Varun Sharma

Finance Ph.D. Student, London Business School (LBS)

Research Areas:

Financial Intermediation; Empirical Asset Pricing; Climate Finance; Insurance; Fixed Income

CV SSRN Google Scholar

The Product Market Effects of Index Inclusion (Job Market Paper)

Invited by The Review of Financial Studies for dual submission (Texas Finance Festival)

AQR Fellowship Award for Research Excellence, 2021 (Finalist)

Funding support from Wheeler Institute

Abstract: I investigate how a firm's inclusion in an index affects its product market outcomes. I compile a micro-level dataset that matches firms' investors with firms' products and customers. Using a plausibly exogenous change in firms index membership, which increases the proportion of firms' equity held by benchmark-constrained funds that track the index, I show that firms (i) reduce product prices, especially for products with lower market share, (ii) generate higher sales, but at the cost of lower profitability, and (iii) introduce new products and diversify. Furthermore, with a higher proportion of such investors, large firms get a competitive advantage and sell similar products 7% cheaper, resulting in a 30% gain in market share. To shed light on the mechanism, I provide evidence that inelastic demand from benchmark-constrained investors allows firms to raise more equity and invest in expanding their customer base and product portfolio. A general equilibrium model with product-level habits and heterogeneous firms further corroborates these findings. These results show that benchmarking can increase product affordability but potentially at the cost of higher market concentration.

Conferences and Seminars: Northern Finance Association 2021 (Ph.D. Session); International Risk Management Conference 2021; Nova Ph.D. Final Countdown; Transatlantic Doctoral Conference 2021; University of Cambridge Judge Business School; Inter-Finance Ph.D. Seminar; London Business School;

The Real Effects of Environmental Activist Investing

Co-author: S Lakshmi Naaraayanan (LBS) and Kunal Sachdeva (Rice University)

Best Paper, European Investment Forum (Cambridge), 2021

Moskowitz Prize for Best Paper in Sustainable and Responsible Investing, 2020

Best Paper in Corporate Finance and Financial Institutions at the FMA European Conference, 2021

Recipient of Research Grant from the Pacific Center for Asset Management (PCAM), UC San Diego

Semi-finalist in the John L. Weinberg/IRRCI Research Award

Semi-finalist, Best Paper, FMA

Media Coverage: Financial Times; ProMarket (Stigler Center at the University of Chicago Booth School of Business); International Pensions Europe

Abstract: We study the real effects of environmental activist investing. Using plant-level data in a quasi-experimental setting, we find that firms targeted by environmental activist investors reduce their toxic releases, greenhouse-gas emissions, and cancer-causing pollution through preventative efforts. Improvements in air quality within a one-mile of targeted plants suggest potentially important externalities to local economies. We provide evidence supporting the external validity of environmental activism while also ruling out reporting biases, forms of selection, and other alternative hypotheses. Overall, our study suggests that engagements are an effective tool for long-term shareholders to address climate change risks.

Conferences: AFA (American Finance Association) 2022*; SFS Cavalcade 2021; Weinberg Center - Corporate Governance Symposium 2021; Political Economy of Finance Conference 2020 (Chicago Booth); European Finance Association (EFA) 2020; 2021 European Investment Forums; FMA Annual Meeting 2020; UBC Winter Finance Conference 2020; Texas Finance Festival 2020; World Symposium on Investment Research 2020; ADBI-JBF-SMU Joint Conference on Green and Ethical Finance; Annual Mid-Atlantic Research Conference (MARC); FMA Europe; European Winter Finance Conference; Mid-west Finance Association 2021; ISB Summer Conference 2020; Northern Finance Association 2020; GRASFI 2020 (Columbia); Wellington Finance Summit 2018; Finance on Cloud 2021; Asia-Pacific Corporate Finance Online Workshop 2021; IRMC 2020;

Institutional Corporate Bond Demand

Co-author: Lorenzo Bretscher (LBS), Lukas Schmid (USC Marshall), and Ishita Sen (Harvard Business School)

Invited by The Review of Financial Studies for dual submission (Texas Finance Festival)

