Finance Down Under - Faculty of Business and Economics

Department of Finance
Finance
Down
Under
Building on the Best from
the Cellars of Finance
March 5-7, 2015
Department of Finance
Finance
Down
Under
Building on the Best from
the Cellars of Finance
March 5-7, 2015
Organised by
Department of Finance
Faculty of Business and Economics
The University of Melbourne
Welcome to Finance
Down Under (FDU) 2015
The Department of Finance in the Faculty of Business and Economics at the University of
Melbourne welcomes everyone to its annual Finance Down Under conference.
Submissions again reached record levels in both quantity and quality this year, and we selected only 20
papers from among more than 250 submissions. These 20 papers from all areas in finance (Corporate
Finance, Asset Pricing, Investments, and Market Microstructure) received high ratings from the
157-member program committee, and we have a nice group of academics who will provide discussions
on the accepted papers.
Our unique format includes a special symposium built around ‘vintage’ work in finance that has withstood
the test of time and continued to inspire current research. This year, FDU will celebrate the 25 years of
research influenced by the 1990 publication of three classic papers by Andy Lo and A. Craig MacKinlay:
“When are contrarian profits due to stock market overreaction?”; “Data-snooping biases in tests of
financial asset pricing models”; and “An econometric analysis of nonsynchronous trading”. We are
honoured to have Professor A. Craig MacKinlay as a keynote speaker, as well as keynote presentations
by Professors Maureen O’Hara, Lubos Pastor and Allan Timmermann. We have also selected two papers
for Saturday’s special session in honour of Lo and MacKinlay’s classic papers.
Finance Down Under 2015 Building on the Best from the Cellars of Finance 1
FINANCE DOWN UNDER 2015:
Building on the Best from the Cellars of Finance
PROGRAM SUMMARY
Thursday, March 5, 2015 (Melbourne Zoo)
5:00 pm – 7:00 pm
Wine Reception (Rainforest Room)
Welcome Speech: John Handley, University of Melbourne
Keynote Speech: Maureen O’Hara, Cornell University
Friday, March 6, 2015 (Melbourne Cricket Ground)
9:30 am – 10:00 am
Registration and Morning Coffee (Registration Desk)
10:00 am – 11:15 am
Parallel Sessions I (Jack Ryder Rooms and Premiership Club Room)
11:15 am – 12:00 pm
Keynote Speech: A. Craig MacKinlay, University of Pennsylvania
12:00 pm – 1:30 pm
Lunch (Premiership Club Room)
1:30 pm – 2:45 pm
Parallel Sessions II (Jack Ryder Rooms and Premiership Club Room)
2:45 pm – 3:15 pm
Afternoon Tea
3:15 pm – 4:30 pm
Parallel Sessions III (Jack Ryder Rooms and Premiership Club Room)
4:45 pm – 5:30 pm
MCG Guided Tour
5:45 pm – 7:45 pm
Wine Reception (Premiership Club Room)
Keynote Speech: Allan Timmermann, University of California San Diego
Saturday, March 7, 2015 (The Spot Building: Copland Theatre, Level B1)
9:00 am – 10:00 am
Coffee and tea served
10:00 am – 11:15 am
Special Session
11:15 am – 12:00 pm
Keynote Speech: Lubos Pastor, University of Chicago
12:00 pm – 1:00 pm
Lunch (Dean’s Boardroom, Level 12, The Spot Building)
1:00 pm – 10:00 pm
Food and Wine Experience (Yarra Valley)
Best Paper Award and Announcement
2 Finance Down Under 2015 Building on the Best from the Cellars of Finance
Parallel
Sessions I
March 6,
10:00 am –
11:15 am
Parallel
Sessions II
March 6,
1:30 pm –
2:45 pm
Parallel
Sessions III
March 6,
3:15 pm –
4:30 pm
Premiership Club Room
Jack Ryder Room 1
Jack Ryder Room 2
Theoretical Asset Pricing in
the Presence of Diverse,
Disparate, Divergent
Decision Makers
Overinvestment,
Underinvestment, Just Right
Investment
Financial Decision Making:
Without Gambling, I Would
Not Exist – Hunter S.
Thompson
Value or Growth? Pricing of
Idiosyncratic Cash-Flow Risk
with Heterogeneous Beliefs
Retail Traders and the
Competitive Allocation of
Attention
Empirical Asset Pricing with
K Factors: 1<K<3, K is an
Integer
Does Short Selling Discipline
Overinvestment?
The Impact of Covenant
Violations on Corporate
Investment in R&D
Theoretical Corporate
Finance: The Short and the
Long Run of It
Growth Expectations,
Dividend Yields, and Future
Stock Returns
Is Market Timing Good for
Shareholders?
Linking Cross-Sectional and
Aggregate Expected Returns
Corporate Policies with
Temporary and Permanent
Shocks
Funds Finishing First
Empirical Corporate Finance:
The Long and the Short Run
of It
Mutual Fund Competition,
Managerial Skill, and Alpha
Persistence
Managerial Myopia and Debt
Maturity
The Freedom of Information
Act and the Race Towards
Information Acquisition
Do Long-Term Investors
Improve Corporate Decision
Making?
Fooled By Randomness?
