In this paper, we study whether credit rating agencies (CRAs), as they claim, follow the rating through-the-cycle approach as opposed to a pro-cyclical approach. In particular, we compare the behavior of CRAs during the credit crunch and normal market conditions. Using the credit rating data by S&P, we find that CRAs assign lower credit ratings to firms during credit crunch relative to normal times. Nevertheless, this result does not necessarily imply that CRAs show an excessively pro-cyclical behavior if credit crunches have a long-term fundamental impact on firms. Our further investigation reveals that downgrades during a credit crunch will not be reversed over the subsequent 1–5 years, which supports through-the-cycle credit rating.
{"title":"Credit rating agencies during credit crunch","authors":"Ali Ebrahim Nejad, Saeid Hoseinzade, Ali Niazi","doi":"10.1002/rfe.1192","DOIUrl":"https://doi.org/10.1002/rfe.1192","url":null,"abstract":"In this paper, we study whether credit rating agencies (CRAs), as they claim, follow the rating through-the-cycle approach as opposed to a pro-cyclical approach. In particular, we compare the behavior of CRAs during the credit crunch and normal market conditions. Using the credit rating data by S&P, we find that CRAs assign lower credit ratings to firms during credit crunch relative to normal times. Nevertheless, this result does not necessarily imply that CRAs show an excessively pro-cyclical behavior if credit crunches have a long-term fundamental impact on firms. Our further investigation reveals that downgrades during a credit crunch will not be reversed over the subsequent 1–5 years, which supports through-the-cycle credit rating.","PeriodicalId":51691,"journal":{"name":"Review of Financial Economics","volume":"10 1","pages":""},"PeriodicalIF":1.2,"publicationDate":"2024-01-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"139373935","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}
Gennaro Bernile, Stefanos Delikouras, George M. Korniotis, Alok Kumar
Abstract This study shows that the geographic network of public firms facilitates the propagation of local economic conditions across the United States. We identify economic connections among U.S. states based on the 10‐K listings of public firms and show that the returns and liquidity of firms headquartered in connected states exhibit excess comovement. The economic connections also generate spillover effects where the economy of a state affects its connected states and amplifies the impact of local economic conditions on the U.S. economy. In particular, a 1% production increase in a large state like California is associated with a 6.71% change in annual U.S. GDP growth, relative to average GDP growth.
{"title":"Geography of firms and propagation of local economic conditions","authors":"Gennaro Bernile, Stefanos Delikouras, George M. Korniotis, Alok Kumar","doi":"10.1002/rfe.1191","DOIUrl":"https://doi.org/10.1002/rfe.1191","url":null,"abstract":"Abstract This study shows that the geographic network of public firms facilitates the propagation of local economic conditions across the United States. We identify economic connections among U.S. states based on the 10‐K listings of public firms and show that the returns and liquidity of firms headquartered in connected states exhibit excess comovement. The economic connections also generate spillover effects where the economy of a state affects its connected states and amplifies the impact of local economic conditions on the U.S. economy. In particular, a 1% production increase in a large state like California is associated with a 6.71% change in annual U.S. GDP growth, relative to average GDP growth.","PeriodicalId":51691,"journal":{"name":"Review of Financial Economics","volume":"146 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-09-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134970715","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}
Wolfgang Breuer, Can Kalender Soypak, Bertram I. Steininger
Abstract We present and expand existing theories about why individuals may assess positive outcomes differently from negative outcomes in intertemporal choices. All of our theories—based on utility or cost considerations – predict a conventional magnitude effect for positive outcomes, that is, a negative relation between outcome size and subjective discount rates. For negative outcomes, however, implications are different for utility‐ and cost‐based approaches. We argue that the relevance of utility‐based aspects is strengthened in a money frame, leading to a conventional magnitude effect even for negative outcomes, whereas cost‐based considerations gain in importance in an interest rate frame, implying, in contrast, a “reverse” magnitude effect, that is, higher discount rates for (absolutely) higher outcome size. A web‐based experiment with 676 participants confirms our theoretical findings: the conventional magnitude effect prevails for positive outcomes in the money and the interest rate frame and negative outcomes in the money frame. However, there is a reverse magnitude effect for negative outcomes in the interest rate frame. Our results might help to better understand prevailing magnitude effects in practical applications and might also be apt to derive suggestions for better designing of intertemporal decision problems.
