Published and Accepted Papers

Competition and the Reputational Costs of Litigation
with Felix von Meyerinck and Vesa Pursiainen
Journal of Financial and Quantitative Analysis, accepted

Abstract:
We study the role of competition in customers’ reactions to litigation against firms, using anonymized mobile phone location data. A class action lawsuit filing results in a 4% average reduction in customer visits to target firms’ outlets in the following months. The effect strongly depends on competition. Outlets facing more competition experience significantly larger negative effects. Closer competition matters more, both in terms of geographic and industry proximity. Announcement returns and quarterly accounting revenues around lawsuit filings also strongly depend on competition. Our results suggest that competition is an important component in customers’ ability to discipline firms for misbehavior.

Firm-Specific Versus Systematic Momentum
with Frank Graef and Daniel Hoechle
Finance Research Letters, 2025, 76, 106963

SSRN (ungated version)

Abstract:
We decompose stock returns into a systematic and a firm-specific component and show that the dynamics of the firm-specific return component drives the well-known stock momentum anomaly. Our results are robust to the use of a variety of prominent factor models for return decomposition. Furthermore, we find that momentum profits are largely unaffected when the investment universe is restricted to stocks with inconspicuous factor loadings. Our empirical findings call into question the transmission mechanism from factor momentum to stock momentum proposed in recent research.

CEO Turnover and Director Reputation
with Felix von Meyerinck and Jonas Romer
Journal of Financial Economics,  2025, 136,  103971
Swiss Finance Institute Working Paper No. 23-87
European Corporate Governance Institute – Finance Working Paper No. 942/2023
SSRN (paper including Online Appendix)

Abstract:
This paper analyzes the reputational effects of forced CEO turnovers on outside directors. We find that directors interlocked to a forced CEO turnover experience large and persistent increases in withheld votes at subsequent re-elections relative to non-turnover-interlocked directors. Directors are not penalized for an involvement in a turnover per se but for forced CEO turnovers that are related to governance failures by the board. Our results challenge the widespread view that forcing out a CEO can generally be understood as a sign of a well-functioning corporate governance.

CEO  Tenure and Firm Value
with Francois Brochet, Peter Limbach, and Meik Scholz-Daneshgari
The Accounting Review, 2021, 96,  47-71
SSRN (ungated version)

Abstract:
Our study is the first to provide systematic evidence of a hump-shaped CEO tenure-firm value relation. Cross-sectionally, firm value starts to decline after fewer years of CEO tenure in more dynamic industries, if CEOs are less adaptable to changes, and in the presence of greater labor market frictions. Overall, the dynamics of CEO-firm match quality appear to be a first-order driver of the CEO tenure-firm value association, as explained by CEO characteristics (adaptability), firm/industry characteristics (dynamism), and labor market characteristics that facilitate optimal matching between firms and CEOs. 

Strategic  Scope and Bank Performance
with Anthony Saunders and Ingo Walter
Journal of Financial Stability, 2020, 46,  100715
SSRN (ungated version)

Abstract:
One of the most dramatic trends in banking since the 1980s has been the secular movement away from core banking and interest generating activities towards enhanced reliance on non-interest-generating activities that focus largely on fees and trading profits. In this paper, we draw on a dataset covering nearly a million quarterly observations on more than 12,000 US banks and find no evidence that this shift in the bank business model harms bank profitability. To the contrary, a higher share of non-traditional bank income is associated with a higher profitability. The increase in profitability does not seem to come at the cost of substantially larger bank-level risk taking, at least not for large banks, which are the banks mostly involved in non-traditional bank business. There is also no conclusive evidence that a larger share of non-traditional income is associated with a larger contribution to systemic risk. The net benefits of non-traditional income increased in the 2000s, when both interest rates and bank margins started to decline. Estimation techniques that mitigate endogeneity concerns resulting from unobserved heterogeneity also show larger net benefits associated with greater bank reliance on generating non-traditional income. 

