticities are non-zero, costly search in one market also affects quantities in other markets. As predicted by our model of search for credit under elastic demand, we show that search frictions in credit markets contribute to price dispersion, affect loan sizes, and decrease final-goods consumption. Using microdata from millions of auto-loan applications and originations not intermediated by car dealers, we isolate plausibly exogenous variation in interest rates due to institution-specific pricing rules …

Sale-Leaseback Transactions: Price Premiums And Market Efficiency, C. F. Sirmans, Barrett A. Slade

Faculty Publications

Sale-leaseback transactions are ubiquitous in real estate markets in the United States with annual volume estimated to be greater than $7 billion. However, there is no evidence concerning the price impact of such transactional arrangements. Using a data set of sale-leaseback transactions, this study examines the price impact on commercial property transactions across seven markets. The findings reveal that transactions structured as saleleasebacks occur at significantly higher prices than market transactions. In addition, after accounting for income differentials, buyers and sellers are appropriately pricing the transactions resulting in no undue advantage to either party, that is, the expected price premium …

Sizing Up Corporate Restructuring In The Covid Crisis, Robin Greenwood, Benjamin Iverson, David Thesmar

Faculty Publications

In the wake of the COVID-19 pandemic, the financial and legal system will need to deal with a surge of financial distress in the business sector. Some firms will be able to survive, while others will face bankruptcy and thus need to be liquidated or reorganized. Many surviving firms will need to be downsized or acquired. In normal times, this triage is supported by the court system, banks, and financial markets. The goal of this paper is to size up the coming surge of financial distress, list the challenges it presents in the current environment, and analyze potential policy solutions. …

A Pedagogical Model For Teaching Data Analytics In An Introductory Information Systems Python Course, Heber C. Brau, James C. Brau, Mark Keith

Faculty Publications

In this paper we answer the call of Sheppard (2012) and Brunner & Kim (2016) and present a model for teaching data analytics in an introductory information systems class using the Python programming language. The pedagogy follows an active-learning strategy in which students are assumed to have no statistical or Python programming training prior to class. The learning outcomes include: 1) Data: write code to import and manipulate data; 2) Visualization: write code to generate useful and theoretically sound data visualizations; 3) Feature Engineering: write code to generate, condense, or recombine variables (i.e., "features") of any type (numeric, categorical, ordinal, …

The Narrowness Of Shorting Profitability, Karl B. Diether

Faculty Publications

I examine the persistence in stock level short-selling profitability by using contract level shorting data. I do find that short-sellers are profitable on average using an approach that takes into account the exact timing of the opening and closing of short positions. But I also find that this profitability is driven by the set of stocks for which short-sellers previously had strongly profitable outcomes. I find that if short-selling contracts for a given stock are profitable in the last six months that on average short sellers continue to make profitable trades in that stock in the future. For stocks with …

Which Early Withdrawal Penalty Attracts The Most Deposits To A Commitment Savings Account?, John Beshears, James J. Choi, Christopher Harris, David Laibson, Brigitte C. Madrian, Jung Sakong

Faculty Publications

Previous research has shown that some people voluntarily use commitment contracts that restrict their own choice sets. We study how people divide money between two accounts: a liquid account that permits unrestricted withdrawals and a commitment account that is randomly assigned in a between-subject design to have either a 10% earlywithdrawal penalty, or a 20% early withdrawal penalty, or not to allowearlywithdrawals at all (i.e., an infinite penalty).When the liquid account and the commitment account pay the same interest rate, higher early-withdrawal penalties attract more commitment account deposits. This pattern is predicted by the hypothesis that some participants are partially- …

Do Physician Incentives Increase Patient Medication Adherence?, Edward Kong, John Beshears, David Laibson, Brigitte C. Madrian, Kevin Volpp, George Loewenstein, Jonathan Kolstad, James J. Choi

Faculty Publications

Objective: To test the effectiveness of physician incentives for increasing patient medication adherence in three drug classes: diabetes medication, antihypertensives, and statins.

Data Sources: Pharmacy and medical claims from a large Medicare Advantage Prescription Drug Plan from January 2011 to December 2012.

Study Design: We conducted a randomized experiment (911 primary care practices and 8,935 nonadherent patients) to test the effect of paying physicians for increasing patient medication adherence in three drug classes: diabetes medication, antihypertensives, and statins. We measured patients’ medication adherence for 18 (6) months before (after) the intervention.