{"title":"Conventional or reverse magnitude effect for negative outcomes: A matter of framing","authors":"Wolfgang Breuer, Can Kalender Soypak, Bertram I. Steininger","doi":"10.1002/rfe.1190","DOIUrl":"https://doi.org/10.1002/rfe.1190","url":null,"abstract":"Abstract We present and expand existing theories about why individuals may assess positive outcomes differently from negative outcomes in intertemporal choices. All of our theories—based on utility or cost considerations – predict a conventional magnitude effect for positive outcomes, that is, a negative relation between outcome size and subjective discount rates. For negative outcomes, however, implications are different for utility‐ and cost‐based approaches. We argue that the relevance of utility‐based aspects is strengthened in a money frame, leading to a conventional magnitude effect even for negative outcomes, whereas cost‐based considerations gain in importance in an interest rate frame, implying, in contrast, a “reverse” magnitude effect, that is, higher discount rates for (absolutely) higher outcome size. A web‐based experiment with 676 participants confirms our theoretical findings: the conventional magnitude effect prevails for positive outcomes in the money and the interest rate frame and negative outcomes in the money frame. However, there is a reverse magnitude effect for negative outcomes in the interest rate frame. Our results might help to better understand prevailing magnitude effects in practical applications and might also be apt to derive suggestions for better designing of intertemporal decision problems.","PeriodicalId":51691,"journal":{"name":"Review of Financial Economics","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2023-09-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135498714","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 provide an overview of the literature investigating (retail) investors' demand for lottery‐like stocks. We summarize different sets of lottery proxies and discuss their implications for cross‐sectional pricing of individual stocks. We present empirical evidence and summarize the findings including (i) the robustness of the lottery demand effect using an extended data set, (ii) the economic underpinnings of the lottery demand effect, and (iii) the explanatory power of the lottery preference factor for established stock market anomalies.
{"title":"Lottery demand, lottery factor, and anomalies","authors":"Turan G. Bali, Quan Wen","doi":"10.1002/rfe.1187","DOIUrl":"https://doi.org/10.1002/rfe.1187","url":null,"abstract":"We provide an overview of the literature investigating (retail) investors' demand for lottery‐like stocks. We summarize different sets of lottery proxies and discuss their implications for cross‐sectional pricing of individual stocks. We present empirical evidence and summarize the findings including (i) the robustness of the lottery demand effect using an extended data set, (ii) the economic underpinnings of the lottery demand effect, and (iii) the explanatory power of the lottery preference factor for established stock market anomalies.","PeriodicalId":51691,"journal":{"name":"Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":1.2,"publicationDate":"2023-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49633460","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}
In this paper, I examine how capital structure (relative to target) affects the financing of R&D spending. Studies on capital structure have shown that firms adjust their debt levels toward target debt levels. I show that firms with below‐target debt are more likely to issue debt to finance R&D spending compared to firms that have above‐target debt. The results are stronger for firms that are smaller in size and firms that do not pay dividends. I also show that firms with below‐target debt are more likely to use a greater fraction of proceeds from net debt issuance to finance R&D spending (either directly or indirectly).
{"title":"Leverage target and R&D spending","authors":"Sharier Azim Khan","doi":"10.1002/rfe.1189","DOIUrl":"https://doi.org/10.1002/rfe.1189","url":null,"abstract":"In this paper, I examine how capital structure (relative to target) affects the financing of R&D spending. Studies on capital structure have shown that firms adjust their debt levels toward target debt levels. I show that firms with below‐target debt are more likely to issue debt to finance R&D spending compared to firms that have above‐target debt. The results are stronger for firms that are smaller in size and firms that do not pay dividends. I also show that firms with below‐target debt are more likely to use a greater fraction of proceeds from net debt issuance to finance R&D spending (either directly or indirectly).","PeriodicalId":51691,"journal":{"name":"Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":1.2,"publicationDate":"2023-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49128237","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 examine the causal effect of stakeholder orientation on firms' product market performance. Using the staggered enactment of constituency statutes across different states as an exogenous shock that increases the extent of the stakeholder orientation, difference‐in‐difference estimations suggest that on average firms incorporated in states that adopted constituency statutes increase sales growth by 1.7% relative to firms incorporated in states that did not adopt such statutes. The effect is stronger if a firm has higher labor intensity and if a firm operates in a durable goods industry. In addition, we find that stakeholder orientation improves the quality of innovation.