Financial Decision-Making
Under Model Uncertainty
When Saving is Gambling
Containing Contagion
Counterparty Risk and the
Establishment of the New
York Stock Exchange
Clearinghouse
Tracing Out Capital Flows:
How Financially Integrated
Banks Respond to Natural
Disasters
Market Microstructure
High Frequency Trading and
the 2008 Short Sale Ban
Shades of Darkness: A
Pecking Order of Trading
Venues
Special Session: Overreacting to Nonsynchronous Data-snooping
(The Spot, Basement Theatre)
March 7,
10:00 am –
11:15 am
Is Aggregate Idiosyncratic Risk Priced? Follow the Bid-Ask Bounce
Asset Pricing with Index Investing
4 2015 Building on the Best from the Cellars of Finance 3
Finance Down Under
PROGRAM DETAILS
FRIDAY, March 6, 2015, 10:00 am – 11:15 am
Theoretical Asset Pricing in the Presence of Diverse, Disparate, Divergent Decision Makers – Premiership
Club Room
Session Chair: Andrea Lu, University of Melbourne
Value or Growth? Pricing of Idiosyncratic Cash-Flow Risk with Heterogeneous Beliefs
Michael F. Gallmeyer, University of Virginia
Hogyu Jhang, Georgia Institute of Technology
Hwagyun Kim, Texas A&M University
Retail Traders and the Competitive Allocation of Attention
Shaun W. Davies, University of Colorado, Boulder
Discussants:
Qi Zeng, University of Melbourne
Filippo Massari, University of New South Wales
Overinvestment, Underinvestment, Just Right Investment – Jack Ryder Room 1
Session Chair: Sturla Fjesme, University of Melbourne
Does Short Selling Discipline Overinvestment?
Eric C. Chang, University of Hong Kong
Tse-Chun Lin, University of Hong Kong
Xiaorong Ma, University of Hong Kong
The Impact of Covenant Violations on Corporate Investment in R&D
Sudheer Chava, Georgia Institute of Technology
Vikram K. Nanda, Rutgers Business School
Steven Chong Xiao, Rutgers Business School
Discussants:
Garry Twite, University of Melbourne
Jordan Neyland, University of Melbourne
Financial Decision Making: Without Gambling, I Would Not Exist – Hunter S. Thompson – Jack Ryder
Room 2
Session Chair: André Gygax, University of Melbourne
Fooled By Randomness? Financial Decision-Making Under Model Uncertainty
Elise Payzan-LeNestour, University of New South Wales
When Saving is Gambling
J. Anthony Cookson, University of Colorado, Boulder
Discussants:
Joshua Shemesh, University of Melbourne
Carsten Murawski, University of Melbourne
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4 Finance Down Under 2015 Building on the Best from the Cellars of Finance
FRIDAY, March 6, 2015, 1:30 pm – 2:45 pm
Empirical Asset Pricing with K Factors: 1<K<3, K is an Integer – Premiership Club Room
Session Chair: Joachim Inkmann, University of Melbourne
Growth Expectations, Dividend Yields, and Future Stock Returns
Zhi Da, University of Notre Dame
Ravi Jagannathan, Northwestern University
Jianfeng Shen, University of New South Wales
Linking Cross-Sectional and Aggregate Expected Returns
Serhiy Kozak, University of Michigan
Shrihari Santosh, University of Maryland
Discussants:
Federico Nardari, University of Melbourne
Antonio Gargano, University of Melbourne
Theoretical Corporate Finance: The Short and the Long Run of It – Jack Ryder Room 1
Session Chair: Ali Akyol, University of Melbourne
Is Market Timing Good for Shareholders?
Ilona Babenko, Arizona State University
Yuri Tserlukevich, Arizona State University
Pengcheng Wan, Arizona State University
Corporate Policies with Temporary and Permanent Shocks
Jean-Paul Decamps, Toulouse School of Economics
Sebastian Gryglewicz, Erasmus University
Erwan Morellec, Swiss Finance Institute
Stephane Villeneuve, Toulouse School of Economics
Discussants:
Neal Galpin, University of Melbourne
Hae Won (Henny) Jung, University of Melbourne
Containing Contagion – Jack Ryder Room 2
Session Chair: Vidhan Goyal, HKUST
Counterparty Risk and the Establishment of the New York Stock Exchange Clearinghouse
Asaf Bernstein, Massachusetts Institute of Technology
Eric N. Hughson, Claremont McKenna College
Marc D. Weidenmier, Claremont McKenna College
Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters
Kristle R. Cortés, Federal Reserve Bank of Cleveland
Philip E. Strahan, Boston College
Discussants:
Spencer Martin, University of Melbourne
Lei Zhang, Nanyang Technological University
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Finance Down Under 2015 Building on the Best from the Cellars of Finance 5
FRIDAY, March 6, 2015, 3:15 pm – 4:30 pm
Funds Finishing First – Premiership Club Room
Session Chair: Allaudeen Hameed, National University of Singapore
Mutual Fund Competition, Managerial Skill, and Alpha Persistence
Gerard Hoberg, University of Maryland
Nitin Kumar, Indian School of Business
Nagpurnanand R. Prabhala, University of Maryland
The Freedom of Information Act and the Race Towards Information Acquisition
Antonio Gargano, University of Melbourne
Alberto G. Rossi, University of Maryland
Russ R. Wermers, University of Maryland
Discussants:
Juan Sotes-Paladino, University of Melbourne
Oliver Boguth, Arizona State University
Empirical Corporate Finance: The Long and the Short Run of It – Jack Ryder Room 1
Session Chair: Ning Gong, University of Melbourne
Managerial Myopia and Debt Maturity
Indraneel Chakraborty, Southern Methodist University
Andrew MacKinlay, Southern Methodist University
William F. Maxwell, Southern Methodist University
Do Long-Term Investors Improve Corporate Decision Making?
Jarrad Harford, University of Washington
Ambrus Kecskes, York University
Sattar Mansi, Virginia Tech
Discussants:
Stefan Petry, University of Melbourne
Jeffrey Harris, American University
Market Microstructure – Jack Ryder Room 2
Session Chair: Carole Comerton-Forde, University of Melbourne
High Frequency Trading and the 2008 Short Sale Ban
Johnathan Brogaard, University of Washington
Terrence Hendershott, University of California - Berkeley
Ryan Riordan, Queen’s University
Shades of Darkness: A Pecking Order of Trading Venues
Albert J. Menkveld, VU University Amsterdam
Bart Z. Yueshen, INSEAD
Haoxiang Zhu, Massachusetts Institute of Technology
Discussants:
Bryan Lim, University of Melbourne
Zhuo Zhong, University of Melbourne
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6 Finance Down Under 2015 Building on the Best from the Cellars of Finance
SATURDAY, March 7, 2015, 10:00 am – 11:15 am
Special Session: Overreacting to Nonsynchronous Data-snooping – The Spot, Copland Theatre
Session Chair: Burton Hollifield, Carnegie Mellon University
Is Aggregate Idiosyncratic Risk Priced? Follow the Bid-Ask Bounce
David A. Lesmond, Tulane University
Yihua Zhao, Tulane University
Asset Pricing with Index Investing
Georgy Chabakauri, London School of Economics and Political Science
Oleg Rytchkov, Temple University
Discussants:
Thijs van der Heijden, University of Melbourne
Vincent Grégoire, University of Melbourne
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Finance Down Under 2015 Building on the Best from the Cellars of Finance 7
BIOGRAPHY OF KEYNOTE SPEAKERS
A. Craig MacKinlay
Joseph P. Wargrove Professor of Finance, Wharton Business School, University of Pennsylvania.
