Finance Publications

Broken promises, competition, and capital allocation in the mutual fund industry

Erik William Jeffries — Wed, 11 Dec 2024 02:03:03 +0000

Broken promises, competition, and capital allocation in the mutual fund industry Erik William J… Tue, 12/10/2024 - 19:03

What characteristics of mutual funds do investors care about? In addition to performance and fees, we show that investors exhibit a clear preference for managers who adhere to the strategies they describe in their prospectuses. Capital flows respond negatively when funds diverge from the average holdings of their text-based strategy peer groups, but positively when they outperform those peer averages. We identify this effect using a novel instrumental variables approach, and show that funds face a delicate trade-off between keeping their promises and outperforming their peers who make similar promises."

Abis, Simona; Lines, Anton. Broken promises, competition, and capital allocation in the mutual fund industry. Journal of Financial Economics. Dec2024, Vol. 162, pN.PAG-N.PAG.

https://www.sciencedirect.com/science/article/pii/S0304405X24001715

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Specialization and performance in private equity: Evidence from the hotel industry

Erik William Jeffries — Wed, 11 Dec 2024 02:00:44 +0000

Specialization and performance in private equity: Evidence from the hotel industry Erik William J… Tue, 12/10/2024 - 19:00

Using granular data on U.S. hotel investments over the past two decades, we show that industry-specialist PE firms achieve higher net income from operations and higher capital gains from sale than generalist PE firms for comparable properties. Those results are driven by specialists implementing more and larger cost savings without compromising revenues. Fundamentally, specialists utilize their hotel-specific operating expertise to produce superior performance outcomes. We show that specialists across investment sectors possess deeper industry-specific operating expertise. Our results suggest that specialist PE firms can compete with their generalist rivals by leveraging such expertise in a chosen market niche.

Spaenjers, Christophe; Steiner, Eva. Specialization and performance in private equity: Evidence from the hotel industry. Journal of Financial Economics. Dec2024, Vol. 162, pN.PAG-N.PAG.

https://www.sciencedirect.com/science/article/pii/S0304405X24001533

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Norms, institutions, and digital veils of uncertainty—Do network protocols need trust anyway?

Erik William Jeffries — Wed, 11 Sep 2024 00:23:38 +0000

Norms, institutions, and digital veils of uncertainty—Do network protocols need trust anyway? Erik William J… Tue, 09/10/2024 - 18:23

In large and complex human groups, social rules reduce individuals' uncertainty about their own choice set, including through these rules' simultaneous influence on the choice set of other individuals. But uncertainty varies as to the extent to which it is knowable and quantifiable ex ante. Therefore, different classes of social rules deal with the future uncertainty of individuals' conduct in structurally distinct ways, with institutions and norms being the hallmark example of this distinction. Institutions, through their costly definition and enforcement by a known organization, require specific delineation of behavior and penalties ex ante, meaning they of necessity confront “known unknowns” (risk), or the conduct of members of an organization that can be predicted ex ante. Norms, in contrast, are only effective in shaping behavior if sufficiently shared within a community, which means their application is automatic in expectation to an individual ordering their conduct considering potential norms. This makes norms apply to ex ante known and unknown situations alike, relative to the precision that the articulation of institutions requires with respect to human behavior. Although digital governance carries the benefits (and costs) of considerable institutional “completeness,” governance by protocol is nonetheless incomplete in the face of the complex set of exogenous shocks and human actions that a given digital networked organization will experience. This means digital institutions need to mimic the adaptability of institutions more generally, through the institutional mechanisms of flexibility detailed in this analysis. More generally, though, the fact that norms can serve as a complementary gap‐filler in contexts where institutions do not reach suggest that digital organization designers cannot avoid simultaneous consideration of the human community of network users that will define the norms that become crucial in periods of true uncertainty for any organization.

Alston, Eric. Norms, institutions, and digital veils of uncertainty—Do network protocols need trust anyway? Regulation & Governance. Sep2024, p1.

https://onlinelibrary.wiley.com/doi/full/10.1111/rego.12628

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Blood Money: Selling Plasma to Avoid High-Interest Loans.