{"title":"Stakeholder orientation and product market performance: Evidence from a natural experiment","authors":"Juntai Lu, Jia Wei","doi":"10.1002/rfe.1188","DOIUrl":"https://doi.org/10.1002/rfe.1188","url":null,"abstract":"We examine the causal effect of stakeholder orientation on firms' product market performance. Using the staggered enactment of constituency statutes across different states as an exogenous shock that increases the extent of the stakeholder orientation, difference‐in‐difference estimations suggest that on average firms incorporated in states that adopted constituency statutes increase sales growth by 1.7% relative to firms incorporated in states that did not adopt such statutes. The effect is stronger if a firm has higher labor intensity and if a firm operates in a durable goods industry. In addition, we find that stakeholder orientation improves the quality of innovation.","PeriodicalId":51691,"journal":{"name":"Review of Financial Economics","volume":" ","pages":""},"PeriodicalIF":1.2,"publicationDate":"2023-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48656336","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}
Amit Goyal, Avanidhar Subrahmanyam, Bhaskaran Swaminathan
Illiquidity measures appear to be related to monthly realized returns but do they impact long-run costs of capital (CoC) for firms? Using U.S. data, we find cross-sectional evidence that, controlling for market capitalization, the Amihud (2002, Journal of Financial Markets, 5, 31) measure of illiquidity is negatively related to CoC estimates. A difference-in-differences analysis around exogenous brokerage closures reveals that Amihud illiquidity increases without an impact on CoC. Nonetheless, other illiquidity measures, such as those based on serial covariances, zero returns, and price impact, do show a strong positive relation with CoC. However, we do not find evidence that liquidity risk and the probability of informed trade influence CoC. Overall, our results advance our understanding of precisely which illiquidity measures influence required firm returns.
非流动性措施似乎与月实现回报有关，但它们是否影响公司的长期资本成本(CoC) ?使用美国的数据，我们发现横截面证据表明，在控制市值的情况下，Amihud (2002, Journal of Financial Markets, 5,31)的非流动性度量与CoC估计呈负相关。围绕外生经纪关闭的差异分析表明，Amihud非流动性增加而对CoC没有影响。尽管如此，其他非流动性指标，如基于序列协方差、零回报和价格影响的指标，确实显示出与CoC的强烈正相关。然而，我们没有发现流动性风险和知情贸易概率影响CoC的证据。总的来说，我们的结果促进了我们对哪些非流动性措施影响所需公司回报的准确理解。
{"title":"Illiquidity and the cost of equity capital: Evidence from actual estimates of capital cost for U.S. data","authors":"Amit Goyal, Avanidhar Subrahmanyam, Bhaskaran Swaminathan","doi":"10.1002/rfe.1179","DOIUrl":"https://doi.org/10.1002/rfe.1179","url":null,"abstract":"Illiquidity measures appear to be related to monthly realized returns but do they impact long-run costs of capital (CoC) for firms? Using U.S. data, we find cross-sectional evidence that, controlling for market capitalization, the Amihud (2002, <i>Journal of Financial Markets</i>, 5, 31) measure of illiquidity is negatively related to CoC estimates. A difference-in-differences analysis around exogenous brokerage closures reveals that Amihud illiquidity increases without an impact on CoC. Nonetheless, other illiquidity measures, such as those based on serial covariances, zero returns, and price impact, do show a strong positive relation with CoC. However, we do not find evidence that liquidity risk and the probability of informed trade influence CoC<i>.</i> Overall, our results advance our understanding of precisely which illiquidity measures influence required firm returns.","PeriodicalId":51691,"journal":{"name":"Review of Financial Economics","volume":"5 1","pages":""},"PeriodicalIF":1.2,"publicationDate":"2023-07-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138529158","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}
This paper demonstrates that overnight returns are subject to highly persistent biases and examines the profitability of overnight-only investments in that context. Overnight returns tend to exceed their intraday counterparts, and the paper first reconciles these patterns by introducing a model that factors in systematic biases. This model identifies one-fifth of stocks as having positive and statistically significant overnight biases. Investing overnight in these stocks in the next year yields twice the market's return for a third of the market beta. Results also have implications for daytime investors as these stocks underperform intraday. Implementation costs and issues are discussed.
{"title":"Night trading: Lower risk but higher returns?","authors":"Marie-Eve Lachance","doi":"10.1002/rfe.1180","DOIUrl":"https://doi.org/10.1002/rfe.1180","url":null,"abstract":"This paper demonstrates that overnight returns are subject to highly persistent biases and examines the profitability of overnight-only investments in that context. Overnight returns tend to exceed their intraday counterparts, and the paper first reconciles these patterns by introducing a model that factors in systematic biases. This model identifies one-fifth of stocks as having positive and statistically significant overnight biases. Investing overnight in these stocks in the next year yields twice the market's return for a third of the market beta. Results also have implications for daytime investors as these stocks underperform intraday. Implementation costs and issues are discussed.","PeriodicalId":51691,"journal":{"name":"Review of Financial Economics","volume":"195 1","pages":""},"PeriodicalIF":1.2,"publicationDate":"2023-07-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138529159","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}
{"title":"Mean‐reversion risk and the random walk hypothesis","authors":"C. K. Jones","doi":"10.1002/rfe.1184","DOIUrl":"https://doi.org/10.1002/rfe.1184","url":null,"abstract":"","PeriodicalId":51691,"journal":{"name":"Review of Financial Economics","volume":"1 1","pages":""},"PeriodicalIF":1.2,"publicationDate":"2023-07-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42794974","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}
Classic value investing à la Graham & Dodd (Security analysis: The classic, McGrawHill, New York, 1934) focuses on selecting stocks that seem cheap relative to their intrinsic value and fundamental quality. We use Bayesian inference to account for a large amount of uncertainty within intrinsic value estimation. We find that an undervalued-minus-overvalued factor that invests in cheap quality stocks and sells expensive junk stocks selected via Bayesian inference yields high risk-adjusted returns and Sharpe ratios for equal-weighted portfolios. We also find that using value-weighted portfolios introduces size-based dilutions and shifts the focus away from actual quality characteristics like profitability, payout, safety, and past growth. Our findings suggest that while the relative benefit of accounting for uncertainty via Bayesian inference is not large over shorter holding periods, it pays off for investment horizons longer than a month.
经典价值投资(la Graham &;Dodd(证券分析:经典，McGrawHill，纽约，1934)侧重于选择相对于其内在价值和基本质量似乎便宜的股票。我们使用贝叶斯推理来解释内在价值估计中的大量不确定性。我们发现，一个被低估-被高估的因子，投资于廉价的优质股票，并出售通过贝叶斯推理选择的昂贵的垃圾股票，对于等权重的投资组合，可以产生高的风险调整回报和夏普比率。我们还发现，使用价值加权投资组合引入了基于规模的稀释，并将焦点从实际质量特征(如盈利能力、支出、安全性和过去的增长)转移开。我们的研究结果表明，虽然通过贝叶斯推理计算不确定性的相对好处在较短的持有期内并不大，但对于超过一个月的投资期限来说，它是值得的。
{"title":"Value investing via Bayesian inference","authors":"Bernd Huefner, Marcel Rueenaufer, Martin Boesch","doi":"10.1002/rfe.1185","DOIUrl":"https://doi.org/10.1002/rfe.1185","url":null,"abstract":"Classic value investing à la Graham & Dodd (Security analysis: The classic, McGrawHill, New York, 1934) focuses on selecting stocks that seem cheap relative to their intrinsic value and fundamental quality. We use Bayesian inference to account for a large amount of uncertainty within intrinsic value estimation. We find that an undervalued-minus-overvalued factor that invests in cheap quality stocks and sells expensive junk stocks selected via Bayesian inference yields high risk-adjusted returns and Sharpe ratios for equal-weighted portfolios. We also find that using value-weighted portfolios introduces size-based dilutions and shifts the focus away from actual quality characteristics like profitability, payout, safety, and past growth. Our findings suggest that while the relative benefit of accounting for uncertainty via Bayesian inference is not large over shorter holding periods, it pays off for investment horizons longer than a month.","PeriodicalId":51691,"journal":{"name":"Review of Financial Economics","volume":"16 1","pages":""},"PeriodicalIF":1.2,"publicationDate":"2023-07-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"138529156","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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