Miracle-dz/UniFAR-FTUs huggingface dataset:
Understanding the Information Content of Alternative Cost-of-Equity Proxies

We show that the implied cost of capital (ICC) and factor model-based proxies (FMPs) of cost of equity have negative (positive) association with corporate investment and external financing. ICCs show negative association with corporate investment and external financing by capturing the discount rate news. Such relationship is pronounced in firms with high private information and external finance dependence. By contrast, FMPs show positive association with corporate investment and external financing by capturing cash flow news which are pronounced in firms with low private information and external finance dependence. Our findings suggest that ICCs and FMPs convey distinctive information for corporate investment and financing decisions in different sets of firms.
Sequential Screening with Type-Enhancing Investment

Due to the well-known efficiency–rent extraction trade-off, the optimal mechanism in a pure screening environment (e.g., revenue maximization in auctions or cost minimization in procurement) typically calls for distortions in allocative efficiency when agents possess private information at the time of contracting. In this paper we introduce first-stage type-enhancing hidden investment to a standard sequential screening model of procurement, and find that (i) with convex investment cost, mitigation of allocative distortion must arise; and (ii) such mitigation can even be extreme with linear investment cost—procurement cost minimization must require social efficiency when the investment is sufficiently effective. (JEL D44, D82, H57)
The cross-herding of bond and equity markets

This paper examines cross-asset herding in US corporate bond and equity markets between January 2008 and December 2018. Our initial unconditional tests detect significant herding effects in speculative grade corporate bonds only. However, once we condition on market liquidity and volatility, we find significant asymmetric herding behavior in both markets and all credit rating portfolios. The results suggest that investors are inclined to collectively herd towards the market consensus during high market liquidity and low volatility days. Interestingly, the herding effects are more pronounced in corporate bonds in comparison to equities. More specifically, we document a positive relationship between herding and market liquidity, with the level of volatility intensifying the observed herding effects. We provide new empirical evidence of the existence of cross-asset herding spillovers, mainly from US corporate bonds to US equities. The direction of the cross-herding effect is time-period specific as it holds during the 2008 Global Financial Crisis period, but switches post-crisis from equity to corporate bonds.
King Solomon's Dilemma: An Experiment on Implementation in Iterative Elimination of Dominated Strategies

“King Solomon's Dilemma” is based on a biblical story that can be considered as an allocation problem for an indivisible good among two players. We experimentally compare the performance of the mechanism of Mihara (Japanese Economic Review, 63(3), 420 - 429, 2012) relative to a modified version of his mechanism that we propose. We find that the modified version performs relatively better than Mihara's mechanism in terms of: (1) the proportion of the “first-best” allocations, (2) the proportion of the right-player allocations, (3) “net mean efficiency,” and (4) players’ equilibrium strategies. Moreover, our experimental results suggest that players may find the best strategy in an ascending clock auction before participating in the auction.
Putting the Price in Asset Pricing

We propose a novel way to study asset prices based on price distortions rather than abnormal returns. We derive the correct identity linking current mispricing to subsequent returns, generating a price-level analogue to the fundamental asset pricing equation, E[MR^e]=0, used to study returns. Our empirical test reveals that the CAPM describes the cross-section of prices better than it describes expected short-horizon returns. Despite the improvement, significant mispricing remains. An interaction of book-to-market and quality provides a parsimonious model of CAPM mispricing that both long-term buy-and-hold investors and researchers disciplining models from the price perspective should prioritize.
Exchange Rate Risk, Banks' Currency Mismatches, and Credit Supply

This paper shows that banks have unbalanced on- and off-balance-sheet currency exposure, which affects the economy profoundly when the inherent exchange rate risk materializes. Even if banks’ net foreign currency exposure is zero in the aggregate, across-banks heterogeneity can lead to a reduction in economic activity: an adverse exchange rate shock induces losses from currency mismatches, leading to a contraction in credit supply as capital constraints bind. This hampers the ability of firms (especially small ones) to borrow and invest, including those unlikely to have had any exchange rate exposure to begin with. These findings highlight that exchange rate risk in combination with currency mismatches at banks is a source of shock propagation with severe macroeconomic implications.
Investor short-termism and real investment

Abstract Short-term traders could affect the informativeness of stock prices about long-run fundamentals. Less (more) short-termism may thus induce managers to rely more (less) on stock prices in real investment decisions. Supporting this notion, we show that the investment-to-price sensitivity is inversely related to two short-termism proxies (controlling for firm size): institutional churn and liquidity. We confirm this finding using decimalization and an increase in mutual fund disclosure frequency as exogenous shocks to short-termism. Furthermore, short-termism is associated with an increased likelihood of voluntary capital expenditure forecasts by managers, suggesting a greater tendency to solicit market feedback when short-termism is high.
Coordination and Fragility in Liquidity Provision

