Bo Becker, Murillo Campello, Viktor Thell, Dong Yan
We show that callable bonds have both higher yields and lower market prices than matched non-callable bonds of the same issuer-time, reflecting the value of call features to issuers and investors. This “value of callability” as well as the inclusion and the exercise of call rights are jointly determined by issuer credit quality. Critically, our agency-based theoretical and empirical analyses show that callability reduces debt overhang in corporate mergers. Our results help explain the value and increasing prevalence of callable bonds in credit markets.
{"title":"Credit Risk, Debt Overhang, and the Life Cycle of Callable Bonds","authors":"Bo Becker, Murillo Campello, Viktor Thell, Dong Yan","doi":"10.1093/rof/rfae001","DOIUrl":"https://doi.org/10.1093/rof/rfae001","url":null,"abstract":"We show that callable bonds have both higher yields and lower market prices than matched non-callable bonds of the same issuer-time, reflecting the value of call features to issuers and investors. This “value of callability” as well as the inclusion and the exercise of call rights are jointly determined by issuer credit quality. Critically, our agency-based theoretical and empirical analyses show that callability reduces debt overhang in corporate mergers. Our results help explain the value and increasing prevalence of callable bonds in credit markets.","PeriodicalId":48036,"journal":{"name":"Review of Finance","volume":null,"pages":null},"PeriodicalIF":4.4,"publicationDate":"2024-01-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139415220","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Hossein Asgharian, Michał Dzieliński, Zahra Hashemzadeh, Lu Liu
We investigate the propagation of environmental performance among competitors and in customer–supplier relationships. We find causal effect among competitors, while the propagation from customers to suppliers and vice versa appears insignificant or does not survive identification tests. The effect is stronger among firms in highly concentrated competitor networks and towards firms with less market and bargaining power than their competitors. We also find significantly stronger propagation of environmental performance among competitors engaged in joint research and development activity. These results show that the propagation stems from both competitive pressure and technological spillover. Importantly, we find that propagation is strong when the competitor improves its environmental performance and when the firm’s own environmental performance is poor initially, alleviating concerns that improvements in performance are concentrated among firms, which are already green. Overall, network effects among competing firms are a significant force shaping environmental performance, and a force mostly for good.
{"title":"Green Links: Corporate Networks and Environmental Performance","authors":"Hossein Asgharian, Michał Dzieliński, Zahra Hashemzadeh, Lu Liu","doi":"10.1093/rof/rfad042","DOIUrl":"https://doi.org/10.1093/rof/rfad042","url":null,"abstract":"\u0000 We investigate the propagation of environmental performance among competitors and in customer–supplier relationships. We find causal effect among competitors, while the propagation from customers to suppliers and vice versa appears insignificant or does not survive identification tests. The effect is stronger among firms in highly concentrated competitor networks and towards firms with less market and bargaining power than their competitors. We also find significantly stronger propagation of environmental performance among competitors engaged in joint research and development activity. These results show that the propagation stems from both competitive pressure and technological spillover. Importantly, we find that propagation is strong when the competitor improves its environmental performance and when the firm’s own environmental performance is poor initially, alleviating concerns that improvements in performance are concentrated among firms, which are already green. Overall, network effects among competing firms are a significant force shaping environmental performance, and a force mostly for good.","PeriodicalId":48036,"journal":{"name":"Review of Finance","volume":null,"pages":null},"PeriodicalIF":4.4,"publicationDate":"2023-12-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138952232","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using exogenous shocks on the ability to issue seasoned equity offerings (SEOs), we show SEOs lead to a higher employee skill composition, i.e., a lower (higher) proportion of low (high) skilled workers. Low-skilled workers decrease more than high-skilled workers increase, leading to lower firm-level employment. These effects are more significant when firms invest more in technology following SEOs and face greater financial constraints before SEOs, suggesting SEOs relieve budget constraints on technology investments. These findings demonstrate that while external equity financing helps upgrade technology to improve productivity, it has a dark side for low-skilled workers.
