Consumer Default,Credit Reporting,and Borrowing Constraints

Why do negative credit events lead to long‐term borrowing constraints? Exploiting banking regulations in Peru and utilizing currency movements, we show that consumers who face a credit rating downgrade due to bad luck experience a three‐year reduction in financing. Consumers respond to the shock by paying down their most troubled loans, but nonetheless end up more likely to exit the credit market. For a set of borrowers who experience severe delinquency, we find that the associated credit reporting downgrade itself accounts for 25% to 65% of their observed decline in borrowing at various horizons over the following several years.     

Effect of a Class Action Suit on Consumer Repurchase Intentions

This study examines willingness to repurchase a Toyota among 335 Toyota owners, 246 who had participated in a class action suit against Toyota and 89 who had not participated. It also examines attitudes toward auto dealers and manufacturers and includes a psychographic measure of global consumer loyalty. Respondents were interviewed one to two years after participants had received a cash settlement to compensate for illegal overcharging. Multivariate analysis indicates that compared to nonparticipants, settlement participants, especially those satisfied with the settlement, were more willing to repurchase a Toyota and were less positive in their attitudes toward the Toyota manufacturer. Positive attitudes toward the Toyota manufacturer and dealers were associated with higher repurchase willingness, while positive attitudes toward other dealers and manufacturers were associated with lower repurchase willingness. Consumer loyalty was associated with higher repurchase willingness. These findings and their implications are discussed in terms of several theoretical frameworks.     

Capital Project Analysis When Cash Flows Evolve as a Continuous Time Branching Process

Optimal capital budgeting criteria now exist for a variety of applications when project cash flows (or present values) evolve in terms of the well-known geometric Brownian motion. However, relatively little is known about the capital budgeting procedures that ought to be implemented when cash flows are generated by stochastic processes other than the geometric Brownian motion. Given this, our purpose here is to develop optimal investment criteria for capital projects with cash flows that evolve in terms of a continuous time branching process. Branching processes are compatible with an empirical phenomenon known as 'volatility smile'. This occurs when there are systematic fluctuations in the implied volatility of a capital project's cash flows as the cash flow grows in magnitude. A number of studies have shown that this phenomenon characterizes the cash flow streams of the capital projects in which firms typically invest. We implement optimal capital budgeting procedures for both the continuous time branching process and the geometric Brownian motion using cost and revenue data for the Stuart oil shale project in central Queensland, Australia. This example shows that significant differences can arise between the optimal investment criteria for cash flows based on a branching process and those based on the geometric Brownian motion. This underscores the need for the geometric Brownian motion broadly to reflect the way a given capital project's cash flows actually evolve if serious errors in valuation and/or capital budgeting decisions are to be avoided.     

Patents, Innovation and Growth

New growth theories emphasize the role played by innovation in promoting economic growth. Since it is difficult to quantify the amount of innovation undertaken in an economy, there is little available empirical evidence assessing the contribution made by innovation to growth, in contrast to abundant evidence on the role of physical capital accumulation in the growth process. In this paper patent data are used to proxy the amount of innovation undertaken in an economy. The patent data are used to explore two questions. First, how important is innovation to economic growth in Australia, and second, are reductions in innovations sourced in Australia offset by increases in foreign sourced innovations in Australia?     

Time Variation in Liquidity: The Role of Market-Maker Inventories and Revenues

We show that market-maker balance sheet and income statement variables explain time variation in liquidity, suggesting liquidity-supplier financing constraints matter. Using 11 years of NYSE specialist inventory positions and trading revenues, we find that aggregate market-level and specialist firm-level spreads widen when specialists have large positions or lose money. The effects are nonlinear and most prominent when inventories are big or trading results have been particularly poor. These sensitivities are smaller after specialist firm mergers, consistent with deep pockets easing financing constraints. Finally, compared to low volatility stocks, the liquidity of high volatility stocks is more sensitive to inventories and losses.     

Expected Mispricing: The Joint Influence of Accounting Transparency and Investor Base

We examine how accounting transparency and investor base jointly affect financial analysts' expectations of mispricing (i.e., expectations of stock price deviations from fundamental value). