Email: davidson.heath@eccles.utah.edu Phone: 801-581-3948 Office: SFEBB 7217
Teaching
FINAN 6022 - Financial Management Most recent evals
Distinguished Teaching Award 2018
Brady Faculty Teaching Award 2020
Working Papers
The Heterogeneous Effects of ETFs on Asset Markets with Jonathan Brogaard and Da Huang
Revise and Resubmit, Journal of Financial and Quantitative Analysis
Passively tracking an index involves tradeoffs, the most basic of which is to minimize tracking error while controlling transaction costs. This paper shows that exchange-traded funds (ETFs) systematically underweight or omit illiquid index assets. As a result, ETFs have heterogeneous effects on underlying asset markets. Using an instrumental variables approach, we find that the trading activity of ETFs harms liquidity and price efficiency and increases volatility and co-movement for liquid assets, but has no effect on illiquid assets. Our results show that the effects of passive investing on asset markets depend on how passive intermediaries replicate their target index.
Published and Forthcoming Papers
Does Socially Responsible Investing Change Firm Behavior? with Daniele Macciocchi, Roni Michaely and Matt Ringgenberg
Using micro-level data, we examine the behavior of socially responsible investment (SRI) funds. SRI funds select firms with lower pollution, more board diversity, higher employee satisfaction, and better workplace safety. Yet both in the cross-section and using an exogenous shock to SRI capital, we find SRI funds do not significantly change firm behavior. Moreover, we find little evidence they try to impact firm behavior using shareholder proposals. Our results suggest SRI funds are not greenwashing, but they are impact washing; they invest in a portfolio of firms with better environmental and social conduct, but do not follow through on their promise of impact. Replication Code
On Index Investing with Jeff Coles and Matt Ringgenberg
Journal of Financial Economics (2022) - Lead Article
We quantify the impact of index investing on asset prices and trading behavior. Using a new research design based on post-2007 Russell index reconstitutions, we confirm that index investing alters the markets for individual stocks, but does not affect the informational efficiency of prices or trading by informed participants. Stocks with more index investors have higher share turnover, index correlations, and short interest, and less total information production. However, there is no difference – precisely estimated – in their variance ratios, institutional trading, earnings announcement returns, or anomaly mispricing. In other words, index investing affects the markets for and attention to individual index stocks, but does not affect price efficiency or informativeness. Replication Code
Reusing Natural Experiments with Matt Ringgenberg, Mehrdad Samadi and Ingrid Werner
Accepted, Journal of Finance
Natural experiments are used in empirical research to make causal inferences. After a natural experiment is first used, other researchers often reuse the setting, examining different outcomes based on causal chain arguments. Using simulation evidence combined with two extensively studied natural experiments, business combination laws and the Regulation SHO pilot, we show that the repeated use of a natural experiment significantly increases the likelihood of false discoveries. To correct this, we propose multiple testing methods which account for dependence across tests and we show evidence of their efficacy. Replication Code
Market Returns and Interim Risk in Mergers with Mark Mitchell
Forthcoming, Management Science
A primary concern in mergers and acquisitions is the risk the deal may be cancelled before it is completed. We document that this “interim risk” varies asymmetrically with the aggregate market return. Deals tend to be renegotiated when the market rises but cancelled when the market crashes. These effects are conditional on the method of payment and the contracting stage of the deal, consistent with a mechanism of ex post renegotiation. Variation in interim risk over time alters the method of payment in mergers and the firms that are targeted and acquired. Replication Code
Profitability and financial leverage: Evidence from a quasi-natural experiment with Giorgo Sertsios
Forthcoming, Management Science
The relationship between profitability and leverage has been controversial in the capital structure literature. We revisit this relation in light of a novel quasi-natural experiment that increases market power for a subset of firms. We find that treated firms increase their profitability throughout the treatment period. However, they only transiently reduce financial leverage, gradually reverting to their pre-shock level. Firms respond differently according to size, with large firms gradually adjusting their leverage towards a new target and small firms reducing it. The patterns are broadly consistent with dynamic trade-off models with both fixed and variable adjustment costs. Replication Code
Do Index Funds Monitor? with Daniele Macciocchi, Roni Michaely and Matt Ringgenberg
Review of Financial Studies (2022)
Passively managed index funds now hold over 30% of U.S. equity fund assets; this shift raises fundamental questions about monitoring and governance. We show that, relative to active funds, index funds are less effective monitors: (i) they are less likely to vote against firm management on contentious governance issues; (ii) there is no evidence they engage effectively publicly or privately, and (iii) they lead to less board independence and worse pay-performance sensitivity at their portfolio companies. Overall, the rise of index funds is decreasing the alignment of incentives between beneficial owners and firm management and shifting control from investors to managers. Internet Appendix Replication Code
The Strategic Effects of Trademark Protection with Chris Mace
Review of Financial Studies (2020)
We study the effects of trademark protection on firms’ profits and strategy using the 1996 Federal Trademark Dilution Act, which granted additional legal protection to selected trademarks. We find that the FTDA raised treated firms’ operating profits and was followed by a spike in trademark lawsuits and lower entry and exit in affected product markets. Treated firms reduced R&D spending, produced fewer patents and new products, and recalled a higher number of unsafe products. Our results suggest that stronger trademark protection negatively affected innovation and product quality. Internet Appendix Replication Code U.S. Trademarks to Compustat Bridge File
Bias-Corrected Estimation of Price Impact in Securities Litigation with Taylor Dove and J.B. Heaton
American Law and Economics Review (2019)
The single-firm event studies that securities litigants use to detect the impact of a corrective disclosure on a firm’s stock price have low statistical power. As a result, observed price impacts are biased against defendants and systematically overestimate the effect on firm value. We use the empirical distribution of daily stock returns to analyze the bias and develop bias-corrected estimators of price impact in securities litigation. Because of low statistical power, the ex ante incentives against committing securities fraud are also too low. We analyze the adjustment for optimal deterrence and find that it is material, but is nowhere equal to the opposing truncation bias. Replication Code
Macroeconomic Factors in Oil Futures Markets
This paper documents new evidence against perfect risk spanning in crude oil futures, and develops an affine futures pricing model that allows for unspanned macroeconomic factors. Compared to previous estimates, the oil spot premium is more volatile and strongly procyclical which suggests that previous models miss the majority of variation in oil risk premiums. The estimates reveal a dynamic two-way relationship between oil futures and economic activity: productivity shocks are associated with higher oil prices, while oil price shocks affect economic activity by lowering future consumption spending. Unspanned macro factors also affect the valuation of real options. Internet Appendix Replication Code
Old Working Papers
Convergence Failure in CBOT Wheat Futures
Massive convergence failures in CBOT agricultural contracts in 2007-2008 were caused by caps on the fees that storage providers could charge holders of delivery certificates.