Data collection/extraction methods: We obtained data directly from the …

Estimating The Need For Additional Bankruptcy Judges In Light Of The Covid-19 Pandemic, Benjamin Iverson, Jared A. Ellias, Mark Roe

Faculty Publications

In this Article, we present the first effort to use an empirical approach to bolster the capacity of the bankruptcy system during a national crisis—here, the COVID-19 crisis. We provide two analyses, one using data from May 2020, very early on in the crisis, and another using data from September 2020, closer to the publication of this Article. Our analysis is based on an empirical observation: Historically, an increase in the unemployment rate has been a leading indicator of a rise in bankruptcy filings. If this historical trend continues to hold, the May 2020 unemployment rate of 13.3% would have …

Air Force Space Programs: Comparing Estimates To Final Development Budgets, Christopher Elworth, Edward D. White, Jonathan D. Ritschel, Gregory E. Brown

Faculty Publications

This article analyzes how development budget estimates, as reported in the Selected Acquisition Reports, change over time for primarily Air Force space programs. Government acquisition policy emphasizes the importance of developing an accurate point estimate for programs to ensure program budget efficiency; however, statistics imply space programs tend to underspend at the beginning of the program and to overspend at the end of Initial Operational Capability. This suggests new phasing methods that reflect the unique needs of space and perhaps other developmental-type programs by allocating more of the budget in later years rather than at the beginning of the program, …

Fraud In Small Businesses: A Preliminary Study, Esther Bunn, Jack Ethridge, Kaili Crow

Faculty Publications

This study investigates the attitudes small business owners and managers have towards fraud and internal controls. Commonly small businesses consist of long-term friends and relatives and tend to embody a culture of family, love, and trust. Four factors were identified that lend themselves to a lack of internal controls and a breeding ground for fraud. A survey was distributed to small business owners and management. The responses were analyzed and compared to the data in the 2016 American Certified Fraud Examiners Report to the Nations. Of the four expectations studied, only the anticipated results of Expectation 1 were confirmed.

The Liquidity Cost Of Private Equity Investments: Evidence From Secondary Market Transactions, Taylor Nadauld, Berk A. Sensoy, Keith Vorkink, Michael S. Weisbach

Faculty Publications

This paper uses proprietary data from a leading intermediary to explain the magnitude and determinants of transaction costs in the secondary market for private equity stakes. Most transactions occur at a discount to net asset value. Buyers average an annualized public market equivalent of 1.023 compared with 0.976 for sellers, implying that buyers outper- form sellers by a market-adjusted 5 percentage points annually. Both the cross-sectional pattern of transaction costs and the identity of sellers and buyers suggest that the market is one in which relatively flexible buyers earn returns by supplying liquidity to investors wishing to exit.

Asset Allocation In Bankruptcy, Shai Bernstein, Emanuele Colonnelli, Benjamin Iverson

Faculty Publications

This paper investigates the consequences of liquidation and reorganization on the allocation and subsequent utilization of assets in bankruptcy. Using the random assignment of judges to bankruptcy cases as a natural experiment that forces some firms into liquidation, we find that the long-run utilization of assets of liquidated firms is lower relative to assets of reorganized firms. These effects are concentrated in thin markets with few potential users and in areas with low access to finance. These findings suggest that when search frictions are large, liquidation can lead to inefficient allocation of assets in bankruptcy.

Urban Land: Price Indices, Performance, And Leading Indicators, Mark Fitzgerald, David J. Hansen, Will Mcintosh, Barrett A. Slade

Faculty Publications

This study had two objectives: first, to evaluate the historical performance of urban land prices across 20 prominent U.S. metro markets; and second, to determine if urban land prices are a leading indicator for prices in the built environment. Using a time-varying econometric model with spatial controls, we constructed constant-quality metropolitanlevel land price indices. We found that 1) from 2000 to 2017 (18 years) national residential and commercial-industrial urban land prices appreciated by 2.08% and 1.87% annually, respectively; 2) urban land prices exhibited greater volatility compared with improved property prices; 3) in many metro markets land prices began to decline …

Who Finances Durable Goods And Why It Matters: Captive Finance And The Coase Conjecture, Justin Murfin, Ryan Pratt

Faculty Publications

We propose that, by financing their own product sales through captive finance subsidiaries, durable goods manufacturers commit to higher resale values for their products in future periods. Using data on captive financing by the manufacturers of heavy equipment, we find that captive-backed models have lower price depreciation. The evidence is consistent with captive finance helping manufacturers commit to ex-post actions that support used machine prices. This, in turn, conveys higher pledgeability for captive-backed products, even for individual machines financed by banks. Although motivated as a rent-seeking device, captive financing generates positive spillovers by relaxing credit constraints.

Redefining 'Useful Life'--An Energy Consumption Method Emerges From The Cc/Ds Environment, James Scott Magruder, Dena S. Mitchell, Carl Smolinski, Eddy J. Burks

Faculty Publications

A redefining of the underlying concept of "useful life" in the depreciation and costing is a result of the changes driven by advancements in the application of technology emerging from the Cloud Computing and data storage environment. Cloud Computing has found success in being an integral structural improvement used in business to improve efficiency and effectiveness as well as to manage costs. Data Storage has proven an equally successful tool in managing the expanding data captured and used in data analytics by companies. Beyond these influences a new approach to existing accounting methods can become a fundamental change which will …

Delineating Operating And Support Costs In Aircraft Platforms, Garrett B. O'Hanlon, Jonathan D. Ritschel, Edward D. White, Gregory E. Brown

Faculty Publications

As the costs of Department of Defense (DoD) Weapon Systems increase, the ability to estimate the Operating and Support (O&S) costs accurately for the various weapon systems has become vital to long-term affordability. This research focuses on the O&S costs of the Air Force fixed-wing arsenal (i.e., platforms) for 1996–2016. First, the Cost Element Structure (CES) for 52 aircraft platforms and seven operational mission categories is analyzed to derive the descriptive statistics per aircraft category through examination of actual historical costs. Second, testing to identify statistical differences within the O&S CES construct across various Air Force aircraft categories is conducted. …

Country And Industry-Level Performance Of Nasdaq-Listed European And Asia Pacific Adrs, Mark Schaub

Faculty Publications

This study examines the 3-year performance of NASDAQ-Listed Asia Pacific and European ADRs versus the NASDAQ Index and their respective regional indexes from 1990-2010. Country specific performance results show ADRs from China, Japan and Ireland performed best versus the US and regional benchmarks. Industry-level results show the best industry performers were in the Technology Hardware & Services industry and in Energy companies.