A former member of the Board of Directors of the American Finance Association
and the NASD Economic Advisory Board, Craig's research interests include
empirical implementation and validation of asset pricing models, measuring
investment performance, pricing of futures contracts, microstructure of
financial markets, assessment of credit risk, and statistical methods in finance.
In addition to teaching, he is also a Research Associate of the National Bureau of Economic Research.
Craig is the co-author of two books, the Econometrics of Financial Markets and A Non-Random Walk
Down Wall Street.
https://fnce.wharton.upenn.edu/profile/955/
Maureen O’Hara
Robert W. Purcell Professor of Finance, Johnson Graduate School of Management, Cornell
University
Maureen O’Hara is the Robert W. Purcell Professor of Finance at the Johnson
Graduate School of Management, Cornell University. She holds degrees from
the University of Illinois (B.S. Economics), and Northwestern University (M.S.
Economics and Ph.D. Finance), and Honorary Doctorates from Facultés
Universitaires Catholiques à Mons (FUCAM), Belgium and Universität Bern,
Switzerland.
Professor O'Hara's research focuses on issues in market microstructure, and she is the author of
numerous journal articles as well as the book Market Microstructure Theory (Blackwell: 1995). Her most
recent research looks at the role of toxicity in affecting liquidity in high frequency markets. Dr. O'Hara
also publishes widely on a broad range of topics including banking and financial intermediaries, law and
finance, and experimental economics. Professor O’Hara has served as President of the American Finance
Association, the Western Finance Association, the Financial Management Association, the Society for
Financial Studies and the International Atlantic Economic Society. She was formerly the Executive Editor
of the Review of Financial Studies. Professor O’Hara is Chairman of the Board of Directors of Investment
Technology Group, Inc (ITG), a global agency brokerage firm, and she serves on the Board of Directors of
NewStar Financial, a commercial finance company, where she is on the audit and governance
committees. She also serves on the Board of Trustees of Teachers Insurance and Annuity Association
(TIAA-CREF). She is a member of the CFTC-SEC Emerging Regulatory Issues Task Force (the “flash crash”
committee), the Global Advisory Board of the Securities Exchange Board of India (SEBI), and the
Advisory Board of the Office of Financial Research, U.S. Treasury. She has consulted for a number of
companies and organizations, including Microsoft, Merrill Lynch, Credit Suisse, the New York Stock
Exchange, Bristol-Meyers Squibb, and the World Federation of Exchanges.
https://www.johnson.cornell.edu/Faculty-And-Research/Profile/id/mo19
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8 Finance Down Under 2015 Building on the Best from the Cellars of Finance
Lubos Pastor
Lubos Pastor is Charles is Charles P. McQuaid Professor of Finance at the
University of Chicago Booth School of Business. He is also co-director of the FamaMiller Center for Research in Finance, Vice President of the Western Finance
Association, member of the CRSP Indexes Advisory Council, Research Associate at
the National Bureau of Economic Research, and Research Fellow at the Centre for
Economic Policy and Research. In addition, he is an Associate Editor of the Journal
of Finance and Journal of Financial Economics, and a former Associate Editor of the
Review of Financial Studies.
Professor Pastor’s research focuses mostly on financial markets and asset management. He has written
on a broad range of topics such as liquidity risk, political uncertainty, stock price bubbles, stock volatility,
return predictability, technological revolutions, portfolio choice, performance evaluation, returns to scale
in active management, indexing, and IPOs. He has analyzed various effects of parameter uncertainty and
learning in finance. His articles have appeared in the American Economic Review, Journal of Finance,
Journal of Financial Economics, Journal of Political Economy, Review of Financial Studies, as well as
nonacademic outlets such as Bloomberg and the Financial Times. His research has been awarded
numerous prizes, such as two Smith Breeden Prizes, two Fama/DFA Prizes, Whitebox Advisors Selected
Research Prize, Goldman Sachs Asset Management Prize, Barclays Global Investors Prize, Rothschild
Caesarea Center Best Paper Award, two Geewax, Terker & Co. Prizes, Marshall Blume Prize, the NASDAQ
Award, and the Q Group Award.
Professor Pastor has been teaching at Chicago Booth since 1999 when he obtained a Ph.D. in finance
from the Wharton School at the University of Pennsylvania. He has received the McKinsey Award for
Excellence in Teaching as well as two Faculty Excellence Awards at Chicago Booth. In his student years,
Professor Pastor won awards in chess and mathematics, mainly in his native Slovakia. In his spare time, he
enjoys sports, reading, and spending time with his family.
http://www.chicagobooth.edu/faculty/directory/p/lubos-pastor
Allan Timmermann
Atkinson/Epstein Endowed Chair, Professor of Finance, Rady School of Management, University of
California San Diego
Timmermann uses a mix of theory, data and econometric techniques to
understand the behavior of prices and expectations in financial markets.
His objective is to understand what determines the movement of security prices
and to use this in managing risk, forming portfolios and forecasting future price
movements. He has also studied mutual fund and pension fund performance.