Does Price Fixing Benefit Corporate Managers?
with Tanja Artiga Gonzalez and David Yermack
Management Science, 2019, 65, 4813-4840
SSRN (ungated version)

Abstract:

We study the effects of cartel participation on top corporate managers. Although a strong public interest exists in regulating price fixing, we find little evidence that either corporate governance or the legal system holds managers of cartel firms accountable. Instead, managers of cartel firms enjoy greater job security, receive higher cash bonuses, and more aggressively take profits from appreciated stock option awards. Legal sanctions against individual managers are infrequent, with enforcement actions focused on corporations rather than their officers. Managers seem to use concealment strategies actively to limit detection of cartel membership by their boards and auditors. 

Financial Advice and Bank Profits
with Daniel Hoechle, Stefan Ruenzi, and Nic Schaub
Review of Financial Studies, 2018, 31, 4447-4492

Abstract:

We use a unique data set from a large retail bank containing internal managerial accounting data on revenues and costs per client to analyze how banks and their financial advisors generate profits with customers. We find that advised transactions are associated with higher profits than independently executed trades of the same client. The bank’s own mutual funds and structured products are most profitable for the bank, and profits increase with trade size. We show that advisors recommend exactly those transactions. Furthermore, we find that advised clients achieve a worse performance than independent clients, suggesting that advisors put their employer’s interest first. 

Settling the Staggered Board Debate
with Yakov Amihud and Steven Davidoff Solomon
University of Pennsylvania Law Review, 2018, 166, 1475-1510

SSRN

Abstract:

We address the heated debate over the staggered board. One theory claims that a staggered board facilitates entrenchment of inefficient management and thus harms corporate value. Consequently, some institutional investors and shareholder rights advocates have argued for the elimination of the staggered board. The opposite theory is that staggered boards are value enhancing since they enable the board to focus on long-term goals. Both theories are supported by prior and conflicting studies and theoretical law review articles. We show that neither theory has empirical support and on average, a staggered board has no significant effect on firm value. Prior studies did not include important explanatory variables in their analysis or account for the changing nature of the firm over time. When we correct for these issues in a sample of up to 2,961 firms from 1990 to 2013 we find that the effect of a staggered board on firm value becomes statistically insignificant after controlling for variables that affect both value and the incidence of a staggered board. Notably, we find that the adoption of a staggered board, its retention, and its removal are not random and exogenous but are rather endogenous, being related to firm characteristics and performance. The effect of a staggered board is idiosyncratic; for some firms it increases value, while for other firms it is value destroying. Our results suggest caution about legal solutions which advocate wholesale adoption or repeal of the staggered board and instead point to an individualized firm approach. 

Industry Expert Directors
with Wolfgang Drobetz, Felix von Meyerinck, and David Oesch
Journal of Banking and Finance, 2018, 92, 195-215
SSRN (ungated version including Online Appendix) 

Abstract:
We analyze the valuation effect of board industry experience and channels through which industry experience of outside directors relates to firm value. Our analysis shows that firms with more experienced outside directors are valued at a premium compared to firms with less experienced outside directors. Additional analyses, including a quasi-experimental setting based on director deaths, mitigate endogeneity concerns. The association between having directors with more industry experience and higher firm value is more pronounced for firms with larger investment programs, larger cash reserves, and during crises. In contrast, it is weaker in more dynamic industries, i.e., industries that rank high in terms of sales growth, R&D expenditures, merger activities, competitive threat, and product market changes, where the value of previously acquired experience is likely to be diminished. Overall, our findings are consistent with board industry experience being a valuable corporate governance mechanism. 

The Impact of Financial Advice on Trade Performance and Behavioral Biases
with Daniel Hoechle, Stefan Ruenzi, and Nic Schaub
Review of Finance, 2017, 21, 871-910
SSRN (ungated version) 

Abstract:
We use a dataset from a large retail bank to examine the impact of financial advice on investors’ stock trading performance and behavioral biases. Our data allow us to classify each individual trade as either advised or independent and to compare them in a trade-by-trade within-person analysis. Thus, our study is not plagued by the endogeneity problems typically faced by studies on financial advice. We document that advisors hurt trading performance. However, they help to reduce some of the behavioral biases retail investors are subject to, but this does not overcompensate the negative performance effects of the bad stock recommendations. 

Is Director Industry Experience Valuable?
with Felix von Meyerinck and David Oesch
Financial Management, 2016, 45, 207-237
SSRN (ungated version)

Abstract:
We investigate whether investor reactions to the announcement of a new outside director appointment significantly depend upon the director's experience in the appointing firm's industry. Our sample includes 688 outside director appointments to boards of S&P 500 companies from 2005 to 2010. We find significantly higher announcement returns upon appointments of experienced versus inexperienced directors. To alleviate endogeneity concerns, we use the deaths of 200 directors holding 280 outside directorships as an identification strategy and find significantly more negative announcement returns associated with the deaths of experienced versus inexperienced directors. However, while our results are robust to accounting for time‐fixed unobservable director and firm characteristics, we still cannot completely rule out endogenous firm‐director matching driving our results. 

Product Market Competition, Corporate Governance, and Firm Value: Evidence from the EU-Area
with Manuel Ammann and David Oesch
European Financial Management, 2013, 19, 452-469
SSRN (ungated version)

Abstract:
This paper investigates whether the valuation effect of corporate governance depends on the degree of competition in the companies’ product markets in a large international sample covering 14 countries from the European Union (EU). Besides providing external validity of previous US-centred studies, this paper uses more comprehensive and reliable measures of both product market competition and corporate governance. Consistent with the hypothesis that product market competition acts as a substitute for corporate governance as competitive pressure imposes discipline on managers to maximise firm value, our results show that corporate governance significantly increases firm value in non-competitive industries only. When investigating the channels through which firm value may be increased, we find that good governance for firms in non-competitive industries leads them to have more capital expenditures, spend less on acquisitions, and be less likely to diversify. Our results are robust to a large number of robustness checks including the use of alternative measures of competition and governance, as well as using alternative regression specifications. 

Hedge Fund Characteristics and Performance Persistence  
with Manuel Ammann and Otto Huber
European Financial Management, 2013, 19, 209-250
SSRN (ungated version)

Abstract:
In this paper, we investigate the performance persistence of hedge funds over time horizons between 6 and 36 months based on a merged sample from the Lipper/TASS and CISDM databases for the time period from 1994 to 2008. Unlike previous literature, we use a panel probit regression approach to identify fund characteristics that are significantly related to performance persistence. We then investigate the performance of two-way sorted portfolios where sorting is based on past performance and one of the additional fund characteristics identified as persistence-enhancing in the probit analysis. We find statistically and economically significant performance persistence for time horizons of up to 36 months. Although we identify several fund characteristics that are strongly correlated with the probability of observing performance persistence, we find only one fund characteristic, a strategy distinctiveness index that attempts to measure manager skills and the uniqueness of the hedge fund's trading strategies, to have the ability to systematically improve performance persistence up to a time horizon of 24 months. The economic magnitude of this improvement amounts to a sizeable increase in alpha by approximately 4.0% and 2.3% p.a. for annual and biennial rebalancing, respectively. 

Hedge Fund Liquidity and Performance: Evidence from the Financial Crisis   
with Nic Schaub
Journal of Banking and Finance, 2013, 37, 671-692
SSRN (ungated version)

Abstract:
We investigate how share restrictions affect hedge fund performance in crisis and non-crisis periods. Consistent with prior research, we find that in the pre-crisis period more illiquid funds generate a share illiquidity premium compensating investors for limited liquidity. In the crisis period, this share illiquidity premium turns into an illiquidity discount. Hedge funds with more stringent share restrictions invest more heavily in illiquid assets. While share restrictions enable funds to manage illiquid assets effectively in the pre-crisis period, they seem insufficient to ensure effective management of illiquid portfolios in the crisis. In a crisis period, funds holding illiquid portfolios experience lower returns and alphas, also when share restrictions are controlled for. Funds with an asset–liability mismatch perform particularly poorly and experience the strongest outflows. Share restrictions are also a proxy for incentives as investors cannot immediately withdraw their money after poor performance. We show that higher incentive fees can offset the share illiquidity discount in the crisis period. 

