2022 / 2023

Title: Comparing factor models with conditioning information

Abstract:

We develop a framework to conduct asymptotically valid tests for comparing factor models with conditioning information. The tests are based on a metric analogous to the squared Sharpe ratio improvement measure that is used to gauge the extent of model mispricing in an unconditional setting. We propose an estimator for the metric and study its limiting properties in detail, establishing the asymptotic normality. An advantage of our framework is that it can be applied without an a priori knowledge of the persistence nature of the conditioning variables. We accommodate a range of dependence classes, including stationary, near stationarity, integrated, and local-to-unity. An application of our methodology to major models shows that the conditional versions of the Stambaugh and Yuan (2017) four-factor model and the Daniel, Hirshleifer, and Sun (2020) three-factor model are the best performers.

Date: Thursday 13th October, 13:00 - 14:00

Title: Momentum and Short-Term Reversals: Theory and Evidence 

Abstract: 

How might short-term reversals and longer-term momentum coexist within markets? To address this question, we develop a dynamic model with liquidity demands and informationprocessing constraints. Specifically, we consider noise traders, and investors who underestimate the quality of information they do not themselves produce. Markets transition from reversals to momentum as lag horizons lengthen. Reversals weaken following earnings announcements. Skipping a month between formation and holding periods increases momentum profits. Larger order flows from retail traders imply stronger reversals. These predictions are supported empirically. If noise demands are positively autocorrelated, price buildups and collapses occur as in recent “meme” stock episodes.

Date: Thursday 27th October, 13:00 - 14:00

Title: Why SPACs: An Apologia

Abstract:

Special purpose acquisition companies (SPACs) dominated the initial public offering (IPO) market in recent years, but the Securities and Exchange Commission (SEC) has proposed rules that have chilled the SPAC market and, if made final, will likely strangle it completely. It is time to examine what, if anything, SPA Cs offer the capital markets.

Most commentators and regulators view SPA Cs as a mere regulatory sleight of hand. This Article focuses on SPA Cs’ fundamental—but overlooked—innovation. Traditional securities law views average investors as prone to hysteria, and therefore relegates them to investment in public companies, reserving investment in private firms for the wealthy. The traditional securities law regime thus has the effect of preventing the general public from investing in private companies until after more wealthy investors have had their turn. But SPA Cs allow the public to trade based on information about a still-private company. Allowing free trading of this information is a radical departure from the basic structure and original purposes of U.S. securities law.

SPA Cs thus challenge securities law at its core. We use an original empirical dataset to argue that their success—or, to be precise, the success of some of them—is evidence that securities law may be overly paternalistic in its attitude toward the general public. Our data provide evidence that, as long as the SEC implements reforms that realign shareholders’ interests with those of SPAC managers, SPA Cs can offer a valuable new opportunity in the markets.

Date: Thursday, 10 November, 13:00 - 14:00

Title: Research Unbundling and Market Liquidity: Evidence from MiFID II

Abstract:

The second Markets in Financial Instruments Directive (MiFID II) mandated the unbundling of payments for research and trading. This research explores whether the impact of MiFID II differs between large and small firms in terms of analyst coverage and stock liquidity. I n p articular, we focus on the London Stock Exchange with its more regulated Official List (Main Market) and less regulated Alternative Investment Market (AIM). We find a significant drop in analyst coverage on the Main Market, which leads to a deterioration in market liquidity. In contrast, the requirement of AIM firms to retain a Nominated Adviser (NOMAD), who often provides research coverage, has mitigated the impact of MiFID II. AIM firms have experienced marginally higher research coverage and liquidity, consistent with NOMA Ds facilitating the dissemination of firm-specific information.

Date: Thursday 26th January, 13:00 - 14:00

Title: Market Segmentation Through Information

Abstract:

An information designer has information about consumers’ preferences over products sold by oligopolists and chooses what information to reveal to firms who, then, compete on price by making personalized offers. We study the market out- comes the designer can achieve. The information designer is a metaphor for an internet platform which uses data on consumers to target advertisements that include discounts and promotions. Our analysis demonstrates the power that users’ data can endow internet platforms with, and speaks directly to current regulatory debates.

For the full paper click here.

