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FINAN 6022 - Financial Management Most recent evals
Distinguished Teaching Award 2018
Brady Faculty Teaching Award 2020
Reusing Natural Experiments with Matt Ringgenberg, Mehrdad Samadi and Ingrid Werner
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
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. There is no such effect for deals paid in stock, consistent with a mechanism of costly 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.
Market on Tilt: ETF Trading and Market Quality with Jonathan Brogaard and Da Huang
Exchange traded funds (ETFs) that track a specified index are a financial technology that has risen dramatically in the last two decades. We model an ETF’s optimal index replication strategy and show that it involves underweighting or omitting illiquid index assets. Instrumenting for ETF trading activity, we find that documented effects of ETFs on asset markets differ or even flip sign depending on an asset’s preexisting liquidity. These effects are stronger for ETFs that explicitly sample their underlying index. The results show that the effects of ETFs on underlying asset markets are determined by their index replication strategy.
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.
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.