Timmermann has developed new methods in areas such as forecasting under structural breaks, forecast
combinations and evaluation of predictive skills. He serves as an associate editor on leading journals in
financial economics and econometrics. Timmermann earned his Ph.D. from the University of Cambridge.
http://rady.ucsd.edu/faculty/directory/timmermann/
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Finance Down Under 2015 Building on the Best from the Cellars of Finance 9
ABSTRACTS
Theoretical Asset Pricing in the Presence of Diverse, Disparate, Divergent Decision
Makers
Value or Growth? Pricing of Idiosyncratic Cash-Flow Risk with Heterogeneous Beliefs
Michael F. Gallmeyer, Hogyu Jhang and Hwagyun Kim
We study a continuous-time pure exchange economy where idiosyncratic cash flow risks are priced via
investors' heterogeneous beliefs. Investors perceive idiosyncratic cash flow risks differently through
heterogeneous subjective mean growth rates on a firm's cash flow. This impacts equilibrium quantities. Our
model shows that idiosyncratic cash flow shocks priced through belief differences can explain crosssectional variations in stock returns and cash flows. Quantitative results show that a value premium arises,
as value stocks have higher idiosyncratic cash-flow volatilities, lower average cash flows, and higher belief
differences, which is empirically supported. A growth premium prevails without belief differences.
Retail Traders and the Competitive Allocation of Attention
Shaun W. Davies
I consider a rational expectations framework in which attention constrained individuals compete against
each other and institutions. The model reconciles a set of empirical facts that cannot be simultaneously
explained by standard theories: retail trader portfolios are highly correlated, retail traders tend to follow
some stocks and ignore others, and aggregate trades from retail traders are profitable over short horizons
and predict future returns (even controlling for past returns or past volume). Additionally, the equilibrium
herding behavior of individuals suggests that their actions are not subsumed by institutions. Instead the
herd competes directly against institutions. The analysis also yields novel predictions regarding portfolio
composition and turnover.
Overinvestment, Underinvestment, Just Right Investment
Does Short Selling Discipline Overinvestment?
Eric C. Chang, Tse-Chun Lin and Xiaorong Ma
We explore the disciplining effect of short selling on overinvestment. Firms with more stock lending supply
have higher abnormal announcement stock returns of acquiring firms, lower subsequent abnormal capital
investments, and longer spells between large investments, and higher subsequent Tobin’s Q and ROA.
Alleviating the endogeneity concern, our multivariate difference-in-difference analysis shows that this
disciplinary force of lending supply is more effective for firms in the Regulation SHO-PILOT Program. We
identify two mechanisms through which short selling disciplines managers: managers’ wealth-performance
sensitivity and likelihood of hostile takeovers. Additionally, the disciplinary force only exists for nonfinancial-constrained firms and non all-cash M&A deals.
The Impact of Covenant Violations on Corporate Investment in R&D
Sudheer Chava, Vikram K. Nanda and Steven Chong Xiao
Using regression discontinuity design, we show that corporate investment in R&D declines sharply
following a financial covenant violation, wherein creditors can use the threat of accelerating the loan to
influence changes in firm policies. The reduction in R&D is more severe in firms with low R&D efficiency i.e.,
when firm R&D is less productive in terms of ROA and results in fewer patents and citations. Consequently,
despite a decrease in R&D, covenant-violating firms do not suffer a drop in innovative output (patents and
citations-to-patents). These results highlight that lenders are judicious in exercising their control rights after
covenant violations and suggest that bank financing can be a viable source of financing for innovative firms.
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10 Finance Down Under 2015 Building on the Best from the Cellars of Finance
Financial Decision Making: Without Gambling, I Would Not Exist
Fooled By Randomness? Financial Decision-Making Under Model Uncertainty
Elise Payzan-LeNestour
Tail risk is pervasive in financial markets. Overlooking it often leads to blow-ups. Here I consider assets that
yield steady streams of good payoffs but eventually inflict a major loss, leading the investor to blow up.
Learning about those assets’ risk/reward profiles is crucial yet challenging. When asked to perform a
stylized version of the task, participants managed to learn in a Bayesian way. However, many still chose to
invest in these assets, apparently owing to an overwhelming desire to pick pennies. These findings may
help flesh out key psychological forces at stake during financial manias.
When Saving is Gambling
J. Anthony Cookson
This paper investigates whether financial gambles substitute for casino gambling using the introduction of
lottery-linked savings accounts in Nebraska as a natural experiment. Using proprietary data on casino cash
withdrawals, the introduction of savings lotteries induces consumers in affected regions to reduce casino
gambling by half relative to unaffected regions. The estimated effect is stronger if savings lotteries and
casino gambling have similar attributes, consistent with the interpretation that the effect reflects
substitution across gambling products. Examining the substitution pattern more deeply, I find savings
lotteries appeal most to high dollar-value gamblers with better financial habits. These findings suggests that
savings lotteries can be an effective tool to improve savings rates by appealing to gambling preferences,
but the introduction of savings lotteries is not merely a substitute for financial education. Indeed, the
impact of savings lotteries on casino gambling would be greater if consumers have better ex ante financial
habits.
Empirical Asset Pricing with K Factors: 1<K<3, K is an Integer
Growth Expectations, Dividend Yields, and Future Stock Returns
Zhi Da, Ravi Jagannathan and Jianfeng Shen
According to the dynamic version of the Gordon growth model, the long-run expected return on stocks,
stock yield, is the sum of the dividend yield on stocks plus some weighted average of expected future
growth rates in dividends. We construct a measure of stock yield as a model-imposed affine combination
of dividend yield and an expected dividend growth proxy measured from sell-side analysts' near-term
earnings forecasts. Stock yield predicts US stock index returns well, with an out-of-sample R-squared that is
consistently above 2% at monthly frequency over our sample period. When both dividend yield and
expected dividend growth are used as explanatory variables in a multivariate regression without any
coefficient restriction to predict future stock returns, the in-sample R-squared is almost the same as that
for stock yield, but the out-of-sample R-squared is only about half of that for stock yield, which suggests
that dividend yield, expected dividend growth and expected future returns are tied together through the
present-value relation. Stock yield also predicts future stock index returns in other G7 countries and
returns of US stock portfolios formed by sorting stocks based on firm characteristics, at various horizons.