Date: Thursday 9th February, 13:00 - 14:00

Title: The Rise of Anti-Activist Poison Pills

Abstract:

We provide the first systematic evidence of contractual innovation in the terms of poison pill plans. In response to the increase in hedge fund activism, pills have changed to include anti-activist provisions, such as low trigger thresholds and acting-in-concert provisions. Using unique data on hedge fund views of SEC filings as a proxy for the threat of activists’ interventions, we show that hedge fund interest predicts pill adoptions. Moreover, the likelihood of a 13D filing declines after firms adopt “anti-activist” pills, suggesting that pills are effective in deterring activists. The results are particularly strong for “NOL” pills that, due to tax laws, have a five percent trigger. Our analysis has implications for understanding the modern dynamics of market discipline of managers in public corporations and evaluating policies that regulate defensive tactics.

Date:  Thursday 23th February, 13:00 - 14:00

Title: Misfortune and Mistake: The Financial Conditions and Decision-Making Ability of High-Cost Loan Borrowers

Abstract:

The appropriateness of many high-cost loan regulations depends on whether demand is driven by financial conditions (“misfortunes”) or imperfect decisions (“mistakes”). Bank records from Iceland show borrowers have especially low liquidity just before getting a loan. Borrowers exhibit lower decision-making ability (DMA) in linked choice experiments: 45% of loan dollars go to the bottom 20% of the DMA distribution. Standard determinants of demand do not explain this relationship, which is also mirrored by the relationship between DMA and an unambiguous “mistake.” Both “misfortune” and “mistake” thus appear to drive demand.

Date: Thursday 9th March, 13:00 - 14:00

Title: Taxes and Equity Risk and Return: The case of Tax-Loss Carry Forwards

Abstract:

How do taxes affect equity risk and return? In this paper, we examine the relationship between corporate taxes and equity risk and return with a focus on tax-loss carry forwards. Tax-loss carry forward (TLCF), the accumulated corporate losses that can be applied to future taxable income, forms an important and risky corporate asset. We first show theoretically that a firm’s TLCF is a complex contingent claim that has a non-monotonic effect on equity risk: at a high level of TLCF , equity risk is increasing in TLCF because firms are more likely to see their TLCF left deferred or unused after negative cash flow shocks. On the other hand, if TLCF is so low that it will be used with near certainty, then equity risk is decreasing with TLCF since TLCF represents a safe cash flow. Empirically, TLCF positively and significantly forecasts various measures of equity risk, as well as future returns controlling for standard risk measures. The positive relationship indicates that TLCF is risky for the typical firm.

Date: Thursday 4th May, 13:00 - 14:00

Title: Distressed Investment, Corporate Debt Liquidity, and Capital Structure

Abstract:

We examine liquidity of corporate debt and capital structure of the firm run by inefficient management in the presence of a distressed investor in the secondary debt market. In addition to having superior information about the firm’s future cash flows, the distressed investor can install a more efficient management and restructure the firm in bankruptcy. An unexpected arrival of the investor negatively impacts liquidity of existing debt claims. However, liquidity is more nuanced when firms choose their capital structure in expectation of the distressed investor. In particular, if value added from restructuring is sufficiently high in deep default states, liquidity of senior claims optimally issued by the firm can still be low. We derive testable implications and examine the impact of various Bankruptcy Code provisions on liquidity and capital structure of the firm.

Date: Thursday 18th May, 12:45 - 13:45

Title: Proxy Voting and the Rise of ESG

Abstract:

We track the temporal pattern of institutional investors’ ideologies as revealed by their proxy votes from 2005 to 2018. Despite the financial crisis, the regulatory changes on proxy voting and transformation of the asset management industry it has spawned, and despite the rise of the socially responsible investment movement, we find that the ideology of the largest investors has remained highly stable. The ideologies of institutional investors are revealed by a dynamic, spatial scaling analysis of all proxy votes of 561mutual fund families. We characterize voting as driven by single-peaked preferences in a two-dimensional Euclidean space. One dimension reflects the familiar left-right ideological leanings, with more socially responsible investors on the left, and the other dimension differences in attitudes towards management, with management-friendly investors at one end and management-disciplinarians at the other. Although the ideology of the largest investors remains solidly stable on average, we find that the ideologies of a substantial fraction of other investors evolve substantially over time.

Date: Thursday 15th June, 13:00 - 14:00