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FINAN 6022 - Financial Management Most recent evals
Distinguished Teaching Award 2018
Brady Faculty Teaching Award 2020
Does Socially Responsible Investing Change Firm Behavior? with Daniele Macciocchi, Roni Michaely and Matt Ringgenberg
Socially responsible investment (SRI) funds are increasing in popularity. Yet, it is unclear if these funds improve corporate behavior. Using novel micro-level data, we find that SRI funds select firms with higher environmental and social standards: the firms they hold exhibit lower pollution, greater board diversity, higher employee satisfaction, higher workplace safety, and fewer customer complaints. Yet, using an exogenous shock to SRI capital, we find no evidence that SRI funds improve firm behavior. The results suggest SRI funds invest in a portfolio consistent with the fund’s objective, but they do not significantly improve corporate conduct.
Reusing Natural Experiments with Matt Ringgenberg, Mehrdad Samadi and Ingrid Werner
R&R, Journal of Financial Economics
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.
Market Returns and Interim Risk in Mergers with Mark Mitchell
R&R, 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 paid in cash tend to be renegotiated when the market rises but cancelled when the market crashes, yet there is no such effect for deals paid in stock, consistent with a mechanism of ex post renegotiation. Variation in interim risk over time affects the market for corporate control, altering the method of payment and the firms that are targeted and acquired.
ETF Design and Asset Markets with Jonathan Brogaard and Da Huang
This paper theoretically and empirically shows that passive investing has heterogeneous effects on asset markets. We develop a model which predicts that funds optimally underweight illiquid index assets. Instrumenting for trading activity from exchange traded funds (ETFs), we show that ETF trading reduces the market quality of liquid assets but does not impact the market quality of illiquid assets. The effects are stronger for funds that explicitly sample their underlying index, compared to funds that are fully replicating. Thus, the effects of passive investing on asset markets depend on how intermediaries replicate their target index.
On Index Investing with Jeff Coles and Matt Ringgenberg
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.
Profitability and financial leverage: Evidence from a quasi-natural experiment with Giorgo Sertsios
Accepted at 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.
Do Index Funds Monitor? with Daniele Macciocchi, Roni Michaely and Matt Ringgenberg
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
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
Price impacts in legal event studies are systematically overestimated, a problem that carries over into damages calculations and results in securities litigation being settled or decided for excessive damages. We quantify and examine the bias using the empirical distribution of daily stock returns, and develop bias-corrected estimators of price impacts for single-event studies. Replication Code
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
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.