Christopher L. Culp, M. Gandhi, Yoshio Nozawa, P. Veronesi
We propose implied spreads (IS) and normalized implied spreads (NIS) as simple measures to characterize option prices. IS is the credit spread of an option’s implied bond, the portfolio long a risk-free bond and short a put option. NIS normalizes IS by the risk-neutral default probability and reflects tail risk. IS and NIS are countercyclical and predict implied bond returns, while neither, like implied volatility, predicts put returns. These opposite predictability results are consistent with a stochastic volatility, stochastic jump intensity model, as put premia increase in volatility but decrease in jump intensity, while implied bond premia increase in both.
{"title":"Option-Implied Spreads and Option Risk Premia","authors":"Christopher L. Culp, M. Gandhi, Yoshio Nozawa, P. Veronesi","doi":"10.2139/ssrn.3871384","DOIUrl":"https://doi.org/10.2139/ssrn.3871384","url":null,"abstract":"We propose implied spreads (IS) and normalized implied spreads (NIS) as simple measures to characterize option prices. IS is the credit spread of an option’s implied bond, the portfolio long a risk-free bond and short a put option. NIS normalizes IS by the risk-neutral default probability and reflects tail risk. IS and NIS are countercyclical and predict implied bond returns, while neither, like implied volatility, predicts put returns. These opposite predictability results are consistent with a stochastic volatility, stochastic jump intensity model, as put premia increase in volatility but decrease in jump intensity, while implied bond premia increase in both.","PeriodicalId":114245,"journal":{"name":"Chicago Booth: Fama-Miller Working Paper Series","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115157510","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We document a novel time-series momentum strategy around monetary policy decisions in the US. Stock returns drift upward preceding expansionary monetary decisions and downward before contractionary decisions. The differential pre-drift amounts to 2.5% and increases to 4.5% in the 15 days post policy decision. The differential drift is a pervasive finding across industries, international markets, other asset classes and is concentrated in times of high uncertainty.
{"title":"Time Series Momentum around FOMC Meetings","authors":"A. Neuhierl, Michael Weber","doi":"10.2139/ssrn.3030126","DOIUrl":"https://doi.org/10.2139/ssrn.3030126","url":null,"abstract":"We document a novel time-series momentum strategy around monetary policy decisions in the US. Stock returns drift upward preceding expansionary monetary decisions and downward before contractionary decisions. The differential pre-drift amounts to 2.5% and increases to 4.5% in the 15 days post policy decision. The differential drift is a pervasive finding across industries, international markets, other asset classes and is concentrated in times of high uncertainty.","PeriodicalId":114245,"journal":{"name":"Chicago Booth: Fama-Miller Working Paper Series","volume":"167 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-02-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115858773","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Governments tax production, and they tax consumption. This note is concerned with the taxation of income from production in the U.S. The goal is to make sense, if possible, of special features of the taxation of the securityholders of open corporations. The special features are as follows. (i) Interest payments on bonds are tax deductible at the corporate level, which means they are only taxed at the personal level and at personal tax rates. (ii) Dividends are not tax deductible at the corporate level, which means the income that produces them is subject first to the corporate tax and then to personal taxes – double taxation. (iii) Retained earnings are subject to the corporate tax, and they are subject to personal tax but at rates below ordinary income rates (at least historically) and only when eventually realized as capital gains.
{"title":"Business Income Taxes","authors":"E. Fama","doi":"10.2139/ssrn.3701923","DOIUrl":"https://doi.org/10.2139/ssrn.3701923","url":null,"abstract":"Governments tax production, and they tax consumption. This note is concerned with the taxation of income from production in the U.S. The goal is to make sense, if possible, of special features of the taxation of the securityholders of open corporations. The special features are as follows. (i) Interest payments on bonds are tax deductible at the corporate level, which means they are only taxed at the personal level and at personal tax rates. (ii) Dividends are not tax deductible at the corporate level, which means the income that produces them is subject first to the corporate tax and then to personal taxes – double taxation. (iii) Retained earnings are subject to the corporate tax, and they are subject to personal tax but at rates below ordinary income rates (at least historically) and only when eventually realized as capital gains.","PeriodicalId":114245,"journal":{"name":"Chicago Booth: Fama-Miller Working Paper Series","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125588681","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Federal, state, and local governments are similar to nonprofits in that their labor inputs pay taxes, but they are otherwise tax exempt. Governments are involved in some activities special to them, for example, defense, police, and court systems, but many government activities overlap with those of nonprofits, for example, education, healthcare, research, and programs for the poor. Nonprofits sell some goods and services, for example, education, and health services, but many also get revenues from donations. Governments also sell some goods and services, but their major revenues are from taxes. Many citizens value government activities. Republicans like defense; democrats like social services. It is, however, puzzling that republicans and democrats alike typically go to great lengths to minimize their taxes. Donations to governments are rare. I offer an explanation.