Recipient of Research Grant from INQUIRE Europe

Abstract: The corporate bond market, dominated by institutional players such as insurance companies, pension funds, and mutual funds, is a critical source of funding for U.S. corporations. We assess the impact of shocks to financial institutions on the costs of debt financing, such as credit spreads, by estimating an equilibrium demand-based corporate bond pricing model. To that end, we first compile a rich novel dataset connecting institutional investors’ holdings to corporate bond characteristics and estimate their equilibrium demand functions. We find significant heterogeneity in demand elasticities across major institutional investors. With low interest rates, mutual funds increasingly seek liquidity in corporate bond markets, with short investment horizons and high demand elasticities, akin to a reaching for yield, which is provided by insurance companies with inelastic demand. In counterfactual equilibrium simulations, we evaluate the corporate bond pricing implications of i) mutual fund fragility and bond fire sales, ii) monetary policy tightening through rising rates, and iii) a tapering of the Fed’s corporate credit facility, among others. While the latter’s effects appear modest, our model predicts substantial disruptions in corporate bond prices for the former two scenarios through shifts in institutional demand. In equilibrium, such disruptions are reflected in the real economy through firms’ financing decisions. Our model thus emphasizes the composition of institutional demand as an important state variable for corporate bond pricing.

Conferences: AFA (American Finance Association) 2022*; CICF 2021;

Internal Models, Make Believe Prices, and Bond Market Cornering

Co-author: Ishita Sen (Harvard Business School)

Abstract: Exploiting position-level heterogeneity in regulatory incentives to misreport and novel data on regulators, we document that U.S. life insurers inflate the values of corporate bonds using internal models. We estimate an additional $9-$18 billion decline in regulatory capital during the 2008 crisis, i.e., a 30% greater decline than what was reported. Supervision helps dissuade misreporting, but only when close pricing benchmarks exist. Insurers, in response, strategically shift asset selection toward bonds where price verification is harder and corner small bonds. Our findings have consequences for assessing the fragility of financial institutions and for understanding the price discovery of corporate bonds.

Conferences: WFA (Western Finance Association) 2021; EFA (European Finance Association) 2021; FIRS 2021; NBER Insurance Workshop; WFA-CFAR Conference (Washington University in St. Louis); Eastern Finance Association 2021; SGF Conference; AFFECT; TADC; Southern Finance Association 2021*; Northern Finance Association 2021; FMA; Harvard-MIT Financial Economics Workshop; EFMA 2021; AFA 2020 (Poster Session);

Is Firm-Level Political Exposure Priced?

Co-author: Evgenii Gorbatikov (LBS), Laurence van Lent (Frankfurt), Narayan Naik (LBS), and Ahmed Tahoun (LBS)

Abstract: The effect of economy-wide political uncertainty on stock market returns is well documented in the literature. However, in order to take a stand on the relation between firm-specific political risk and the cross-section of stock returns, we need a measure independent of those returns. Using a machine-learning based firm-specific measure of political risk, we show that political risk is priced in the cross-section of stock returns. On average, a one standard deviation increase in a firm's political risk is associated with a 0.5% to 1.0% increase in their annual returns. Using a related non-price measure that captures the mean of a firm's political-shocks, we disentangle whether the asset pricing implications of political risk stem from news about the discount rate or future cash flows. We further show that political risk is priced only for firms that do not actively manage political risk. Finally, using a natural language processing (NLP) enabled measure of risk associated with political topics, we examine how (and to what extent) sub-components are priced.

Drivers of the investments that make our homes greener

Co-author: Nuno Clara (Duke), João F. Cocco (LBS), and S Lakshmi Naaraayanan (LBS)

Abstract: The operation of residential buildings (our homes) is responsible for roughly 22% of the global energy consumption and 17% of the CO2 emissions. We use a large data set to study the investments that improve the energy efficiency and environmental performance of homes. Investments in elements that require larger capital expenditures and yield lower annual savings per pound of capex are undertaken less frequently. A regulation that requires privately rented properties to satisfy a minimum energy efficiency standard generates significant rental sector investments, similar in nature to those undertaken by owner-occupiers. However, the environmental gains of rental properties are limited by their use of more polluting energy sources. Regulatory interventions that target carbon emissions directly may be more effective in tackling the climate challenge.

Works in Progress

How do Managers Learn about their Skills

Co-author: Vikas Agarwal (GSU) and Narayan Naik (LBS)

Political Economy of Climate Change (video)

Recipient of Research Grant from Wheeler Institute

* Scheduled