Risk Management, Corporate Governance, and Bank Performance in the Financial Crisis    
with Vincent Aebi and Gabriele Sabato
Journal of Banking and Finance, 2012, 36, 3213-3226
SSRN (ungated version)

Abstract:
The recent financial crisis has raised several questions with respect to the corporate governance of financial institutions. This paper investigates whether risk management-related corporate governance mechanisms, such as for example the presence of a chief risk officer (CRO) in a bank’s executive board and whether the CRO reports to the CEO or directly to the board of directors, are associated with a better bank performance during the financial crisis of 2007/2008. We measure bank performance by buy-and-hold returns and ROE and we control for standard corporate governance variables such as CEO ownership, board size, and board independence. Most importantly, our results indicate that banks, in which the CRO directly reports to the board of directors and not to the CEO (or other corporate entities), exhibit significantly higher (i.e., less negative) stock returns and ROE during the crisis. In contrast, standard corporate governance variables are mostly insignificantly or even negatively related to the banks’ performance during the crisis. 

Is there Really no Conglomerate Discount?  
with Manuel Ammann and Daniel Hoechle
Journal of Business Finance and Accounting, 2012, 39, 264-288
SSRN (ungated version)

Abstract:
Recent research questions the existence of a conglomerate discount. This study addresses two of the most important explanations for the conglomerate discount and finds evidence in support of an economically and statistically significant discount. The first explanation is that the risk-reducing effect of diversification increases debt value and consequently the use of the book value of debt leads to an underestimation of firm value in diversified firms. We show that the effect of using an imputed market value of debt reduces the conglomerate discount only by a small fraction. However, consistent with the value-transfer hypothesis, we find the discount to increase in leverage and no discount for all-equity firms. An agency cost-based explanation, which reconciles these conflicting findings, is that managers in levered firms become aligned with creditors and reduce firm risk at the expense of shareholders. Hence, the diversification discount only occurs in levered firms and stems from conflicts of interest between managers and shareholders over corporate risk taking. Second, the conglomerate discount may emerge from a neglect of the endogenous nature of the diversification decision. We first show that the conglomerate discount in fact disappears when we account for endogeneity in a Heckman selection model. However, when we account for fixed effects, the conglomerate discount remains statistically and economically significant, also in a Heckman selection-model or instrumental variables framework. 

Geographical Diversification and Firm Value in the Financial Services Industry  
with Ingo Walter
Journal of Empirical Finance, 2012, 19, 109-122
SSRN (ungated version)

Abstract:
This paper investigates whether geographic diversification is value-enhancing or value-destroying in the financial services sector, broadly defined. Our dataset comprises approximately 3579 observations over the period from 1985 to 2004 and covers the entire range of U.S. financial intermediaries — commercial banks, investment banks, insurance companies, asset managers, and financial infrastructure services firms. We use two alternative measures of geographic diversification: (1) a dummy variable whether the firm reports more than one geographic segment and (2) the percentage of sales from non-domestic operations. Our results indicate that geographic diversification is not associated with a significant valuation discount in financial intermediaries. However, when accounting for the firms' main activity-areas, we find evidence of a significant discount associated with geographic diversification in securities firms and a premium in credit intermediaries and insurance companies. All these results are robust after taking into account functional diversification of the firms, a potential endogeneity of both functional and geographic diversification, and a potential value transfer from equity to debt holders by using estimates of the market value of debt. 

How Much of the Diversification Discount Can be Explained by Poor Corporate Governance?
with Daniel Hoechle, Ingo Walter, and David Yermack
Journal of Financial Economics, 2012, 103, 41-60
SSRN (ungated version)

Abstract:
We investigate whether the diversification discount occurs partly as an artifact of poor corporate governance. In panel data models, we find that the discount narrows by 16% to 21% when we add governance variables as regression controls. We also estimate Heckman selection models that account for the endogeneity of diversification and dynamic panel generalized method of moments models that account for the endogeneity of both diversification and governance. We find that the diversification discount persists even with these controls for endogeneity. However, in selection models the discount disappears entirely when we introduce governance variables in the second stage, and in dynamic panel GMM models the discount narrows by 37% when we include governance variables. 