{"title":"External Financing, Technological Changes, and Employees","authors":"E Han Kim, Yuan Li, Yao Lu, Xinzheng Shi","doi":"10.1093/rof/rfad040","DOIUrl":"https://doi.org/10.1093/rof/rfad040","url":null,"abstract":"Using exogenous shocks on the ability to issue seasoned equity offerings (SEOs), we show SEOs lead to a higher employee skill composition, i.e., a lower (higher) proportion of low (high) skilled workers. Low-skilled workers decrease more than high-skilled workers increase, leading to lower firm-level employment. These effects are more significant when firms invest more in technology following SEOs and face greater financial constraints before SEOs, suggesting SEOs relieve budget constraints on technology investments. These findings demonstrate that while external equity financing helps upgrade technology to improve productivity, it has a dark side for low-skilled workers.","PeriodicalId":48036,"journal":{"name":"Review of Finance","volume":null,"pages":null},"PeriodicalIF":4.4,"publicationDate":"2023-11-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138494546","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The US Securities and Exchange Commission’s mandated CEO pay ratio is a simple, but salient, metric that could resonate with employees given it focuses on their compensation. Reporting a relatively or surprisingly high ratio reduces employee perceptions of their pay, views of the CEO, and hampers productivity growth. Employee pay satisfaction drops after disclosing a high ratio even if their wages were previously disclosed and when the pay ratio disclosure adds little new information. Disclosures by firms with a high ratio contain more discretionary language to explain the ratio or portray employee relations positively and are more likely to be covered by the media. However, neither information source substantially alters the employee response to a salient ratio. Our work illustrates that requiring firms to disclose a salient metric can have unintended consequences on employees and suggests caution in requiring firms to report simplified Environmental, Social, and Governance (ESG) metrics that are inherently multifaceted.
{"title":"The saliency of the CEO pay ratio","authors":"Audra Boone, Austin Starkweather, Joshua T White","doi":"10.1093/rof/rfad039","DOIUrl":"https://doi.org/10.1093/rof/rfad039","url":null,"abstract":"The US Securities and Exchange Commission’s mandated CEO pay ratio is a simple, but salient, metric that could resonate with employees given it focuses on their compensation. Reporting a relatively or surprisingly high ratio reduces employee perceptions of their pay, views of the CEO, and hampers productivity growth. Employee pay satisfaction drops after disclosing a high ratio even if their wages were previously disclosed and when the pay ratio disclosure adds little new information. Disclosures by firms with a high ratio contain more discretionary language to explain the ratio or portray employee relations positively and are more likely to be covered by the media. However, neither information source substantially alters the employee response to a salient ratio. Our work illustrates that requiring firms to disclose a salient metric can have unintended consequences on employees and suggests caution in requiring firms to report simplified Environmental, Social, and Governance (ESG) metrics that are inherently multifaceted.","PeriodicalId":48036,"journal":{"name":"Review of Finance","volume":null,"pages":null},"PeriodicalIF":4.4,"publicationDate":"2023-11-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138494545","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract This paper studies ETF price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. I propose a new way to measure ETF-related price distortions based on the specifics of futures contracts. This allows me to isolate a component in VIX futures prices that is strongly related to the rebalancing of ETFs. I derive a novel decomposition of ETF trading demand into leverage rebalancing, calendar rebalancing, and flow rebalancing, and show that trading against ETFs is risky. Leverage rebalancing has the largest effects on the ETF-related price component. This rebalancing amplifies price changes and exposes ETF counterparties to variance.