Erik William Jeffries — Tue, 10 Sep 2024 21:41:08 +0000

Blood Money: Selling Plasma to Avoid High-Interest Loans. Erik William J… Tue, 09/10/2024 - 15:41

Little is known about the motivations and outcomes of sellers in remunerated markets for human materials. We exploit dramatic growth in the U.S. blood plasma industry to shed light on the sellers of plasma. Sellers tend to be young and liquidity-constrained with low incomes and limited access to traditional credit. Plasma centers absorb demand for nontraditional credit. After a plasma center opens nearby, demand for payday loans falls by over 13% among young borrowers. Meanwhile, foot traffic increases by over 4% at nearby stores, suggesting that constrained households use plasma markets to smooth consumption without appealing to high-cost debt.

Dooley, John M; Gallagher, Emily A. Blood Money: Selling Plasma to Avoid High-Interest Loans. Review of Financial Studies. Sep2024, Vol. 37 Issue 9, p2779-2816.

https://academic.oup.com/rfs/article/37/9/2779/7663472

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Friends During Hard Times: Evidence from the Great Depression

Erik William Jeffries — Tue, 10 Sep 2024 21:37:44 +0000

Friends During Hard Times: Evidence from the Great Depression Erik William J… Tue, 09/10/2024 - 15:37

Using a novel data set of over 3,500 public and private firms, we construct the network of executive and director connections prior to the 1929 financial market crash. We find that more connected firms have 17% higher 10-year survival rates. Consistent with a working capital channel, the results are strongest for small, private, cash-poor firms, and firms located in counties with high bank suspension rates. Moreover, connections to cash-rich firms that increase accounts receivable matter the most. Our results suggest that network connections can play a stabilizing role during a financial crisis by easing the flow of capital to constrained firms.

Babina, Tania; García, Diego; Tate, Geoffrey. Friends During Hard Times: Evidence from the Great Depression. Journal of Financial & Quantitative Analysis. Sep2024, Vol. 59 Issue 6, p2647-2694.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2839049

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Crisis and non-crisis short selling and bank enforcement actions.

Erik William Jeffries — Wed, 03 Nov 2021 21:32:15 +0000

Crisis and non-crisis short selling and bank enforcement actions. Erik William J… Wed, 11/03/2021 - 15:32

Boni, Leslie; Leach, J. Chris; White, Reilly S. Crisis and non-crisis short selling and bank enforcement actions. Journal of Banking & Finance. Nov2021, Vol. 132, pN.PAG-N.PAG.

Employing standard informed trading intuition, we develop testable hypotheses regarding short selling before and after bank enforcement action (EA) initiations. For U.S.-listed bank firm data for 2007 to 2012, we find strong support for differentiated short seller activity and skill in crisis versus non-crisis periods. In financial crises, short sellers predominantly position prior to EAs. The EA initiations then act as information-homogenizing and profit-taking events reducing incentives to remain positioned. In contrast, EAs in non-crisis periods appear to serve as wake-up calls that attract additional short selling. Our findings offer potentially important insights for regulators considering short sellers' reactions to EA announcements in general, during financial crises, and when not experiencing a broad financial crisis.

https://www.sciencedirect.com/science/article/pii/S0378426621001941

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Ownership, Learning, and Beliefs.

Erik William Jeffries — Fri, 03 Sep 2021 21:24:30 +0000

Ownership, Learning, and Beliefs. Erik William J… Fri, 09/03/2021 - 15:24

Hartzmark, Samuel M; Hirshman, Samuel D; Imas, Alex. Ownership, Learning, and Beliefs. Quarterly Journal of Economics. Aug2021, Vol. 136 Issue 3, p1665-1717.