We study liquidity provision by dealers in a model of two-tier, fully decentralized asset markets. When economic fundamentals are high (low), dealers provide more (less) liquidity by holding more (less) inventory, the market is more (less) liquid, and interdealer trading is active (inactive). When fundamentals are medium, a dealer provides more liquidity if and only if other dealers do so, leading to multiple equilibria. Switching between equilibria implies non-fundamental fluctuations in dealer inventory holdings and market liquidity, providing a plausible explanation for empirically observed large liquidity deteriorations in various important asset markets that were not fully explained by fundamental shocks.
Asset Pricing with Consumption Frictions

We study asset pricing with consumption frictions. Frictions in consumption include adjustment costs which prevent a consumer from adjusting consumption freely, due to transaction costs, commitments, search and learning costs, and psychological costs. The stochastic discount factor is determined by a marginal investor's marginal utility of adjustable consumption, and has the same form as that of the external habit model, similarly to the models with stock market non-participation. We next identify a potentially important source of risk for asset pricing: simultaneous adjustments of frictional consumption by a large number of population in the economy, which can have a large impact on interest rates. This risk is present neither in the habit model nor in other models, and provides another reason why governments and central banks are much concerned about households' consumption. However, the risk does not affect the market price of risk. We investigate the long-term behavior of asset prices, and show that equity strips have no excess volatility over zero-coupon bonds in the long run, if the stochastic discount factor admits the Hansen-Scheinkman decomposition with appropriate conditions.
Competition and Misconduct

Misconduct is widespread in Finance alongside other industries. Mis-selling, mis-representation and negligence harm consumers, or society, while raising profits. I develop a model in which managers are ethical. Managers must find a balance between their ethics, the actions which maximise their profits, any risk of regulatory sanction, and risk of reputational cost. Market structure raises two issues. First concentrated markets allow managers to capture large rents from small levels of misconduct, hurting many people only a little. But in dispersed competitive markets profits may be meagre without misconduct. Modelling these competing tensions theoretically I characterise when competition encourages misconduct.
Sharing Risk to Avoid Tragedy: Informal Insurance and Irrigation in Village Economies

I present a model of joint co-operation over irrigation and risk sharing in presence of limited commitment constraints. I estimate the framework to the setting of three village economies in rural India. The implied dynamics are validated by non-targeted empirical evidence and show that if access to irrigation can be regulated by villagers, the two institutions reinforce each other. However, if irrigation is non-excludable (as is the case with provision by central authorities), such investments harm local co-operation. Counterfactual experiments quantify mutual reinforcement between the two institutions and gains attainable by replacing the government-owned irrigation.
Optimal Orchestration of Rewards and Punishments in Rank-Order Contests

We allow negative prizes and investigate effort-maximizing prize design in rank-order contests. Endogenous participation arises due to less-efficient types' incentive to avoid punishments. If prize sequences are independent of the number of entrants, the optimum features winner-take-all for the best performer coupled with a potential punishment for the worst performer only when all contestants participate. If prize sequences can be contingent on the number of entrants, the optimum integrates winner-take-all and egality: When all contestants participate, all non-top performers are penalized by a budget-augmenting negative prize and the top performer collects the augmented prize budget; otherwise, an egalitarian rule applies.
The Blessing and Curse of Deregulation

Deregulation affects incumbent firms through entry threats (a curse) and entry opportunities (a<br>blessing). To separate these effects, we construct novel network-based measures of U.S. state-level bank deregulation intensity that allow us to isolate the blessing- and curse-related effects of deregulation on incumbents’ outcomes for the first time in the literature. In contrast to existing bank<br>deregulation studies, we find that increased competition leads to higher deposit funding costs and<br>a reduction in banks’ net interest margins and profitability. In response, banks increase their risk-taking, shift their business models, and become more likely to be acquired. Our framework and<br>results bridge multiple literatures and support early bank deregulation theories in which reductions in bank charter values lead to increased risk-taking. <br>
A note on great inflation, robust monetary policy, and TANK

This note investigates how model uncertainty influences economic fluctuation in a two-agent New Keynesian (TANK) model. We reveal that, as the fraction of non-asset holders rises, the effects of the model uncertainty on the inflation rate become larger. This leads to large fluctuations of the inflation rate in response to the cost-push shock. Our results show that the fluctuation of the inflation rate can be high even when monetary policy is appropriate for the economy.
The Fu (2009) Positive Relation between Idiosyncratic Volatility and Expected Returns Is Due to Look-Ahead Bias

