Journal of Empirical Finance最新文献

The present paper combines nonlinear shrinkage with the multivariate generalized hyperbolic (MGHyp) distribution, thereby extending a flexible parametric model to high dimensions. An expectation–maximization (EM) algorithm is developed that is fast, stable, and applicable in high dimensions. Theoretical arguments for the monotonicity of the proposed algorithm are provided and it is shown in simulations that it is able to accurately retrieve parameter estimates. Finally, in an extensive Markowitz portfolio optimization analysis, the approach is compared to state-of-the-art benchmark models. The proposed model excels with a strong out-of-sample portfolio performance combined with a comparably low turnover.

Banks’ ability to convert liquidity into lending depends crucially on the various regulatory constraints they face. This paper investigates the differential lending responses of banks with varying levels of reserves, and their impact on the real economy. The distribution of reserves within the banking system became significantly more dispersed during the quantitative easing (QE) periods. Loan growth for those more liquidity-constrained does not vary meaningfully with liquidity changes, despite abundance at the aggregate level. Consequently, our findings imply that the uneven bank reserve distribution may exacerbate the spatial disparities in bank lending and regional economic development through differential lending responses of banks in different parts of the reserve distribution.

This study investigates the relationship between CEO narcissism and debt financing costs, highlighting a potential trade-off between leadership traits and firm financial well-being. While prior research has identified potential benefits associated with narcissistic CEOs, such as enhanced innovation, we demonstrate that such leadership incurs higher borrowing costs, as evidenced by elevated bond yields in firms led by narcissistic executives. This effect is amplified for grandiose narcissists, suggesting that investors are particularly wary of their risk-taking tendencies. Leveraging a natural experiment, we establish a robust causal link between narcissism and debt costs, revealing higher bond yield premiums demanded by investors in firms with narcissistic CEOs. These findings underscore the critical importance of considering CEO personality traits, particularly narcissism when evaluating corporate governance practices and ensuring optimal alignment with stakeholders' interests.

China launched a pilot program in March 2010 to lift the ban on margin-buying and short-selling. Based on the first two batches of designated stocks, the literature documents that lifting the ban has a negative effect on stock valuation. However, we show that the effect has reversed to positive for the next six batches of designated stocks. We explore several potential explanations. Our analyses show that as short-selling volume grew at a much slower pace or even declined relative to margin-buying volume over our sample period, the positive effect of margin-buying on stock valuation has dominated the negative effect of short-selling. Both time-series and cross-sectional tests show that the imbalance between margin-buying and short-selling is the main driver of the reversal. We further show that the effect of lifting margin-buying and short-selling ban on stock price efficiency and discovery also reversed over time.

Employing a sample of 6,084 acquisitions from 2001 to 2017, we show that higher media coverage of rival firms (i.e., in the same industry as the target) increases their likelihood of being subsequently targeted and the announcement CARs. We conduct various tests to alleviate the endogeneity concern. Our results are robust when controlling for analyst coverage and the media coverage of acquirer and target firms. We further show that rivals with greater media attention have higher premiums when they receive future acquisition bids. Lastly, we find that the effect of media coverage on the rival response is more pronounced for rivals with a higher similarity score to the target, initial industry acquisitions, and acquisitions occur early in an industry merger wave. Our study highlights the media's vital role in shaping the rival response to acquisition targets.

An extensive literature finds that CEO compensation, especially bonus pay, exhibits downward rigidity. This is despite corporate boards usually retaining the discretion to deviate from their stated bonus formulae. We conjecture that the infrequent occasions in which there is an unexpected bonus cut, the board likely possesses unfavorable private information about the firm's long-term prospects and the CEO's ability. We hypothesize, therefore, that unexpected bonus cuts will be predictive of the company's future operating performance as well as forced CEO turnovers. We first validate our private information premise by showing that stock market reactions to CEO firings or earnings announcements are muted for firms experiencing unexpected bonus cuts but not for those without cuts. Consistent with these predictions, we find that unexpected bonus cuts are robust predictors of subsequent underperformance (ROE) and lower firm valuation (Tobin's Q) as well as CEO firings. Further, we examine the impact of Regulation S-K (2006) and show that predictive power becomes stronger post Reg. S-K, along with the disappearance of downward rigidity. This suggests that compensation transparency makes it harder for boards to deviate from stated bonus formulae and, if they do, the deviations are more informative.

The performance of the widely used betting-against-beta (BAB) investment strategy is improved by controlling for the stochastic dominance (SD) relation between individual stocks and the market portfolio. Dominating stocks, preferred by all risk-averse and prudent investors, are excluded from the short leg of the BAB strategy. Stocks that are dominated by the market are excluded from the long leg of the strategy. This prefiltering significantly enhances a wide range of performance and risk measures including abnormal returns relative to various factor models. The improvements are especially pronounced for the third-order SD, are robust to transaction costs and different market conditions.

We use carbon dioxide (CO${}_{\text{2}}$) emissions growth to measure consumption risk within a consumption-based capital asset pricing model framework. Given the comprehensive worldwide coverage of CO${}_{\text{2}}$ emissions, this measure allows us to use the full history of stock market data in the US, Europe, the world, and fifteen international markets. For the US (Europe/the world), we are able to explain the observed equity market premium with a relative risk aversion of 6 (10/12), which is less than half the size of that estimated using the canonical expenditures-based consumption growth measure. The average estimated relative risk aversion across fifteen other international markets is 5. We also find evidence that the growth of CO${}_{\text{2}}$ emissions is a priced risk factor that captures the cross section of stock portfolio returns.

I find on average firms respond to a horizontal merger by investing less in PP&E, labor, and R&D. There is notable heterogeneity among the non-merging rivals. The laggard rivals reduce investments in PP&E, labor, and R&D while the neck-and-neck rivals do the opposite. There is an insignificant change for the leader rivals. These results support Aghion et al. (2005) on the inverted-U relationship between competition and innovation. Also, I show evidence that financial constraints and innovativeness are two factors that drive rivals’ heterogeneous responses. This empirical study sheds light upon the pattern in which horizontal mergers shape industry evolvement.

We investigate the impact of the local banking market structure on the level of corporate cash holdings and the value of cash. We find that, in more concentrated banking markets, firms increase their cash holdings by issuing more equity. The marginal value of $1 cash increases by 10 cents with a one-standard-deviation increase in bank concentration. The positive relationship between bank concentration and value of cash is robust to a rich set of tests such as for firms having access to bond markets or firms using syndicated loans and is more prominent for more financially constrained firms. We also explore the mechanism, and our results suggest that in more concentrated banking markets firms demand more cash to shield against default risk.