The findings are consistent with a single dominant factor driving expected returns on stocks over different
holding periods. That single factor extracted from the cross section of stock yields using the Kelly and Pruitt
(2013) partial regressions method predicts stock index returns better. The performance of the Binsbergen
and Koijen (2010) latent factor model for forecasting stock returns improves significantly when stock yield
is included as an imperfect observation of expected return on stocks. Consistent with folk wisdom, stock
returns are more predictable coming out of a recession. Our measure performs as well in predicting stock
returns as the implied cost of capital, another common stock yield measure that uses additional
information.
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Finance Down Under 2015 Building on the Best from the Cellars of Finance 11
Linking Cross-Sectional and Aggregate Expected Returns
Serhiy Kozak, Shrihari Santosh
We propose a one state variable ICAPM that rationalizes the size, value, and momentum “anomalies”
observed in stock returns. Our main insight is that differential covariance with news about future market
discount rates drives the observed crosssectional variation in expected returns. We find that in response to
an increase in expected future market discount rates, large, growth, and recent losers company stocks
outperform small, value, and recent winner stocks, respectively. Our interpretation is that such an increase
in discount rates represents “bad” news for the representative investor, increasing his marginal utility of
wealth. We further show that ignoring this state variable leads to drastic underestimation of the
equilibrium price of “level risk” measured using bond returns. An augmented model which adds a “level”
factor jointly prices both stock and bond returns.
Theoretical Corporate Finance: The Short and the Long Run of It
Is Market Timing Good for Shareholders?
Ilona Babenko, Yuri Tserlukevich and Pengcheng Wan
We challenge the view that equity market timing always benefits shareholders. By distinguishing the effect
of a firm’s equity decisions from the effect of mispricing itself, we show that market timing can decrease
shareholder value. Additionally, the timing of equity sales has a more negative effect on existing
shareholders than the timing of share repurchases. Our theory can be used to infer firms’ maximization
objectives from their observed market timing strategies. We argue that the popularity of stock buybacks,
the low frequency of seasoned equity offerings, and the observed post-event stock returns are consistent
with managers maximizing current shareholder value.
Corporate Policies with Temporary and Permanent Shocks
Jean-Paul Decamps, Sebastian Gryglewicz, Erwan Morellec and Stephane Villeneuve
We develop a dynamic model of investment, cash holdings, financing, and risk management policies in
which firms face financing frictions and are subject to permanent and temporary cash flow shocks. In this
model, target cash holdings depend on the long-term prospects of the firm, implying that the payout policy
of the firm, its financing policy, and its cash-flow sensitivity of cash display a more realistic behaviour than
in prior models with financing frictions. In addition, risk management policies are richer and depend on the
nature of cash flow shocks and potential collateral constraints. Lastly, the timing of investment and the
firms initial asset mix both reflect financing frictions and the joint effects of permanent and temporary
shocks.
Containing Contagion
Counterparty Risk and the Establishment of the New York Stock Exchange Clearinghouse
Asaf Bernstein, Eric N. Hughson and Marc D. Weidenmier
Heightened counterparty risk during the recent financial crisis has raised questions about the role
clearinghouses play in global financial stability. Empirical identification of the effect of centralized clearing
on counterparty risk is challenging because of the co-incidence of macro-economic turbulence and the
introduction of clearinghouses. We overcome these concerns by examining a novel historical experiment,
the establishment of a clearinghouse on the New York Stock Exchange (NYSE) in 1892. During this period
the largest NYSE stocks were also listed on the Consolidated Stock Exchange (CSE), which already had a
clearinghouse. Using identical securities on the CSE as a control, we find that the introduction of clearing
reduced annualized volatility of NYSE returns by 90-173bps and increased asset values. Prior to clearing,
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12 Finance Down Under 2015 Building on the Best from the Cellars of Finance
shocks to overnight lending rates reduced the value of stocks on the NYSE, relative to identical stocks on
the CSE, but this was no longer true after the establishment of clearing. We also show that at least ½ of the
average reduction in counterparty risk on the NYSE is driven by a reduction in contagion risk –the risk of a
cascade of broker defaults. Our results indicate that clearing can cause a significant improvement in market
stability and value through a reduction in network contagion and counterparty risk.
Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters
Kristle R. Cortés and Philip E. Strahan
Multi-market banks reallocate capital when local credit demand increases after natural disasters. Following
such events, credit in unaffected but connected markets declines by about 50 cents per dollar of additional
lending in shocked areas, but most of the decline comes from loans in areas where banks do not own
branches. Moreover, banks increase sales of more-liquid loans in order to lessen the impact of the demand
shock on credit supply. Larger, multi-market banks appear better able than smaller ones to shield credit
supplied to their core markets (those with branches) by aggressively cutting back lending outside those
markets.
Funds Finishing First
Mutual Fund Competition, Managerial Skill, and Alpha Persistence
Gerard Hoberg, Nitin Kumar and Nagpurnanand R. Prabhala
Whether fund managers can generate positive alpha and do so persistently are key questions in the mutual
fund literature. We propose a new economic force that limits persistence in alpha: competition from other
funds that cater to similar segments of investor demand. We make three contributions. First, we use new
spatial methods to identify the dynamic competition faced by funds. Second, we develop a new measure of
fund manager skill, viz., the ability of a fund to beat its spatially close rivals. The skill measure predicts
alphas for at least four quarters ahead. Finally, we show that alpha is persistent only when a fund has few
rivals. This new persistence is not driven by diseconomies of scale, is economically large, and lasts up to
four quarters. Thus, besides the scale diseconomies emphasized by Berk and Green (2004), competition
between funds is a potent force that limits the persistence of alpha.