Product Market Competition, Managerial Incentives, and Firm Valuation  
with Stefan Beiner and Gabrielle Wanzenried
European Financial Management, 2011, 17, 331-366
SSRN (ungated version)

Abstract:
This paper contributes to the very small empirical literature on the effects of competition on managerial incentive schemes. Based on a theoretical model that incorporates both strategic interaction between firms and a principal agent relationship, we analyse the relationship between product market competition, incentive schemes and firm valuation. The model predicts a nonlinear relationship between the intensity of product market competition and the strength of managerial incentives. We test the implications of our model empirically based on a unique and hand-collected dataset comprising over 600 observations on 200 Swiss firms over the 2002–2005 period. Our results suggest that, consistent with the implications of our model, the relation between product market competition and managerial intensive schemes is convex indicating that above a certain level of intensity in product market competition, the marginal effect of competition on the strength of the incentive schemes increases in the level of competition. Moreover, competition is associated with lower firm values. These results are robust to accounting for a potential endogeneity of managerial incentives and firm value in a simultaneous equations framework. 

Has Hedge Fund Alpha Disappeared?   
with Manuel Ammann and Otto Huber
Journal of Investment Management, 2011, 9, 50-71
SSRN (ungated version)

Abstract:
This paper investigates the alpha generation of the hedge fund industry based on a recent sample compiled from the Lipper/TASS database covering the time period from January 1994 to September 2008. We find a positive average hedge fund alpha in the cross-section for the majority of strategies and a positive and significant alpha for roughly half of all funds. Moreover, the alpha of three-quarter of the strategy indices is positive and significant in the time series. A comparison of a factor model in which the risk factors are selected based on a stepwise regression approach and the widely used factor model proposed by Fung and Hsieh (2004) reveals that the estimated alpha is robust with respect to the choice of the factor model. In contrast to prior research, we find no evidence of a decreasing hedge fund alpha over time. Moreover, based on our sample, we cannot confirm prior evidence pointing to capacity constraints in the hedge fund industry. 

Corporate Governance and Firm Value: International Evidence    
with Manuel Ammann and David Oesch
Journal of Empirical Finance, 2011, 18, 36-55
SSRN (ungated version)

Abstract:
In this paper, we investigate the relation between firm-level corporate governance and firm value based on a large and previously unused dataset from Governance Metrics International (GMI) comprising 6663 firm-year observations from 22 developed countries over the period from 2003 to 2007. Based on a set of 64 individual governance attributes we construct two alternative additive corporate governance indices with equal weights attributed to the governance attributes and one index derived from a principal component analysis. For all three indices we find a strong and positive relation between firm-level corporate governance and firm valuation. In addition, we investigate the value relevance of governance attributes that document the companies' social behavior. Regardless of whether these attributes are considered individually or aggregated into indices, and even when “standard” corporate governance attributes are controlled for, they exhibit a positive and significant effect on firm value. Our findings are robust to alternative calculation procedures for the corporate governance indices and to alternative estimation techniques. 

Ownership Structure and the Separation of Voting and Cash Flow Rights – Evidence from Switzerland
Applied Financial Economics, 2009, 19, 1453-1476
SSRN (ungated version)

Abstract:
This article analyses the relation between a firm's equity capital structure, managerial and outside block ownership, and firm value based on a unique and hand-collected sample of 545 observations on 174 Swiss firms over the period from 2002 to 2005. While previous papers concentrate either on managerial ownership or on blockholdings, which can, but need not be, managerial, this article distinguishes between the two and investigates their relative importance. This distinction turns out to be important. I find the probability that a firm has a dual-class structure to be positively related to managerial ownership, the ownership of the single largest shareholder, and inside blockholders more generally while negatively related to the ownership of ‘true’ outside blockholders such as listed companies, mutual and pension funds. Moreover, I present strong evidence that the aim of the dual-class structure is to secure the largest shareholder's and, more specifically, inside blockholders’ control over the firm. Most importantly, I find evidence that these inside controlling shareholders take advantage of the dual-class structure by extracting private benefits of control. 

