Found 493 article(s) for author 'Financial Services'

The Economic Effects of Private Equity Buyouts

The Economic Effects of Private Equity Buyouts. Josh Lerner, October 14, 2019, Paper, “We examine thousands of U.S. private equity (PE) buyouts from 1980 to 2013, a period that saw huge swings in credit market tightness and GDP growth. Our results show striking, systematic differences in the real-side effects of PE buyouts, depending on buyout type and external conditions. Employment at target firms shrinks 13% over two years in buyouts of publicly listed firms but expands 13% in buyouts of privately held firms, both relative to contemporaneous outcomes at control firms. Labor productivity rises 8% at targets over two years post buyout (again, relative to controls), with large gains for both public-to-private and private-to-private buyouts. Target productivity gains are larger yet for deals executed amidst tight credit conditions. A post-buyout widening of credit spreads or slowdown in GDP growth lowers employment growth at targets and sharply curtails productivity gains in public-to-private and divisional buyouts. Average earnings per worker fall by 1.7% at target firms after buyouts, largely erasing a pre-buyout wage premium relative to controls. Wage effects are also heterogeneous. In these and other respects, the economic effects of private equity vary greatly by buyout type and with external conditions.Link

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Undisclosed Debt Sustainability

Undisclosed Debt Sustainability. Laura Alfaro, 2019, Paper, “Over the past decade, non–Paris Club creditors, notably China, have become an important source of financing for low- and middle-income countries. In contrast with typical sovereign debt, these lending arrangements are not public, and other creditors have no information about their magnitude. We transform the traditional sovereign debt and default model to quantitatively study incomplete information arrangements and find they greatly reduce traditional/Paris Club creditors’ debt sustainability. Disclosure of nontraditional debt would imply significant welfare gains for the recipient countries but would reduce its sustainability. We discuss the implications of nontraditional lending on standard assumptions of sovereign debt models.Link

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Crowdsourcing Memories: Mixed Methods Research by Cultural Insiders-Epistemological Outsiders

Crowdsourcing Memories: Mixed Methods Research by Cultural Insiders-Epistemological Outsiders. Tarun Khanna, Karim Lakhani, 2019, Paper, “This paper examines the role that the two lead authors’ personal connections played in the research  methodology and data collection for the Partition Stories Project – a mixed methods approach to revisiting the much-studied historical trauma of the Partition of British India in 1947. The Project collected survivors’ oral histories, a data type that is a mainstay of qualitative research, and subjected their narrative data to statistical analysis to detect aggregated trends. In this paper, the authors discuss the process of straddling the dichotomies of insider/outsider and qualitative/quantitative, address the “myth of informed objectivity”, and the need for hybrid research structures with the intent to innovate in humanities projects such as this. In presenting key learnings from the project, this paper highlights the tensions that the authors faced between positivist and interpretivist methods of inquiry, between “insider” and “outsider” categories of positionality, and in the quantification of qualitative oral history data. The paper concludes with an illustrative example from one of the lead authors’ past research experiences to suggest that the tensions of this project are general in occurrence and global in applicability, beyond the specifics of the Partition case study explored here.Link

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The effect of automatic enrolment on debt

The effect of automatic enrolment on debt. John Beshears, David Laibson, September 17, 2019, Paper, “Automatic enrolment in defined contribution pension plans might be the most common policy application of behavioural economics. But does automatic enrolment increase pension savings at the expense of increased household debt? This column examines a natural experiment in which the US Army began automatically enrolling its civilian employees in its retirement savings plan. It finds strong evidence against the hypothesis that automatic enrolment increases financial distress and debt excluding auto loans and first mortgages.Link

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Collusion in Brokered Markets

Collusion in Brokered Markets. Scott Duke Kominers, September 7, 2019, Paper, “The U.S. residential real estate agency market presents a puzzle for economic theory: commissions on real estate transactions have remained constant and high for decades even though agent entry is frequent and agents’ costs of providing service are low. We model the real estate agency market, and other brokered markets, via repeated extensive form games; in our game, brokers first post prices for customers and then choose which agents on the other side of the market to work with. We show that prices appreciably higher than the competitive prices can be sustained (for a fixed discount factor) regardless of the number of brokers; this is done through strategies that condition willingness to transact with each broker on that broker’s initial posted prices. Our results can thus rationalize why brokered markets exhibit pricing high above marginal cost despite fierce competition for customers; moreover, our model can help explain why agents and platforms who have tried to reduce commissions have had trouble entering the market.Link

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Financial Market Risk Perceptions and the Macroeconomy

