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558
Returns to experience for U.S. workers have changed over the post-war period. This paper argues that a simple model goes a long way towards replicating these changes. The model features three well-known ingredients: (i) an aggregate production function with constant skill-biased technical change; (ii) cohort qualities that vary with average years of schooling; and crucially (iii) time-invariant age-efficiency profiles. The model quantitatively accounts for changes in longitudinal and cross-sectional returns to experience, as well as the differential evolution of the college wage premium for young and old workers.
528
This study examines the role of actual and perceived financial sophistication (i.e., financial literacy and confidence) for individuals' wealth accumulation. Using survey data from the German SAVE initiative, we find strong gender- and education-related differences in the distribution of the two variables and their effects on wealth: As financial literacy rises in formal education, whereas confidence increases in education for men but decreases for women, we observe that women become strongly underconfident with higher education, while men remain overconfident.Regarding wealth accumulation, we show that financial literacy has a positive effect that is stronger for women than for men and that is increasing (decreasing) in education for women (men). Confidence, however, supports only highly-educated men's wealth. When considering different channels for wealth accumulation, we observe that financial literacy is more important for current financial market participation, whereas confidence is more strongly associated with future-oriented financial planning. Overall, we demonstrate that highly-educated men's wealth levels benefit from their overconfidence via all financial decisions considered, but highly-educated women's financial planning suffers from their underconfidence. This may impair their wealth levels in old age.
552
Event studies have become increasingly important in securities fraud litigation after the Supreme Court’s decision in Halliburton II. Litigants have used event study methodology, which empirically analyzes the relationship between the disclosure of corporate information and the issuer’s stock price, to provide evidence in the evaluation of key elements of federal securities fraud, including materiality, reliance, causation, and damages. As the use of event studies grows and they increasingly serve a gatekeeping function in determining whether litigation will proceed beyond a preliminary stage, it will be critical for courts to use them correctly.
This Article explores an array of considerations related to the use of event studies in securities fraud litigation. It starts by describing the basic function of the event study: to determine whether a highly unusual price movement has occurred and the traditional statistical approach to making that determination. The Article goes on to identify special features of securities fraud litigation that distinguish litigation from the scholarly context in which event studies were developed. The Article highlights the fact that the standard approach can lead to the wrong conclusion and describes the adjustments necessary to address the litigation context. We use the example of six dates in the Halliburton litigation to illustrate these points.
Finally, the Article highlights the limitations of event studies – what they can and cannot prove – and explains how those limitations relate to the legal issues for which they are introduced. These limitations bear upon important normative questions about the role event studies should play in securities fraud litigation.
543
Based on a unique data set of driving behavior we find direct evidence that private information has significant effects on contract choice and risk in automobile insurance. The number of car rides and the relative distance driven on weekends are significant risk factors. While the number of car rides and average speeding are negatively related to the level of liability coverage, the number of car rides and the relative distance driven at night are positively related to the level of first-party coverage. These results indicate multiple and counteracting effects of private information based on risk preferences and driving behavior.
539
Using novel monthly data for 226 euro-area banks from 2007 to 2015, we investigate the determinants of changes in banks’ sovereign exposures and their effects during and after the crisis. First, public, bailed out and poorly capitalized banks responded to sovereign stress by purchasing domestic public debt more than other banks, with public banks’ purchases growing especially in coincidence with the largest ECB liquidity injections. Second, bank exposures significantly amplified the transmission of risk from the sovereign and its impact on lending. This amplification of the impact on lending does not appear to arise from spurious correlation or reverse causality.
570
We use the Italian Survey of Household Income and Wealth, a rather unique dataset with a long time dimension of panel information on consumption, income and wealth, to structurally estimate a buffer-stock saving model. We exploit the information contained in the joint dynamics of income, consumption and wealth to quantify the degree of insurance against income risk. The estimated model implies that Italian households can insure between 89 and 95 percent of a transitory and between 7 and 9 percent of a permanent income shock. Compared to existing empirical estimates for the same dataset, our findings suggest that Italian households do not have access to significant insurance beyond self-insurance.
559
Does an increase in competition increase or decrease bank stability? I exploit how the state-specific process of interstate banking deregulation lowered barriers to entry into urban banking markets and find that greater competition significantly increases bank stability. This result is robust to the inclusion of additional fixed effects and other influences, such as merger and acquisitions or diversification. Moreover, I find that greater competition reduces banks' nonperforming loans and increases bank profitability. These findings suggest that competition increases stability as it improves bank profitability and asset quality.
547
This paper shows that long debt maturities eliminate equity holders’ incentives to reduce leverage when the firm performs poorly. By contrast, short debt maturities commit equity holders to such leverage reductions. However, shorter debt maturities also lead to higher transactions costs when maturing bonds must be refinanced. We show that this tradeoff between higher expected transactions costs against the commitment to reduce leverage when the firm is doing poorly motivates an optimal maturity structure of corporate debt. Since firms with high costs of financial distress benefit most from committing to leverage reductions, they have a stronger motive to issue short-term debt.