Expected idiosyncratic volatility and its relation to the expected return of Fu (2009) can be closely replicated, but only when we include all information up to t when estimating the idiosyncratic volatility of t. Since look-ahead bias may exist, we re-estimate the expected idiosyncratic volatility using information only up to t−1. We find no significant relation between idiosyncratic volatility and return, and our results are robust to the sample extended to before and after that of Fu (2009). Our findings are consistent with the fact that idiosyncratic risk is not priced.
The Numeraire Effect in Initial Coin Offerings

There is a high correlation between the returns of cryptocurrencies and those of utility tokens, which are claims to products and services yet to be developed that are issued through ICOs and traded on crypto-exchanges. I demonstrate the presence of a numeraire effect in the pricing of these tokens and present evidence that it is driven by a combination of group thinking and representativeness bias. Investors mistakenly overestimate the probability that a cryptocurrency-denominated token is issued by a blockchain firm, and thus believe the fundamental value of the token is correlated with that of Bitcoin. I show that a 1% increase in the return on Bitcoin during the month before a token first lists on a crypto exchange predicts a 5% higher ICO return for a cryptocurrency-denominated token than for a fiat-currency-denominated token. If a token is denominated in a cryptocurrency on one exchange and its otherwise identical twin is denominated in a fiat currency on another exchange, then a 1% increase in the cryptocurrency return relative to the fiat currency predicts a 60 bp divergence in their prices. Consistent with being driven by a combination of group thinking and representativeness bias, the numeraire effect is more pronounced for tokens with more complex business plans. Experimental evidence corroborates these empirical findings and suggests that the numeraire effect is present in other asset prices as well and can explain home-currency bias. The combination of high volatility and numeraire effects undermines the ability of cryptocurrencies to serve as units of account.
What’s my Share? The Use of Borrower Accounting Reports by Loan Syndicate Participants

Participant lenders in syndicated loans depend on information collected by the lead lender for borrower screening and monitoring, as the lead lender is primarily responsible for ex-ante due diligence in evaluating borrowers. This gives rise to both moral hazard and adverse selection concerns within the syndicate. We investigate whether participant lenders use borrower accounting reports to mitigate these information frictions. We find that participant lenders’ SEC EDGAR searches of borrower filings are positively associated with their shares of the syndicated loan, consistent with mitigation of intra-syndicate information asymmetry. This association is stronger for searches of current period filings and 10-K/Qs, and weaker when the lead lender is more reliable and when the borrower’s information environment is richer. This novel evidence enhances our understanding of the role of accounting information in facilitating deal formation in syndicated loan markets.
How does managerial expropriation affect equity volatility? Theory and worldwide evidence∗

This paper investigates how the degree of managerial expropriation affects equity volatility of individual firms. We develop a corporate finance model with endogenous financing policies and manager-shareholder agency conflicts, and identify two countervailing forces. First, in response to stronger corporate governance, a reduction in managerial expropriation increases equity valuation and decreases equity volatility. Second, lower managerial expropriation induces managers to take on more debt, which pushes up leverage and equity volatility. We show that the valuation effect dominates, and equity volatility thus drops with corporate governance improvements. In the cross-section, this effect is especially strong for financially constrained firms, as they face greater difficulty in adjusting their capital structure. We confirm these theoretical predictions with a difference-in-difference specification exploiting the staggered passage of governance reforms on a sample of 33,831 firms from 48 countries over the 1990-2016 period. JEL Codes: G12, G32, G34
What’s in a 'Username'? Examining the Effect of Perceived Anonymity on Herding in Crowdfunding

This research examines the role of perceived anonymity in shaping herding behavior in crowdfunding markets. Drawing on theories from social psychology literature, we argue that a lender forms different credibility perceptions toward preceding peers based on their perceived anonymity state; she then uses such perceptions to adjust her herding momentum toward them. Using a unique data set collected from a leading debt-based crowdfunding platform, we classify individuals’ usernames as either anonymous or real-seeming, with the latter referring to a username that seems to reveal one’s legal name. The results show that successors demonstrate weaker herding momentum toward predecessors who are presented with real-seeming usernames than anonymous ones. This finding, which we attribute to a lower extent of perceived credibility derives from a non-conforming behavior, challenges the conventional wisdom that considers anonymity a negative factor for source credibility. We further show that the uncovered positive effect of perceived anonymity on herding is accentuated in the early stage of the fundraising period; nevertheless, we find no such discrepancies between listings that are assigned with high-risk and low-risk credit grades. Our study contributes to the literatures dealing with anonymity and herding in online environments.
Managers' Productivity and Recruitment in the Public Sector: The Case of School Principals