{"title":"Government and Nonprofits","authors":"E. Fama","doi":"10.2139/ssrn.3410649","DOIUrl":"https://doi.org/10.2139/ssrn.3410649","url":null,"abstract":"Federal, state, and local governments are similar to nonprofits in that their labor inputs pay taxes, but they are otherwise tax exempt. Governments are involved in some activities special to them, for example, defense, police, and court systems, but many government activities overlap with those of nonprofits, for example, education, healthcare, research, and programs for the poor. Nonprofits sell some goods and services, for example, education, and health services, but many also get revenues from donations. Governments also sell some goods and services, but their major revenues are from taxes. Many citizens value government activities. Republicans like defense; democrats like social services. It is, however, puzzling that republicans and democrats alike typically go to great lengths to minimize their taxes. Donations to governments are rare. I offer an explanation.","PeriodicalId":114245,"journal":{"name":"Chicago Booth: Fama-Miller Working Paper Series","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-09-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115448594","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We investigate how the Dodd-Frank Act (DFA) affects voluntary disclosures of large bank holding companies (BHCs) relative to other banks and unregulated firms in the financial sector. Using a difference-in-differences research design, we find that following the introduction of the DFA, large banks become less likely to issue earnings forecasts containing bad news. They also reduce the frequency of issuing earnings forecasts but increase the frequency of providing forecasts for dividends and return on assets. In earnings-related conference calls, managers of large banks offer information with incrementally higher numerical and forward-looking intensity in both the prepared remarks and their answers to analysts’ questions. Finally, we find that large banks provide incrementally less information than other banks about certain regulated activities and instead focus more on commercial banking financial performance and market innovation. Our findings provide the first evidence of the unintended consequences of the DFA on changes in affected banks’ voluntary disclosures, an important component of the information environment.
{"title":"The Impact of Banking Regulation on Voluntary Disclosures: Evidence from the Dodd-Frank Act","authors":"Anya Kleymenova, Li Zhang","doi":"10.2139/ssrn.3332488","DOIUrl":"https://doi.org/10.2139/ssrn.3332488","url":null,"abstract":"We investigate how the Dodd-Frank Act (DFA) affects voluntary disclosures of large bank holding companies (BHCs) relative to other banks and unregulated firms in the financial sector. Using a difference-in-differences research design, we find that following the introduction of the DFA, large banks become less likely to issue earnings forecasts containing bad news. They also reduce the frequency of issuing earnings forecasts but increase the frequency of providing forecasts for dividends and return on assets. In earnings-related conference calls, managers of large banks offer information with incrementally higher numerical and forward-looking intensity in both the prepared remarks and their answers to analysts’ questions. Finally, we find that large banks provide incrementally less information than other banks about certain regulated activities and instead focus more on commercial banking financial performance and market innovation. Our findings provide the first evidence of the unintended consequences of the DFA on changes in affected banks’ voluntary disclosures, an important component of the information environment.","PeriodicalId":114245,"journal":{"name":"Chicago Booth: Fama-Miller Working Paper Series","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-02-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132274676","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
S. Terry, Toni M. Whited, Anastasia A. Zakolyukina
We quantify the real implications of trade-offs between firm information disclosure and long-term investment efficiency. We estimate a dynamic equilibrium model in which firm managers confront realistic incentives to misreport earnings and distort their real investment choices. The model implies a socially optimal level of disclosure regulation that exceeds the estimated value. Counterfactual analysis reveals that eliminating earnings misreporting completely through disclosure regulation incentivizes managers to distort real investment. Lower earnings informativeness raises the cost of capital, which results in a 5.7% drop in average firm value, but more modest effects on social welfare and aggregate growth.
{"title":"Information versus Investment","authors":"S. Terry, Toni M. Whited, Anastasia A. Zakolyukina","doi":"10.2139/ssrn.3073956","DOIUrl":"https://doi.org/10.2139/ssrn.3073956","url":null,"abstract":"\u0000 We quantify the real implications of trade-offs between firm information disclosure and long-term investment efficiency. We estimate a dynamic equilibrium model in which firm managers confront realistic incentives to misreport earnings and distort their real investment choices. The model implies a socially optimal level of disclosure regulation that exceeds the estimated value. Counterfactual analysis reveals that eliminating earnings misreporting completely through disclosure regulation incentivizes managers to distort real investment. Lower earnings informativeness raises the cost of capital, which results in a 5.7% drop in average firm value, but more modest effects on social welfare and aggregate growth.","PeriodicalId":114245,"journal":{"name":"Chicago Booth: Fama-Miller Working Paper Series","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130493870","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages in the transmission of monetary policy shocks. Quantitatively, heterogeneity in price stickiness is the central driver for real effects. Input-output linkages and consumption shares alter the identity of the most important sectors to the transmission. Reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.