563
It is commonly believed that the response of the price of corn ethanol (and hence of the price of corn) to shifts in biofuel policies operates in part through market expectations and shifts in storage demand, yet to date it has proved difficult to measure these expectations and to empirically evaluate this view. We utilize a recently proposed methodology to estimate the market’s expectations of the prices of ethanol, unfinished motor gasoline and crude oil at horizons from three months to one year. We quantify the extent to which price changes were anticipated by the market, the extent to which they were unanticipated, and how the risk premium in these markets has evolved. We show that the Renewable Fuel Standard (RFS) is likely to have increased ethanol price expectations by as much $1.45 in the year before and in the year after the implementation of the RFS had started. Our analysis of the term structure of expectations provides support for the view that a shift in ethanol storage demand starting in 2005 caused an increase in the price of ethanol. There is no conclusive evidence that the tightening of the RFS in 2008 shifted market expectations, but our analysis suggests that policy uncertainty about how to deal with the blend wall raised the risk premium in the ethanol futures market in mid-2013 by as much as 50 cents at longer horizons. Finally, we present evidence against a tight link from ethanol price expectations to corn price expectations and hence to storage demand for corn in 2005-06.
553
Directors have traditionally been elected by a plurality of the votes cast. This means that in uncontested elections, a candidate who receives even a single vote is elected. Proponents of “shareholder democracy” have advocated a shift to a majority voting rule in which a candidate must receive a majority of the votes cast to be elected. Over the past decade, they have been successful, and the shift to majority voting has been one of the most popular and successful governance reforms.
Yet critics are skeptical as to whether majority voting improves board accountability. Tellingly, directors of companies with majority voting rarely fail to receive majority approval – even more rarely than directors of companies with plurality voting. Even when such directors fail to receive majority approval, they are unlikely to be forced to leave the board. This poses a puzzle: why do firms switch to majority voting and what effect does the switch have, if any, on director behavior?
We empirically examine the adoption and impact of a majority voting rule using a sample of uncontested director elections from 2007 to 2013. We test and find partial support for four hypotheses that could explain why directors of majority voting firms so rarely fail to receive majority support: selection; deterrence/accountability; electioneering by firms; and restraint by shareholders.
Our results further suggest that the reasons for and effects of adopting majority voting may differ between early and later adopters. We find that early adopters of majority voting were more shareholder-responsive than other firms even before they adopted majority voting. These firms seem to have adopted majority voting voluntarily, and the adoption of majority voting has made little difference in their responsiveness to shareholders responsiveness going forward. By contrast, for late adopters, we find no evidence that they were more shareholder-responsive than other firms before they adopted majority voting, but strong evidence that they became more responsive after adopting majority voting.
Differences between early and late adopters can have important implications for understanding the spread of corporate governance reforms and evaluating their effects on firms. Reform advocates, rather than targeting the firms that, by their measures, are most in need of reform, instead seem to have targeted the firms that are already most responsive. They may then have used the widespread adoption of majority voting to create pressure on the nonadopting firms. Empirical studies of the effects of governance changes thus need to be sensitive to the possibility that early adopters and late adopters of reforms differ from each other and that the reforms may have different effects on these two groups of firms.
537
The euro crisis was fueled by the diabolic loop between sovereign risk and bank risk, coupled with cross-border flight-to-safety capital flows. European Safe Bonds (ESBies), a union-wide safe asset without joint liability, would help to resolve these problems. We make three contributions. First, numerical simulations show that ESBies would be at least as safe as German bunds and approximately double the supply of euro safe assets when protected by a 30%-thick junior tranche. Second, a model shows how, when and why the two features of ESBies — diversification and seniority — can weaken the diabolic loop and its diffusion across countries. Third, we propose a step-by-step guide on how to create ESBies, starting with limited issuance by public or private-sector entities.
526
Chen and Zadrozny (1998) developed the linear extended Yule-Walker (XYW) method for determining the parameters of a vector autoregressive (VAR) model with available covariances of mixed-frequency observations on the variables of the model. If the parameters are determined uniquely for available population covariances, then, the VAR model is identified. The present paper extends the original XYW method to an extended XYW method for determining all ARMA parameters of a vector autoregressive moving-average (VARMA) model with available covariances of single- or mixed-frequency observations on the variables of the model. The paper proves that under conditions of stationarity, regularity, miniphaseness, controllability, observability, and diagonalizability on the parameters of the model, the parameters are determined uniquely with available population covariances of single- or mixed-frequency observations on the variables of the model, so that the VARMA model is identified with the single- or mixed-frequency covariances.