{"title":"When Passive Funds Affect Prices: Evidence from Volatility and Commodity ETFs","authors":"Karamfil Todorov","doi":"10.1093/rof/rfad038","DOIUrl":"https://doi.org/10.1093/rof/rfad038","url":null,"abstract":"Abstract This paper studies ETF price impact in the most ETF-dominated asset classes: volatility (VIX) and commodities. I propose a new way to measure ETF-related price distortions based on the specifics of futures contracts. This allows me to isolate a component in VIX futures prices that is strongly related to the rebalancing of ETFs. I derive a novel decomposition of ETF trading demand into leverage rebalancing, calendar rebalancing, and flow rebalancing, and show that trading against ETFs is risky. Leverage rebalancing has the largest effects on the ETF-related price component. This rebalancing amplifies price changes and exposes ETF counterparties to variance.","PeriodicalId":48036,"journal":{"name":"Review of Finance","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135510233","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract I test the hypothesis that the use of leverage by market speculators can increase the likelihood and magnitude of crashes in asset prices. Using a direct leverage measure derived from U.S. public filings, I find that (1) stocks held by highly leveraged hedge funds subsequently have more negatively skewed returns than stocks held by less leveraged funds, and (2) upon extremely negative earnings surprises or funding liquidity shocks, stocks owned by high-leverage funds exhibit abnormal price declines and subsequent reversal. Consistent with the fire-sale and contagion hypothesis, high-leverage funds tend to reduce the position following negative news about a stock, and such selling can extend to other stocks in the portfolio, increasing the crash-proneness of the stocks they hold.
{"title":"Leveraged Speculators and Asset Prices","authors":"Wenxi Jiang","doi":"10.1093/rof/rfad037","DOIUrl":"https://doi.org/10.1093/rof/rfad037","url":null,"abstract":"Abstract I test the hypothesis that the use of leverage by market speculators can increase the likelihood and magnitude of crashes in asset prices. Using a direct leverage measure derived from U.S. public filings, I find that (1) stocks held by highly leveraged hedge funds subsequently have more negatively skewed returns than stocks held by less leveraged funds, and (2) upon extremely negative earnings surprises or funding liquidity shocks, stocks owned by high-leverage funds exhibit abnormal price declines and subsequent reversal. Consistent with the fire-sale and contagion hypothesis, high-leverage funds tend to reduce the position following negative news about a stock, and such selling can extend to other stocks in the portfolio, increasing the crash-proneness of the stocks they hold.","PeriodicalId":48036,"journal":{"name":"Review of Finance","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135976940","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract This article proposes a novel perspective on the term structure of market equity yields. Instead of using market dividend futures, we aggregate equity yields of individual firms to estimate the market equity yield curve. This approach allows studying the aggregation effect that shapes the market equity yield curve. During the period from 1990 to 2019, we find a positive aggregation effect: companies with high equity yields were expected to grow at higher rates than companies with low equity yields. Thus, high-yield companies were expected to generate an increasing share of total market dividends when expanding the investment time horizon. Under the assumption of flat firm-risk premia, this implies an upward-sloping term structure of equity risk premia. Together with the concave bond yield curve, the market equity yield curve was upward-sloping.
{"title":"The Term Structure of Equity Yields—a Bottom-Up Approach","authors":"David Schröder","doi":"10.1093/rof/rfad036","DOIUrl":"https://doi.org/10.1093/rof/rfad036","url":null,"abstract":"Abstract This article proposes a novel perspective on the term structure of market equity yields. Instead of using market dividend futures, we aggregate equity yields of individual firms to estimate the market equity yield curve. This approach allows studying the aggregation effect that shapes the market equity yield curve. During the period from 1990 to 2019, we find a positive aggregation effect: companies with high equity yields were expected to grow at higher rates than companies with low equity yields. Thus, high-yield companies were expected to generate an increasing share of total market dividends when expanding the investment time horizon. Under the assumption of flat firm-risk premia, this implies an upward-sloping term structure of equity risk premia. Together with the concave bond yield curve, the market equity yield curve was upward-sloping.","PeriodicalId":48036,"journal":{"name":"Review of Finance","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135367249","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Mengqiao Du, Alexandra Niessen-Ruenzi, Terrance Odean
Abstract This article shows that mutual funds’ trading experiences bias their future repurchasing decisions. Mutual funds are less likely to repurchase a stock if they previously sold the stock for a loss rather than for a gain. After switching to managing a different fund, fund managers still avoid repurchasing stocks they sold for a loss at a past fund. We do not find that mutual fund managers are biased against repurchasing past loser stocks because of superior information. Though less likely to be repurchased, repurchased losers do not underperform repurchased winners—and the fund itself—in the subsequent quarter.