Do Financial Conglomerates Create or Destroy Economic Value?   
with Ingo Walter
Journal of Financial Intermediation, 2009, 18, 193-216
SSRN (ungated version)

Abstract:
This paper investigates whether functional diversification is value-enhancing or value-destroying in the financial services sector, broadly defined. Based on a U.S. dataset comprising approximately 4060 observations covering the period 1985–2004, we report a substantial and persistent conglomerate discount among financial intermediaries. Our results suggest that it is diversification that causes the discount, and not that troubled firms diversify into other more promising areas. In addition, the discount applies to all financial services activity-areas with the exception of investment banking and is stable over different combinations of financial activity-areas with the exception of commercial banking units combined with insurance companies and/or investment banking activities. 

The Performance Persistence of Equity Long/Short Hedge Funds   
with  Samuel Manser
Journal of Derivatives and Hedge Funds, 2009, 15, 51-69
SSRN (ungated version)

Abstract:
Studies examining the persistence of hedge fund performance vary greatly in their conclusions owing to different methodologies, databases, investigation periods and performance measures. This paper does not consider various approaches to clarify the picture, but, instead, focuses on a particularly flexible one. Every period, hedge funds are sorted into portfolios according to characteristics in the last period, and the portfolios are then tracked for the next period. After the tracking period, the sorting is repeated. This approach has been used in the mutual fund literature by Hendricks et al 2 and Carhart,3 among others, and has several advantages. First, portfolio betas may be more stable than betas of individual funds because time-varying betas can offset each other on the portfolio level. This is particularly relevant for hedge funds: as they have fewer restrictions on borrowing, shorting, the use of derivatives and so on, they typically follow highly opportunistic strategies that lead to time-varying risk exposures. Secondly, beta measurement is more precise owing to diversification of idiosyncratic risk and long time series for the portfolio returns. Finally, suppose there is only a very small autocorrelation in fund returns. Given the high return variance, it is difficult to detect this correlation by looking at individual funds. As in the case of momentum strategies, we have to buy a portfolio of last period’s winners, not just one fund, to find persistence. 

Trust and Success in Venture Capital Financing – An Empirical Analysis with German Survey Data   
with  Stefan Duffner and Heinz Zimmermann
Kyklos, 2009, 62, 15-43
SSRN (ungated version)

Abstract:
This paper presents an empirical analysis of the role of trust in the relationship between venture capitalist and entrepreneur. Following the social sciences literature, we try to differentiate between trust as an affective, value-based category from confidence which is understood as a backward-looking, evidence-based mechanism. Using data from a survey among German venture capitalists conducted in 2003, we analyze 111 financing relationships from 75 respondents. We find a significant reciprocal positive relationship between trust and success. Other significant determinants of trust include the perceived quality of the entrepreneur and credibility of information (two proxy variables for measuring confidence), the perceived importance of reputation and the stage of the entrepreneur's venture. The level of monitoring and control is identified as a substitute for trust. We address a potential endogeneity of trust and success by estimating a system of two simultaneous equations by 3SLS and find the results to be robust. Finally, we use data from a second survey conducted in 2006 to assess whether trust predicts success. In fact, our results indicate that a higher level of trust in 2003 is associated with a higher success rate in 2006. 

The First- and Second-Hand Effect of Analysts' Stock Recommendations – Evidence from the Swiss Stock Market   
with  Philipp Schlumpf and Heinz Zimmermann
European Financial Management, 2008, 14, 962-988
SSRN (ungated version)

Abstract:
This paper empirically investigates the impact of both the first release of analysts' stock recommendations to a limited clientele and the subsequent dissemination of the same information in a major newspaper to a broader audience. For a sample of 1460 stock recommendations published in FuW, Switzerland's major financial newspaper, significant positive abnormal returns on the day of the original release of buy recommendations and on the day of publication in FuW are documented. Tests of the price pressure and information hypotheses reveal that analysts' recommendations contain new information, which is quickly incorporated in the stock prices on the first release of this information. In contrast, the statistically significant announcement effects associated with the subsequent publication can be primarily ascribed to price pressure in the underlying securities. 