Closing Pandora’S Box: Reducing Student Confusion With A Process Costing Simulation, Marie Kelly, Nikki Shoemaker

Faculty Publications

This paper describes a classroom Process Costing simulation that can be used in both introductory managerial accounting and cost accounting courses in order to help students better understand the principles of process costing and how to apply these principles to a problem. In groups, students work to manufacture candy necklaces for a set amount of time. After the manufacturing time has ended, students work together to determine equivalent units of production, cost per equivalent unit, and total costs for the period. Subsequently, a final class discussion provides opportunities for differences between groups to be discussed and any additional questions to …

Determinants Of State Audit Delay: An Empirical Analysis, Mary Fischer, Treba Marsh

Faculty Publications

Prior audit delay studies concentrated on municipal government, counties and school districts. This study adds to the literature by examining the determinants of state governments’ timeliness of audit reports. Audit delay determinants found by previous municipal research are used to identify characteristics that may influence state audit delay. This study’s results suggest both agreement and contradiction of prior research audit delay determinants. Financial variables alone do not predict state government audit delay. However, a combination of financial and nonfinancial variables used in municipal audit delay studies do.

Education, Cognitive Performance, And Investment Fees, John Beshears, James J. Choi, David Laibson, Brigitte C. Madrian, William L. Skimmyhorn, Stephen P. Zeldes

Faculty Publications

We study the association between human capital and rollovers into Individual Retirement Accounts (IRAs), using administrative records from the defined contribution savings plan for U.S. government employees: the Thrift Savings Plan (TSP). Employees who separate from government employment have the option to leave balances in the TSP, where fees are currently under 4 basis points. However, we estimate that more than a third of the TSP balances end up being rolled over into IRA accounts, which are very likely to have much higher fees. We find that educational attainment has a very small positive association with the propensity to roll …

Monthly Payment Targeting And The Demand For Maturity, Bronson Argyle, Taylor Nadauld, Christopher Palmer

Faculty Publications

We provide evidence of mental accounting in the market for consumer installment debt and argue that increases in credit supply have been an important contributor in the recent rise in auto debt through a demand-for-maturity channel. Since the Great Recession, auto debt has grown faster than any other category of U.S. consumer credit and now eclipses credit cards in total debt outstanding. Simultaneously, auto-loan maturities have increased such that more than half of 2016 auto-loan originations had a term of over 65 months. We document three phenomena we jointly refer to as monthly payment targeting using data from millions of …

Public Ownership And The Local Economy, Jess Cornaggia, Matthew Gustafson, Jason Kotter, Kevin Pisciotta

Faculty Publications

We provide evidence that a firm’s transition from private to public ownership stunts local economic growth, especially in less populated and poorer areas. After accounting for endogeneity in the ownership decision, areas hosting companies that go public experience muted growth in employment, establishments, population, and wages, relative to areas where firms file to go public and remain private. Establishment-level analyses reveal that transitioning to public ownership causes firms to geographically diversify their establishments and employee base. These findings are consistent with public ownership reducing a firm’s reliance on local agglomeration economies, to the detriment of the local community.

Private Equity Indices Based On Secondary Market Transactions, Brian Boyer, Taylor D. Nadauld, Keith Vorkink, Michael S. Weisbach

Faculty Publications

Measuring the performance of private equity investments (buyout and venture) has historically only been possible over long horizons because the IRR on a fund is only observable following the fund’s final distribution. We propose a new approach to evaluating performance using actual prices paid for limited partner shares of funds in secondary markets. We construct indices of buyout and venture capital performance using a proprietary database of secondary market prices between 2006 and 2017. These transaction-based indices exhibit significantly higher betas and volatilities, and lower alphas than NAV-based indices built from Preqin and obtained from Burgiss. There are a number …

Get In Line: Chapter 11 Restructuring In Crowded Bankruptcy Courts, Benjamin Iverson

Faculty Publications

Bankruptcy costs depend not only on the laws that govern financial distress but also on the ability of the court to rehabilitate distressed firms. This paper tests whether Chapter 11 restructuring outcomes are affected by time constraints in busy bankruptcy courts. Using the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act as an exogenous shock to caseloads, I find that commercial banks report lower charge-offs on business lending when court caseloads decline, suggesting that the costs of financial distress are lower in less-congested courts. Further, court caseload affects how restructuring takes place. Less-busy bankruptcy judges liquidate fewer small …