The Freedom of Information Act and the Race Towards Information Acquisition
Antonio Gargano, Alberto G. Rossi and Russ R. Wermers
We document a previously unknown source of information exploited by sophisticated institutional
investors: the Freedom of Information Act, a law that allows for the full or partial disclosure of previously
unreleased information and documents controlled by the United States government. Through our own
FOIA requests we uncover the identities of several large institutional investors, chiefly hedge funds, that
routinely request value-relevant information to the Food and Drug Administration. We first provide a
detailed analysis of how FOIA requests are generated, the kind of information commonly requested by
institutional investors and its costs. We then document that the target of FOIA requests are large firms that
experience periods of low profitability and high stock price volatility. Finally, we show that FOIA requests
allow institutional investors to generate abnormal portfolio returns and provide evidence suggesting that
the FOIA information is not systematically known to other investors in the marketplace.
Empirical Corporate Finance: The Long and the Short Run of It
Managerial Myopia and Debt Maturity
Indraneel Chakraborty, Andrew MacKinlay and William F. Maxwell
We argue that firms with relatively shorter term debt face higher managerial myopia. Because shorter term
debt is less sensitive to the firm's long-term performance, short-term debtholders have less incentive to
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Finance Down Under 2015 Building on the Best from the Cellars of Finance 13
monitor the firm management regarding myopic investments. Myopic versus long-term investments affect
the value of the firm differently at different horizons, and ultimately the firm's short-term and long-term
equity returns. We use a generated instrumental variables approach to distinguish the fraction of debt
maturity reduction due to investor preference and not firm preference. Ceteris paribus, at the mean
issuance debt maturity of almost 10 years, we find that for a one year reduction in debt maturity due to
investor preference, five-year equity returns fall by about 2:1% per annum. The benefits of monitoring by
debtholders can be quite significant for equityholders.
Do Long-Term Investors Improve Corporate Decision Making?
Jarrad Harford, Ambrus Kecskes and Sattar Mansi
We study the effect of investor horizons on a comprehensive set of corporate decisions. Long-term
investors have the means and motive to monitor corporate managers, which generates corporate decisions
that are consistent with shareholder value maximization. We find that long-term investors restrain
numerous corporate misbehaviors such as earnings management and financial fraud and strengthen
internal governance. They discourage a range of investment and financing activities but encourage payouts.
Shareholders benefit through higher stock returns, greater profitability, and lower risk. Firms diversify their
operations. We use a popular identification strategy to establish causality of our results.
Market Microstructure
High Frequency Trading and the 2008 Short Sale Ban
Johnathan Brogaard, Terrence Hendershott and Ryan Riordan
We examine the effects of high frequency traders (HFTs) on liquidity and price efficiency using the
September 2008 short sale ban. To disentangle the separate impacts of short selling by HFTs and non-HFTs
(nHFTs) we use an instrumental variables approach exploiting differences in the ban's cross-sectional
impact on HFTs and nHFTs. nHFTs’ short selling improves liquidity and price efficiency, as measured by bidask spreads and pricing errors. HFTs’ short selling has the opposite effect by decreasing liquidity and price
efficiency. HFTs’ negative impact is driven by liquidity demanding trades. HFTs’ liquidity supply improves
liquidity and price efficiency, but not enough to outweigh the negative HFT liquidity demand effect.
Shades of Darkness: A Pecking Order of Trading Venues
Albert J. Menkveld, Bart Z. Yueshen and Haoxiang Zhu
Investors trade in various types of venues. When demanding immediacy they face a basic tradeoff between
price impact and execution uncertainty. Venues can be sorted accordingly along a “pecking order,” with
mid-point dark pools and lit markets at the top and bottom, and non-midpoint pools in the middle. A
simple model formalizes this pecking order hypothesis. We test it using a unique dataset that disaggregates
U.S. dark trading into various categories. A higher VIX or larger earnings surprise tilts trading volumes from
the top of the pecking order to the bottom, confirming the hypothesis.
Special Session: Overreacting to Nonsynchronous Data-snooping
Is Aggregate Idiosyncratic Risk Priced? Follow the Bid-Ask Bounce
David A. Lesmond and Yihua Zhao
This paper models a market microstructure bias, driven by the bid-ask spread, that is evident in the pricing
of aggregate firm-level risk embodied by the stock return variance estimates of Goyal and Santa-Clara
(2003). Controlling for this bias, we find no pricing ability for aggregate firm-level variance for the period
1927 to 2012 or for any sub-period tested. Market microstructure also explains the time-trend of aggregate
firm-level volatility observed from 1962 to 1997 (Campbell, Lettau, Malkiel, and Xu, 2001), and subsumes
any relation between retail trading and future idiosyncratic volatility from 1983 to 1999 (Brandt, Brav,
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14 Finance Down Under 2015 Building on the Best from the Cellars of Finance
Graham, and Kumar, 2010). We conclude that the aggregate firm-level bid-ask spread is priced with future
market returns rather than any of the aggregate firm-level risk measures.
Asset Pricing with Index Investing
Georgy Chabakauri and Oleg Rytchkov
We provide a novel theoretical analysis of how index investing affects capital market equilibrium. We
consider a dynamic exchange economy with heterogeneous investors and two Lucas trees and find that
indexing can either increase or decrease the correlation between stock returns and in general increases
(decreases) volatilities and betas of stocks with larger (smaller) market capitalizations. Indexing also
decreases market volatility and interest rates, although those effects are weak. The impact of index
investing is particularly strong when stocks have heterogeneous fundamentals. Our results highlight that
indexing changes not only how investors can trade but also their incentives to trade.
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Finance Down Under 2015 Building on the Best from the Cellars of Finance 15
MAP & TRANSPORTATION
From the Melbourne airport to the hotels in the city, it takes 20-30 minutes, which might vary
depending on the traffic. You can either take a taxi (fare: $50-60) or SkyBus (fare: $18 for one way/$30 for
return). On arrival at Southern Cross Station in the city, SkyBus provides a complimentary hotel transfer
service, subject to availability (visit www.skybus.com.au for details).
For your transportation needs within the city area, we highly recommend the public transit system in
Melbourne. There is a free tram zone in the Melbourne CBD – refer map below. For travel outside this
zone you must purchase a "Myki" pass which allows travel on trams, busses, and trains. The Public
transit is effective and as safe as can be reasonably expected.