We study whether differences in management can explain variation in productivity and how more effective managers can be recruited in absence of high-powered incentives. To investigate this, we first extend the canonical teacher value-added model to account for school principals, and we document substantial variation in their ability to improve students’ learning. Teachers’ survey responses and quasi-experimental designs based on changes in school management validate our measure of principal effectiveness. Then, we leverage the timing of adoption of a civil service reform and show that despite having relatively rigid wages, public schools were able to attract more effective managers after increasing the competitiveness and transparency of their personnel selection process.
Dynamic Choice with Volitional Attention

Dynamic choices of cognitively constrained individuals have been ascribed, by the rational inattention theory, as being a filtering problem, in which the attentional intensity is consciously elected. Human attention, however, is not merely of voluntary intensity; it is rather of volitional placement nature. In this article, I study the implications of a dynamic theory of volitional attention describing individuals who choose among the alternatives that are induced by their attentional choices. Firstly, a consumer search application using US scanner data indicates that attentional choices are characterized by complementarities. Costs do not exclusively depend on the cardinality of consideration sets, but also on experience and similarities between considered items. Neglecting, thereby, attentional placement aspects potentially leads to misidentification of preference characteristics. Secondly, participation inertia in financial markets is revisited under the scope of volitional attention and a cultural-based argument of why it can be optimal not to participate is provided. <br>
Sabotage and self-promotion: How strategic behaviors undermine idea selection

Generating and selecting ideas are fundamental tasks for most organizations. Thus designing and managing these processes and the associated challenges is vital. We study how idea generators employ two forms of strategic behavior---sabotage and self-promotion---to gain personal advantages during idea evaluation. Based on predictions from a theoretical model we empirically investigate the patterns of how individuals of heterogeneous ability engage in different strategic behaviors and how this affects the organization's ability to select the best ideas. Using field data on 38 million peer evaluations of more than 150,000 ideas across 75,000 individuals, we find that the use of strategic behaviors differs significantly depending on the ability of idea generators. While self-promotion is used heavily by all individuals, sabotage is committed by high-ability individuals who target other high-ability individuals. We investigate the important role of incentives and costs for the emergence of strategic behaviors and rule out alternative explanations using three natural experiments. Looking at the aggregate outcomes of these micro-patterns we find evidence that strategic behavior systematically threatens the ability of organizations to detect the most promising ideas. Our findings have broad implications for the literature on organizing innovation processes and especially the design of incentives as we uncover important spillovers via the usually hidden aspect of strategic behaviors.
Bank Relationship and Contractual Flexibility: Evidence from Covenant Enforcement

This paper investigates how banks utilize soft information to provide contractual flexibility in loan covenant enforcement. We find that relationship lenders are significantly less likely to enforce material covenant violations when borrowers breach financial covenants. In addition, covenant-breaching borrowers with such relationships are less likely to experience raises in loan interest rates, to reduce subsequent financing and investment activities, and to file for bankruptcy. The mitigation of information asymmetry along relationship lending, rather than alternative explanations, is the underlying mechanism. Our findings imply that soft information accumulated during lending relationship is vital for banks to provide contractual flexibility.
Common Ownership and Innovation Efficiency

How does common ownership affect innovation? We study this question using project-level data on pharmaceutical startups and their venture capital (VC) investors. We find that common VC ownership reduces duplication of R&D in patent races. Specifically, common ownership leads VCs to shut down lagging drug projects, withhold funding from lagging startups, and redirect those startups' innovation. These results support theories dating back to Loury (1979): By coordinating R&D efforts across firms in a patent race, a common owner can reduce excess R&D. Consistent with common ownership improving innovation efficiency, common ownership rates are positively correlated with the ratio of R&D output to funding.
Distorted Stock Prices, Behavioral Bias, and Stock Splits*

Distorted prices misguide managerial incentives and resource allocation. Distorted prices may occur when firms’ stock prices are near their 52-week highs because investors tend to perceive the stocks as relatively overvalued and are reluctant to bid prices higher even if new information warrants it. We show that managers can deal with the distorted price problem using stock splits, which call investor attention and induce brokerage houses to produce more firm-specific information. Consistent with our argument, the firms’ likelihood of engaging stock splits increases with CEO wealth-performance sensitivity, and their investment-price sensitivity increases following stock splits. Our findings suggest that managers have contractual incentives to use stock splits to correct price distortion induced by investors’ 52-week high anchoring bias and to enhance stock prices’ informational roles in resource allocation. This version: January 21, 2021 JEL classification: D82; G12; G14; G41; M41