551
Using merger announcements and applying methods from computational linguistics we find strong evidence that stock prices under-react to information in financial media. A one standard deviation increase in the media-implied probability of merger completion increases the subsequent 12-day return of a long-short merger strategy by 1.2 percentage points. Filtering out the 28% of announced deals with the lowest media-implied completion probability increases the annualized alpha from merger arbitrage by 9.3 percentage points. Our results are particularly pronounced when high-yield spreads are large and on days when only few merger deals are announced. We also document that financial media information is orthogonal to announcement day returns.
525
It has been forty years since the oil crisis of 1973/74. This crisis has been one of the defining economic events of the 1970s and has shaped how many economists think about oil price shocks. In recent years, a large literature on the economic determinants of oil price fluctuations has emerged. Drawing on this literature, we first provide an overview of the causes of all major oil price fluctuations between 1973 and 2014. We then discuss why oil price fluctuations remain difficult to predict, despite economists’ improved understanding of oil markets. Unexpected oil price fluctuations are commonly referred to as oil price shocks. We document that, in practice, consumers, policymakers, financial market participants and economists may have different oil price expectations, and that, what may be surprising to some, need not be equally surprising to others.
530
We assess the degree of market fragmentation in the euro-area corporate bond market by disentangling the determinants of the risk premium paid on bonds at origination. By looking at over 2,400 bonds we are able to isolate the country-specific effects which are a suitable indicator of the market fragmentation. We find that, after peaking during the sovereign debt crisis, fragmentation shrank in 2013 and receded to pre-crisis levels only in 2014. However, the low level of estimated market fragmentation is coupled with a still high heterogeneity in actual bond yields, challenging the consistency of the new equilibrium.
556
We examine the impact of house prices on labour supply decisions using UK micro data. We combine household survey data with local level house price measures and controls for local labour demand. Our micro data also allows us to control for individual level income expectations. We find significant house price effects on labour supply, consistent with leisure being a normal good. Labour supply responses to house prices are concentrated among young married female owners and older owners. This finding suggests house prices affect the decisions of marginal workers in the economy. Our estimates imply house prices are economically important for the participation decisions for these workers.
541
How do insiders trade?
(2016)
We characterize how informed investors trade in the options market ahead of corporate news when they receive private, but noisy, information about (i) the timing of the announcement and (ii) its impact on stock prices. Our theoretical framework generates a rich set of predictions about the insiders’ behavior and their maximum expected returns. Three different analyses offer empirical support for our approach. First, predicted trades resemble illegal insider trades documented in SEC litigation cases with insiders being more likely to trade in options that offer higher expected returns. Second, pre-announcement patterns in unusual activity in the options market ahead of significant corporate news are consistent with the predictions of our framework. We employ our approach to characterize informed trading ahead of twelve different types of news including the announcement of earnings, corporate guidance, M&As, product innovations, management changes, and analyst recommendations. Third, to address concerns that pre-announcement patterns are driven by speculation, we show that measures capturing trading activity in call (put) options with high expected returns predict significant positive (negative) corporate news in the aggregate cross-section.
538
The recent financial crisis has demonstrated that a failure of Systemically Important Financial Institutions (SIFIs) could seriously damage the stability of the financial system. A precise and consistent definition of a SIFI is pivotal to ensure efficient and effective regulation of the global financial sector. This paper proposes a threefold test logic that allows to classify Financial Institutions as systemically important across the various industry segments.
557
We reconsider the role for human capital in accounting for cross-country income differences. Our contribution is to bring to bear new data on the pre- and post- migration labor market experiences of immigrants to the U.S. Immigrants from poor countries experience wage gains that are only 40 percent of the GDP per worker gap, which implies that “country" accounts for 40 percent of income differences, while human capital accounts for 60 percent. Our approach handles selection by comparing the wage of the same individual in two different countries. We also provide evidence on and a correction for skill transfer.
560
This paper explores the impact of immigrants on the imports, exports and productivity of service- producing firms in the U.K. Immigrants may substitute for imported intermediate inputs (offshore production) and they may impact the productivity of the firm as well as its export behavior. The first effect can be understood as the re-assignment of offshore productive tasks to immigrant workers. The second can be seen as a productivity or cost cutting effect due to immigration, and the third as the effect of immigrants on specific bilateral trade costs. We test the predictions of our model using differences in immigrant inflows across U.K. labor markets, instrumented with an enclave-based instrument that distinguishes between aggregate and bilateral immigration, as well as immigrant diversity. We find that immigrants increase overall productivity in service-producing firms, revealing a cost cutting impact on these firms. Immigrants also reduce the extent of country-specific offshoring, consistent with a reallocation of tasks and, finally, they increase country-specific exports, implying an important role in reducing communication and trade costs for services.