{"title":"The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy","authors":"E. Pastén, Raphael S. Schoenle, Michael Weber","doi":"10.2139/ssrn.3288756","DOIUrl":"https://doi.org/10.2139/ssrn.3288756","url":null,"abstract":"Realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages in the transmission of monetary policy shocks. Quantitatively, heterogeneity in price stickiness is the central driver for real effects. Input-output linkages and consumption shares alter the identity of the most important sectors to the transmission. Reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.","PeriodicalId":114245,"journal":{"name":"Chicago Booth: Fama-Miller Working Paper Series","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121359617","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using a hand-collected sample of election nominations for more than 30,000 directors over the period 2001–2010, we construct a novel measure of director proximity to elections called Years-to-election. We find that the closer directors of a board are to their next elections, the higher CEO turnover-performance sensitivity is. A series of tests, including one that exploits variation in Years-to-election that comes from other boards, supports a causal interpretation. Further analyses show that other governance mechanisms do not drive the relation between board Years-to-election and CEO turnover-performance sensitivity. We conclude that director elections have important implications for corporate governance. Received March 10, 2016; editorial decision May 19, 2017 by Editor Itay Goldstein.
{"title":"Do Director Elections Matter?","authors":"Vyacheslav Fos, Kai Li, Margarita Tsoutsoura","doi":"10.2139/ssrn.2609815","DOIUrl":"https://doi.org/10.2139/ssrn.2609815","url":null,"abstract":"Using a hand-collected sample of election nominations for more than 30,000 directors over the period 2001–2010, we construct a novel measure of director proximity to elections called Years-to-election. We find that the closer directors of a board are to their next elections, the higher CEO turnover-performance sensitivity is. A series of tests, including one that exploits variation in Years-to-election that comes from other boards, supports a causal interpretation. Further analyses show that other governance mechanisms do not drive the relation between board Years-to-election and CEO turnover-performance sensitivity. We conclude that director elections have important implications for corporate governance. Received March 10, 2016; editorial decision May 19, 2017 by Editor Itay Goldstein.","PeriodicalId":114245,"journal":{"name":"Chicago Booth: Fama-Miller Working Paper Series","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-07-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115473384","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We model financial innovations such as Exchange-Traded Funds, smart beta products, and many index-based vehicles as composite securities that facilitate trading common factors in assets' liquidation values. Through accessing a larger basket of assets in endogenously-chosen proportions, composite securities can benefit both informed and liquidity traders and attract all factor investors with optimal designs that feature selecting liquid and representative assets. Consistent with empirical findings, introducing composite securities leads to higher price variability and co-movements, larger trading costs and synchronicity, and lower asset-specific but higher factor information in prices, especially for illiquid assets. Trading transparency, distinction between bundles and derivatives, and endogenous information acquisition also significantly affect prices and security design.
{"title":"Rise of Factor Investing: Asset Prices, Informational Efficiency, and Security Design","authors":"L. Cong, Douglas Xu","doi":"10.2139/ssrn.2800590","DOIUrl":"https://doi.org/10.2139/ssrn.2800590","url":null,"abstract":"We model financial innovations such as Exchange-Traded Funds, smart beta products, and many index-based vehicles as composite securities that facilitate trading common factors in assets' liquidation values. Through accessing a larger basket of assets in endogenously-chosen proportions, composite securities can benefit both informed and liquidity traders and attract all factor investors with optimal designs that feature selecting liquid and representative assets. Consistent with empirical findings, introducing composite securities leads to higher price variability and co-movements, larger trading costs and synchronicity, and lower asset-specific but higher factor information in prices, especially for illiquid assets. Trading transparency, distinction between bundles and derivatives, and endogenous information acquisition also significantly affect prices and security design.","PeriodicalId":114245,"journal":{"name":"Chicago Booth: Fama-Miller Working Paper Series","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133507412","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop a simple general equilibrium model with heterogeneous agents, incomplete financial markets, and redistributive taxation. Agents differ in both skill and risk aversion. In equilibrium, agents become entrepreneurs if their skill is sufficiently high or risk aversion sufficiently low. Under heavier taxation, entrepreneurs are more skilled and less risk-averse, on average. Through these selection effects, the tax rate is positively related to aggregate productivity and negatively related to the expected stock market return. Both income inequality and the level of stock prices initially increase but eventually decrease with the tax rate. Investment risk, stock market participation, and skill heterogeneity all contribute to inequality. Cross-country empirical evidence largely supports the model's predictions.
{"title":"Income Inequality and Asset Prices Under Redistributive Taxation","authors":"Ľuboš Pástor, P. Veronesi","doi":"10.2139/ssrn.2674633","DOIUrl":"https://doi.org/10.2139/ssrn.2674633","url":null,"abstract":"We develop a simple general equilibrium model with heterogeneous agents, incomplete financial markets, and redistributive taxation. Agents differ in both skill and risk aversion. In equilibrium, agents become entrepreneurs if their skill is sufficiently high or risk aversion sufficiently low. Under heavier taxation, entrepreneurs are more skilled and less risk-averse, on average. Through these selection effects, the tax rate is positively related to aggregate productivity and negatively related to the expected stock market return. Both income inequality and the level of stock prices initially increase but eventually decrease with the tax rate. Investment risk, stock market participation, and skill heterogeneity all contribute to inequality. Cross-country empirical evidence largely supports the model's predictions.","PeriodicalId":114245,"journal":{"name":"Chicago Booth: Fama-Miller Working Paper Series","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122418506","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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