↑ To Melb Zoo - 2.8kms
Welcome Reception, Thursday 5th March 5:00pm – 7:00pm
Melbourne Zoo, Rainforest Room
Elliott Avenue, Parkville, Tram 55 to Melbourne Zoo
Conference Sessions, Friday 6th March 9:30am – 7:45pm
Melbourne Cricket Ground, Premiership Club & Jack Ryder
Rooms Gate 6A, Brunton Ave, Melbourne, Tram 70 to MCG
Conference Special Session, Saturday 7th March 9:00am – 1:00pm
The University of Melbourne
Copland Theatre (Basement), The Spot Building
198 Berkeley St, Parkville, Tram 19 or 59 to Haymarket
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16 Finance Down Under 2015 Building on the Best from the Cellars of Finance
FRIDAY MELBOURNE CRICKET GROUND GUIDED TOUR
The Melbourne Cricket Ground http://www.mcg.org.au/ was built in 1853 and, since then, has established
a marvellous history that compares favourably with any other in the world. Known colloquially as the ‘G,
Australia’s favourite stadium is the birthplace of Test cricket and the home of Australian football, holding
more than 80 events annually and boasting a capacity of 100,024.
The MCG guided tour gives the opportunity to relive great sporting memories through a
comprehensive tour of this marvellous stadium.
MCG TOUR FEATURES
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The Ponsford Stand
MCC Members Reserve
MCG Tapestry
Players' change rooms
Long Room
MCC Library
Media facilities
A walk on the arena
SATURDAY YARRA VALLEY WINE TOUR & DINNER
The Yarra Valley has the enviable reputation as one of the world's great food and wine regions.
From architectural statements to rustic tin sheds hidden among the vines, the Yarra Valley has a
wonderful range of cellar doors, all reflecting the diversity of styles and approaches in this
beautiful, cool-climate region. Sample the grapes and marvel at the harmony of diverse soils,
temperate weather, and the dedication of generations of vignerons in the pioneering region that
kick-started Victoria's wine industry in 1838. http://www.wineyarravalley.com/
Groups of up to 10 people will tour the Yarra Valley in small coaches, departing 1:00pm Saturday
7th March and returning 9:00pm. Each group will visit two wineries from the selection below and
indulge their sweet side at the Chocolaterie & Ice Creamery. The day will conclude with the official
FDU conference dinner and award presentations at De Bortoli Estate.
Balgownie http://www.balgownieestate.com.au/
Balgownie Estate is set amongst the undulating green landscape on 30 hectares surrounded by
vineyards and breathtakingly beautiful views which are accentuated by the striking geometry of
corridors of grape vines. The extensive wine tasting range includes some of our award winning
wines as well as our flagship Estate Cabernet Sauvignon and Estate Shiraz from our original 40 year
old vines in Bendigo.
Domaine Chandon http://www.domainechandon.com.au/
Domaine Chandon was established by French champagne house Moët & Chandon in 1986 and is
dedicated to the production of méthode traditionnelle sparkling wine and premium quality, coolclimate still wines.
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Finance Down Under 2015 Building on the Best from the Cellars of Finance 17
Rochford Wines http://www.rochfordwines.com.au/
Winemaker Marc Lunt produces high quality wines with fruit sourced from our vineyards, located
in two of Victoria’s premium cool climate wine regions. Marc works to ensure that the vineyards in
the Macedon Ranges and the Yarra Valley produce only the finest of grapes to be used in the
making of our wines.
Tarrawarra Estate http://www.tarrawarra.com.au/
Under the watchful eye of winemaker Clare Halloran, all of TarraWarra’s wines are meticulously
grown, hand picked, vinified and aged on the estate. TarraWarra Estate is best known as a
producer of exceptional Pinot Noir and Chardonnay and we also make several other single block
heritage varietals and estate blends.
Yering Station http://www.yering.com/
Yering Station was originally established in 1838 as Victoria's first vineyard and today, this family
owned Winery Tourism Complex is reaching new heights. Beyond the manicured gardens lies the
contemporary stone edifice where you can taste the full range of the estate's award-winning
wines, Barak's Bridge, Yering Station and Yarra Edge, along with the critically acclaimed traditional
method, Yarrabank.
Yarra Valley Chocolaterie & Ice Creamery http://www.yvci.com.au/
Delight in the experience of tasting, seeing and indulging in quality products in our spectacular
showroom and café nestled amongst sweeping valley vistas. Ice creams and decadent sweet
treats await in our café while our expansive lawns, orchard and sculptures are the perfect place to
explore.
Conference Dinner
De Bortoli Yarra Valley Estate http://debortoliyarra.com.au/
De Bortoli Wines Yarra Valley Estate was established in 1989 by the De Bortoli family. The estate is
managed by third generation Leanne De Bortoli and her husband, De Bortoli Chief Winemaker
Steve Webber. Together they have built a successful estate based on the family traditions of warm
hospitality and a passion for creating interesting and delicious wine and food. At the Estate they
have some of the oldest plantings in the Yarra Valley region. These carefully cultivated vines are
handled with care and each year continue to produce exceptional quality fruit and a range of
wines to suit every palate and every pocket.