We examine how owning a good affects learning and beliefs about its quality. We show that people have more extreme reactions to information about a good they own compared with the same information about a nonowned good: ownership causes more optimistic beliefs after receiving a positive signal and more pessimistic beliefs after receiving a negative signal. Comparing learning to normative benchmarks reveals that people overextrapolate from signals about goods they own, which leads to an overreaction to information; in contrast, learning is close to Bayesian for nonowned goods. We provide direct evidence that this effect is driven by ownership channeling greater attention toward associated information, which leads people to overweight recent signals when forming beliefs. The relationship between ownership and beliefs has testable implications for trade and market expectations. In line with these predictions, we show that the endowment effect doubles in response to positive information and disappears with negative information, and demonstrate a significant relationship between ownership and overextrapolation in survey data about stock market expectations.

https://academic.oup.com/qje/article-abstract/136/3/1665/6224867

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Personal Wealth, Self-Employment, and Business Ownership

Erik William Jeffries — Mon, 02 Aug 2021 00:42:27 +0000

Personal Wealth, Self-Employment, and Business Ownership Erik William J… Sun, 08/01/2021 - 18:42

We study the effect of personal wealth on entrepreneurial decisions using data on mineral payments from Texas shale drilling to individuals throughout the United States. Large cash windfalls increase business formation by 0.8 to 2.1 percentage points, but do not affect transitions to self-employment. By contrast, cash windfalls significantly extend self-employment spells, but do not affect the duration of business ownership. Our findings help reconcile contrasting findings in prior work: liquidity constraints have different effects on entrepreneurial activity that may depend on the entrepreneur's motivations.

https://academic.oup.com/rfs/article-abstract/34/8/3935/6218782?redirectedFrom=fulltext

Bellon, Aymeric; Cookson, J Anthony; Gilje, Erik P; Heimer, Rawley Z. Personal Wealth, Self-Employment, and Business Ownership. Review of Financial Studies. Aug2021, Vol. 34 Issue 8, p3935-3975.

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How Do Foreclosures Exacerbate Housing Downturns?

Anonymous — Tue, 27 Apr 2021 14:31:33 +0000

How Do Foreclosures Exacerbate Housing Downturns? Anonymous (not verified) Tue, 04/27/2021 - 08:31

This article uses a structural model to show that foreclosures played a crucial role in exacerbating the recent housing bust and to analyse foreclosure mitigation policy. We consider a dynamic search model in which foreclosures freeze the market for non-foreclosures and reduce price and sales volume by eroding lender equity, destroying the credit of potential buyers, and making buyers more selective. These effects cause price-default spirals that amplify an initial shock and help the model fit both national and cross-sectional moments better than a model without foreclosure. When calibrated to the recent bust, the model reveals that the amplification generated by foreclosures is significant: ruined credit and choosey buyers account for 25.4% of the total decline in non-distressed prices and lender losses account for an additional 22.6%. For policy, we find that principal reduction is less cost-effective than lender equity injections or introducing a single seller that holds foreclosures off the market until demand rebounds. We also show that policies that slow down the pace of foreclosures can be counterproductive.

Guren, A. M., & McQuade, T. J. (2020). How do foreclosures exacerbate housing downturns? The Review of Economic Studies, 87(3), 1331-1364. https://doi.org/10.1093/restud/rdaa001

Guren, A. M., & McQuade, T. J. (2020). How do foreclosures exacerbate housing downturns? The Review of Economic Studies, 87(3), 1331-1364. https://doi.org/10.1093/restud/rdaa001

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Assortative Matching and Reputation in the Market for First Issues.

Erik William Jeffries — Sat, 03 Apr 2021 21:52:02 +0000

Assortative Matching and Reputation in the Market for First Issues. Erik William J… Sat, 04/03/2021 - 15:52

Akkus, Oktay; Cookson, J. Anthony; Hortaçsu, Ali. Assortative Matching and Reputation in the Market for First Issues. Management Science. Apr2021, Vol. 67 Issue 4, p2049-2074.

Using a tractable structural model of the matching equilibrium between underwriters and equity-issuing firms, we study the determinants of value in underwriter–firm relationships. Our estimates imply that high underwriter prestige is associated with 5.3%–14.1% greater equilibrium surplus. According to the structural model, high prestige exhibits a significant certification effect throughout the sample (1985–2010), but there is also a countervailing effect of underwriter prestige that reflects subscriber preferences for more underpricing. Consistent with trading off profits from issuers and subscribers, high-prestige underwriters underprice more in hot markets when rents to catering to subscribers are greatest. This paper was accepted by Gustavo Manso, finance.

https://pubsonline.informs.org/doi/10.1287/mnsc.2020.3594

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Finance Publications

Broken promises, competition, and capital allocation in the mutual fund industry

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