Financial Market Risk Perceptions and the Macroeconomy. Emil Siriwardane, Adi Sunderam, , Paper, “In this appendix, we provide details about the data construction for all variables used in the main text. We then present a battery of tests and additional analysis demonstrating the robustness of the relationship between the real rate and PVSt. In addition, we show that roughly 90% of the covariation between the real rate and PVSt stems from the fact that the real rate forecasts future returns on the vol-sorted portfolio. We also relate PVS to objective and subjective measures of expected risk for aggregate macroeconomic variables and the aggregate stock market, showing that PVS is related to expected risk, and that this connection is most evident for subjective measures of risk that reflect both public and private firms.  Moreover, we offer complementary VAR and local projection evidence that shocks to risk perceptions, as measured by PVSt, lead to a boom in the real economy. We also document that periods of high risk perceptions coincide with investor outflows from high-volatility mutual funds. Finally, we provide proofs for the propositions contained in the model section of the main text.Link

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Robust Decision Theory and Econometrics

Robust Decision Theory and Econometrics. Gary Chamberlain, 2019, Paper, “Subjective expected utility can provide normative guidance to an investor making a portfolio choice. The investor, however, may have doubts on the specification of the distribution. The investor may, at some cost, be able to reduce these doubts by working on a more careful specification of the model. Or he may seek a decision theory that is less sensitive to the specification. I consider three such theories: maxmin expected utility, multiplier preferences, and smooth ambiguity preferences. A simple two-period model is used to illustrate their application. The model is rich enough to exhibit connections between atemporal preferences over contingent plans and recursive (conditional) preferences, and to draw attention to limitations of recursive preferences in some cases. In addition to portfolio choice, the paper discusses connections between robust decision theory and point estimation in misspecified models.Link

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Controlling the Long-Term Problem of Short-Term Funding

Controlling the Long-Term Problem of Short-Term Funding. Hal Scott, August 23, 2019, Paper, “While financial crises can be triggered by several causes, runs on short-term liabilities are at the heart of all financial crises, with the recent 2007–09 financial crisis being no exception. Given the unpredictability of crisis triggers and the overwhelming predictability of short-term funding’s role in financial crises, legislative and regulatory responses to the recent financial crisis should focus on the consequences of relying on short-term funding in the financial system. However, in addressing the problem of such funding, it is important to recognize the social benefits afforded by short-term liabilities and not simply the costs. To this end, this paper provides a brief overview of short-term funding in the U.S. financial system, while also highlighting the trade-off between the costs and benefits of short-term liabilities. The paper proceeds with an analysis of various proposals aimed at addressing the short-term funding issue.Link

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The Value of Intermediation in the Stock Market

The Value of Intermediation in the Stock Market. Marco Di Maggio, Mark Egan, August 2019, Paper, “Brokers continue to play a critical role in intermediating institutional stock market transactions. More than half of all institutional investor order flow is still executed by high-touch (non-electronic) brokers. Despite the continued importance of brokers, we have limited information on what drives investors’ choices among them. We develop and estimate an empirical model of broker choice that allows us to quantitatively examine each investor’s responsiveness to execution costs and access to research and order flow information. Studying over 300 million institutional trades, we find that investor demand is relatively inelastic with respect to commissions and that investors are willing to pay a premium for access to top research analysts and order-flow information. There is substantial heterogeneity across investors. Relative to other investors, hedge funds tend to be more price insensitive, place less value on sell-side research, and place more value on order-flow information. Furthermore, using trader-level data, we find that investors are more likely to trade with traders who are located physically closer and are less likely to trade with traders that have misbehaved in the past. Lastly, we use our empirical model to investigate the unbundling of equity research and execution services related to the MiFID II regulations. While under-reporting for the average firm is relatively small (4%), we find that the bundling of execution and research allows some institutional investors to under-report management fees by up to 15%.Link

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Market Reaction to Mandatory Nonfinancial Disclosure

Market Reaction to Mandatory Nonfinancial Disclosure. George Serafeim, August 8, 2019, Paper, “We examine the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure. These disclosures relate to firms’ environmental, social, and governance (ESG) performance, and would be applicable to firms listed on EU exchanges or with significant operations in the EU. We predict and find (i) an average negative market reaction of –0.79% across all firms, (ii) a less negative market reaction for firms having higher predirective nonfinancial performance, and (iii) a less negative reaction for firms having higher predirective nonfinancial disclosure levels. In addition, results are accentuated for firms having the most material ESG issues, as well as investors anticipating proprietary and political costs as a result of the mandated disclosures. Finally, we find that the negative market reaction is concentrated in firms with weak preregulation ESG performance and disclosure, which exhibit an average return of –1.54%; in contrast, firms with strong preregulation disclosure and performance exhibit an average positive return of 0.52%. Overall, the results are consistent with the equity market perceiving net costs (benefits) for firms with weak (strong) nonfinancial performance and disclosure around key events surrounding the mandatory disclosure regulation of nonfinancial information.Link

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