{"title":"Stock Repurchasing Bias of Mutual Funds","authors":"Mengqiao Du, Alexandra Niessen-Ruenzi, Terrance Odean","doi":"10.1093/rof/rfad035","DOIUrl":"https://doi.org/10.1093/rof/rfad035","url":null,"abstract":"Abstract This article shows that mutual funds’ trading experiences bias their future repurchasing decisions. Mutual funds are less likely to repurchase a stock if they previously sold the stock for a loss rather than for a gain. After switching to managing a different fund, fund managers still avoid repurchasing stocks they sold for a loss at a past fund. We do not find that mutual fund managers are biased against repurchasing past loser stocks because of superior information. Though less likely to be repurchased, repurchased losers do not underperform repurchased winners—and the fund itself—in the subsequent quarter.","PeriodicalId":48036,"journal":{"name":"Review of Finance","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134944043","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Abstract We study the impact of an urban land titling program on firm investment in Shenzhen, China. We find that this program increased the investment rate for titling firms, but this positive effect only holds for politically connected firms. Further analysis suggests that the titling effect is more pronounced for those titling firms associated with greater expropriation risk. During program implementation, the connected titling firms increased their investment perhaps because, as observed, they experienced fewer disputes than non-connected titling firms.
{"title":"Property Rights, Political Connections, and Corporate Investment","authors":"Meng Miao, Dragon Yongjun Tang, L. Colin Xu","doi":"10.1093/rof/rfad029","DOIUrl":"https://doi.org/10.1093/rof/rfad029","url":null,"abstract":"Abstract We study the impact of an urban land titling program on firm investment in Shenzhen, China. We find that this program increased the investment rate for titling firms, but this positive effect only holds for politically connected firms. Further analysis suggests that the titling effect is more pronounced for those titling firms associated with greater expropriation risk. During program implementation, the connected titling firms increased their investment perhaps because, as observed, they experienced fewer disputes than non-connected titling firms.","PeriodicalId":48036,"journal":{"name":"Review of Finance","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135302157","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Andreas G F Hoepner, Ioannis Oikonomou, Zacharias Sautner, Laura T Starks, Xiao Y Zhou
Abstract We show that engagement on environmental, social, and governance issues can benefit shareholders by reducing firms’ downside risks. We find that the risk reductions (measured using value at risk and lower partial moments) vary across engagement types and success rates. Engagement is most effective in lowering downside risk when addressing environmental topics (primarily climate change). Further, targets with large downside risk reductions exhibit a decrease in environmental incidents after the engagement. We estimate that the value at risk of engagement targets decreases by 9% of the standard deviation after successful engagements, relative to control firms.
{"title":"ESG Shareholder Engagement and Downside Risk","authors":"Andreas G F Hoepner, Ioannis Oikonomou, Zacharias Sautner, Laura T Starks, Xiao Y Zhou","doi":"10.1093/rof/rfad034","DOIUrl":"https://doi.org/10.1093/rof/rfad034","url":null,"abstract":"Abstract We show that engagement on environmental, social, and governance issues can benefit shareholders by reducing firms’ downside risks. We find that the risk reductions (measured using value at risk and lower partial moments) vary across engagement types and success rates. Engagement is most effective in lowering downside risk when addressing environmental topics (primarily climate change). Further, targets with large downside risk reductions exhibit a decrease in environmental incidents after the engagement. We estimate that the value at risk of engagement targets decreases by 9% of the standard deviation after successful engagements, relative to control firms.","PeriodicalId":48036,"journal":{"name":"Review of Finance","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135648192","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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