Should Chairman and CEO Be Separated? Leadership Structure and Firm Performance in Switzerland   
with Heinz Zimmermann
Schmalenbach Business Review, 2008, 60, 182-204
SSRN (ungated version)

Abstract:
We investigate the valuation effects of leadership structure in switzerland where, in contrast to the U.S., a separation of the CEO and chairman functions is common. Consistent with the majority of prior research focusing on the U.S., we find no evidence of a systematic and significant difference in valuation between firms with combined and firms with separated functions. We also investigate whether the leadership structure is related to firm-level corporate governance characteristics. We find a curvilinear relation between leadership structure and managerial shareholdings that is similar to what we observe between firm value and managerial shareholdings. A possible interpretation is that the agency costs associated with a combined function are mitigated by a higher incentive alignment of the CEO/chairman through an adequate level of managerial shareholdings. 

Estimating the Cost of Executive Stock Options: Evidence from Switzerland   
with Wolfgang Drobetz and Pascal Pensa
Corporate Governance: An International Review, 2007, 15, 798-815
SSRN (ungated version)

Abstract:
It is often argued that Black-Scholes (1973) values overstate the subjective value of stock options granted to risk-averse and under-diversified executives. We construct a “representative” Swiss executive and extend the certainty-equivalence approach presented by Hall and Murphy (2002) to assess the value-cost wedge of executive stock options. Even with low coefficients of relative risk aversion, the discount can be above 50 per cent compared to the Black-Scholes values. Regression analysis reveals that the equilibrium level of executive compensation is explained by economic determinant variables such as firm size and growth opportunities, whereas the pay-for-performance sensitivity remains largely unexplained. Firms with larger boards of directors pay higher wages, indicating potentially unresolved agency conflicts. We reject the hypothesis that cross-sectional differences in the amount of executive pay vanish when risk-adjusted values are used as the dependent variable. 

Feasible Momentum Strategies – Evidence from the Swiss Stock Market   
with David Rey
Financial Markets and Portfolio Management, 2007, 21, 325-352
SSRN (ungated version)

Abstract:
While there is little controversy on the profitability of momentum strategies, their implementation is afflicted with many difficulties. Most important, chasing momentum can generate high turnover. Though there are already several attempts to make momentum strategies less expensive with respect to transaction costs, we go a step further in the simplification of momentum strategies. By restricting our sample to Switzerland’s largest blue-chip stocks and choosing only one winner and one loser stock, we find average returns to our momentum arbitrage portfolios of up to 44% p.a. depending on the formation and holding periods. While unconditional risk models are at odds with momentum profits, stock market predictability and time-varying expected returns explain a large part of the momentum payoffs, including the post-holding period behavior of the winner and loser stocks (overreaction and subsequent price correction). 

An Integrated Framework of Corporate Governance and Firm Valuation
with Stefan Beiner, Wolfgang Drobetz, and Heinz Zimmermann
European Financial Management, 2006, 12, 249-283
SSRN (ungated version)

Abstract:
Recent empirical research shows evidence of a positive relationship between the quality of firm-specific corporate governance and firm valuation. Instead of looking at one single corporate governance mechanism in isolation, we construct a broad corporate governance index and apply five additional variables related to ownership structure, board characteristics, and leverage to provide a comprehensive description of firm-level corporate governance for a representative sample of Swiss firms. To control for potential endogeneity of these six governance mechanisms, we develop a system of simultaneous equations and apply three-stage least squares (3SLS). Our results support the widespread hypothesis of a positive relationship between corporate governance and firm valuation. 

Working Papers

Financial Advice and Retirement Savings
with Daniel Hoechle, Stefan Ruenzi, and Nic Schaub

SSRN

Abstract:
We study the impact of financial advice on retirement savings. We document that advisors help clients to prepare for retirement by inducing them to take advantage of tax incentives offered on retirement accounts. Advisors particularly promote retirement funds as compared to savings accounts. After-tax returns of advised retirement fund investments exceed returns of likely counterfactual investments. We find no indication that adviser-induced contributions to retirement accounts lead to negative side-effects, such as reductions in other savings or liquidity constraints. Hence, we provide evidence of a bright side of financial advice. Furthermore, investments in retirement accounts increase bank profits, pointing towards a win-win situation. However, advisors do not in particular target clients that are at a higher risk of undersaving for retirement, such as female clients, clients with lower wealth, and less-educated clients.

