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FINAN 6022 - Financial Management Most recent evals
Distinguished Teaching Award 2018
On Index Investing with Jeff Coles and Matt Ringgenberg
We quantify the impact of index investing on stock prices. Using a regression discontinuity analysis around yearly Russell index reconstitutions, we find that index investing introduces noise into stock prices, but does not impact long-term price efficiency or trading by arbitrageurs. Stocks with more index investors have prices that deviate more from a random walk and exhibit higher correlations with index price movements. However, these stocks have no difference in turnover, trading volume, or earnings response coefficients. In other words, index investing introduces noise into prices, but it does not impact the ability of arbitrageurs to impound information into prices.
Do Index Funds Monitor? with Daniele Macciocchi, Roni Michaely and Matt Ringgenberg
Passively managed index funds now hold over 25% of U.S. mutual fund and ETF assets. The rise of index investing raises fundamental questions about monitoring and corporate governance. We examine the voice and exit mechanisms and find that compared to active funds, index funds rarely vote against firm management on contentious corporate governance issues, and do not use exit to express dissatisfaction with firm management. Moreover, across a variety of tests, we find no evidence that index funds engage with firm management. Our results suggest that the rise of index investing is shifting control from investors to firm managers.
Not all profits are created equal: New evidence on the profits-leverage puzzle with Giorgo Sertsios
A robust and controversial finding in the capital structure literature is the inverse relation between profitability and leverage. We revisit this relation in light of a novel quasi-natural experiment that increases market power for a subset of firms and has product-market spillovers on their suppliers. We find that treated firms and their suppliers similarly increase their profitability, but only suppliers reduce their leverage in response. The different nature of profitability shocks explains the results: The profitability increase was permanent and riskless for treated firms, but transitory and risky for suppliers. Unobserved components of profitability variation seem to explain earlier findings.
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.