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18 Finance Down Under 2015 Building on the Best from the Cellars of Finance
PROGRAM COMMITTEE
Tim Adam
Humboldt University
Ron Giammarino
University of British Colombia
Phong Ngo
Australian National University
Renée B. Adams
University of New South Wales
Stefano Giglio
University of Chicago
Oyvind Norli
BI Norwegian Business School
Sumit Agarwal
National University of Singapore
Luis Filipe Goncalves-Pinto
National University of Singapore
Kjell G. Nyborg
University of Zürich
Vikas Agarwal
Georgia State University
Todd A. Gormley
University of Pennsylvania
Maureen O’Hara
Cornell University
Reena Aggarwal
Georgetwon University
Vidhan K. Goyal
HKUST
Micah S. Officer
Loyola Marymount University
Anup Agrawal
University of Alabama
Roberto C. Gutierrez
University of Oregon
Emilio Osambela
Carnegie Mellon University
Heitor Almeida
University of Illinois Urbana-Champaign
Allaudeen Hameed
National University of Singapore
Marco Pagano
University of Napoli Federico II
George O. Aragon
Arizona State University
Kathleen Hanley
University of Maryland
Dimitris Papanikolaou
Northwestern University
Illona Babenko
Arizona State University
Andrew Hertzberg
Columbia University
Andrew Patton
Duke University
Kerry Back
Rice University
Christian Heyerdahl-Larsen
London Business School
Bradley S. Paye
University of Georgia
Gurdip Bakshi
University of Maryland
Nicholas Hirschey
London Business School
Neil Pearson
University of Illinois UrbanaChampaign
Pierluigi Balduzzi
Boston College
Burton Hollifield
Carnegie Mellon University
Kim Peijnenberg
Bocconi University
Thomas W. Bates
Arizona State University
Edith S. Hotchkiss
Boston College
Francisco Perez-Gonzalez
Stanford University
Robert Battalio
University of Notre Dame
David A. Hsieh
Duke University
Ludovic Phalippou
Oxford University
Gregory Bauer
Bank of Canada
Eric Hughson
Claremont McKenna College
Gordon M. Phillips
University of Southern California
Simon Benninga
Tel Aviv University
Zoran Ivković
Michigan State University
Christopher Polk
London School of Economics
Antje Berndt
North Carolina State University
Kris Jacobs
University of Houston
Jeffrey E. Pontiff
Boston College
Gennaro Bernile
Singapore Management University
Shane A. Johnson
Texas A&M University
Uday Rajan
University of Michigan
Utpal Bhattacharya
Indiana University
Jennifer L. Juergens
Drexel University
David Reeb
National University of Singapore
Audra L. Boone
Texas A&M University
Brandon Julio
London Business School
Jay Ritter
University of Florida
Peter L. Bossaerts
California Institute of Technology
Marcin T. Kacperczyk
New York University
Jörg Rocholl
European School of Management
and Technology
Jonathan Brogaard
University of Washington
Charles Kahn
University of Illinois Urbana-Champaign
Harley E. (Chip) Ryan Jr.
Georgia State University
Stephen J. Brown
New York University
Patrick Kelly
New Economic School Moscow
Stefano Sacchetto
Carnegie Mellon University
Max Bruche
City University London
Ralph Koijen
London Business School
Ravindra Sastry
Southern Mothodist University
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Finance Down Under 2015 Building on the Best from the Cellars of Finance 19
Sabrina Buti
University of Toronto
Robert A. Korajczyk
Northwestern University
Astrid Schornick
INSEAD
Murillo Campello
Cornell University
Arthur Korteweg
University of Southern California
Norman Schürhoff
Université de Lausanne
Jerry Cao
Singapore Management University
David Lando
Copenhagen Business School
Ivan Shaliastovich
University of Pennsylvania
Indraneel Chakraborty
Southern Methodist University
Anh Le
University of North Carolina
Kelly Shue
University of Chicago
Susan Christoffersen
University of Toronto
Laura Lindsey
Arizona State University
Clemens Sialm
The University of Texas at Austin
Lauren H. Cohen
Harvard Business School
Juhani Linnainmaa
University of Chicago
Stephan Siegel
University of Washington
Carole Comerton-Forde
University of Melbourne
Hong Liu
Washington University St Louis
Tom M. Smith
University of Queensland
Jennifer Conrad
UNC Chapel Hill
Laura Xiaolei Liu
HKUST
Denis Sosyura
University of Michigan
Martin Cremers
University of Notre Dame
Richard Lowery
The University of Texas at Austin
Heather Tookes
Yale University
Sudipto Dasgupta
HKUST
Michelle B. Lowry
The Pennsylvania State University
Yuri Tserlukevich
Arizona State University
Stephen G. Dimmock
Nanyang Technological University
Christian T. Lundblad
UNC Chapel Hill
Garry J. Twite
University of Melbourne
Amy Dittmar
University of Michigan
Peter Mackay
HKUST
Patrick Verwijmeren
VU University Amsterdam
Ran Duchin
University of Washington
Andrew MacKinlay
Southern Methodist University
Mitch Warachka
Claremont McKenna College
B. Espen Eckbo
Dartmouth College
Craig MacKinlay
University of Pennsylvania
Scott J. Weisbenner
University of Illinois
Roger Edelen
University of California Davis
Igor Makarov
London School of Economics
Russ Wermers
University of Maryland
Andrew Ellul
Indiana University
Max Maksimovic
Maryland University
Bill Wilhelm
University of Virginia
Daniel Ferreira
London School of Economics
Spencer Martin
University of Melbourne
Youchang Wu
University of Wisconsin
Eliezer M. Fich
Drexel University
Christoph Merkle
University of Mannheim
David Yermack
New York University
Fangjian Fu
Singapore Management University
Alexander Michaelides
Imperial College
Fernando Zapatero
University of Southern California
Paolo Fulghieri
UNC Chapel Hill
Roni Michaely
Cornell University
Joe Zhang
Singapore Management
University
Michael F. Gallmeyer
University of Virginia
Todd T. Milbourn
Washington University St Louis
Guofu Zhou
Washington University St Louis
Simon Gervais
Duke University
Erwan Morellec
Swiss Finance Institute
Haoxiang Zhu
Massachusettes Institute of
Technoligy
Vikram Nanda
Georgia Institute of Technology
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20 Finance Down Under 2015 Building on the Best from the Cellars of Finance
Notes
Finance Down Under 2015 Building on the Best from the Cellars of Finance 21
CONTACT
Conference Administrators
AnnMaree Murray and Silvia Barberoglou
Department of Finance
Faculty of Business and Economics
The University of Melbourne
Parkville, VIC 3010, AUSTRALIA
T: +61 3 8344 3538 | F: +61 3 8344 6914
[email protected]
http://fbe.unimelb.edu.au/finance/fdu
Organizing Committee:
Neal Galpin, Vincent Grégoire,
Bruce D.Grundy and Hae Won (Henny) Jung