Generalized Portfolio Sorts for Factor Validation
with Daniel Hoechle and Heinz Zimmermann
SSRN

Abstract:
Portfolio sorts are widely used in empirical asset pricing to identify firm characteristics that predict stock returns. However, such tests can conflate genuine characteristic-based predictability with persistent, firm-level heterogeneity. To address this limitation, we propose a Generalized Portfolio Sorts (GPS) model, which can exactly replicate results from all variants of conventional portfolio sorts, but can also be specified so that it separates a firm characteristic’s genuine predictive power from stable firm-level factors. We also derive a statistical test to detect whether return predictability arises from the sorting characteristic itself or from persistent, firm-level traits. Applied to a large set of proposed asset pricing predictors, we find that nearly half lose significance once persistent, firm-level heterogeneity is accounted for. The GPS-model thus strengthens factor validation, advances our understanding of the factor zoo, and provides a more robust foundation for empirical asset pricing tests.

How do Retail Investors Adapt to Exchange Rate Shocks?
with Martin Brown, Daniel Hoechle, and Lizet Alejandra Perez Cortes
SSRN

Abstract:
We study the impact of monetary policy on household finance in open economies. We examine the response of retail investors to a policy shock which led to (i) a sharp appreciation of the domestic currency, (ii) a significant increase in exchange rate volatility, and (iii) the introduction of a negative policy rate. Our analysis is based on monthly, account-level data covering bank deposits, securities holdings and trades for a large sample of affluent bank clients. The policy shock leads to a shift of assets away from fixed income securities towards domestic currency bank deposits and foreign currency risky securities. Wealthier clients display a stronger portfolio shift towards risky securities in foreign currency as they search for yield. Investor attention, as measured by trading activity and contacts with bank advisors, increases temporarily after the shock. 

As California Goes, So Goes the Nation? Board Gender Quotas and Shareholders' Distaste of Government Interventions
with Felix von Meyerinck, Alexandra Niessen-Ruenzi, and Steven Davidoff Solomon
European Corporate Governance Institute – Finance Working Paper No. 785/2021

Abstract:
In 2018, California became the first U.S. state to adopt a mandatory board gender quota for all firms headquartered in the state. In 2022, it became the first U.S. state to invalidate a board gender quota. We document large negative abnormal returns to the adoption of the gender quota for California firms and large spillover effects to non-California firms. We show that director labor market frictions are not the main driver of these effects and propose a novel explanation: Shareholders’ distaste of stakeholder-friendly government interventions. Consistently, we find that more stakeholder-friendly firms, measured by their ESG scores or presence of SRI funds among their shareholder base, react more positively to the California gender quota. We also find that California and non-California firms with higher sensitivity to regulatory uncertainty react more negatively to the quota’s adoption, and more positively to its invalidation. For non-California firms, the effects are concentrated among firms in states that are likely to follow California’s legislative lead.

Bankruptcy Prediction of Privately Held SMEs Using Feature Selection Models
with Florentina Paraschiv and Ranik Raaen Wahlstrom
SSRN

Abstract:
We test alternative feature selection methods for bankruptcy prediction and illustrate their superiority versus popular models used in the literature. We apply these methods to a comprehensive dataset of more than 1.8 million financial statements covering the entire universe of privately held Norwegian SMEs in 2006-2020. We find that input variables chosen by an embedded least absolute shrinkage and selection operator (LASSO) method yield the best in-sample fit, out-of-sample performance, and stability. This finding holds across different time periods, including the coronavirus crisis, and is robust to using either discrete hazard models with logistic regression or a deep artificial neural network in the estimation. We also study the implications of coronavirus governmental relief programs on bankruptcies and bankruptcy prediction and show that the size of compensation grants contributes to predicting bankruptcy during the coronavirus period. In a real-world simulation of a competitive credit market, we show that small differences in model performance can significantly impact bank profitability, with LASSO outperforming any other bankruptcy prediction model.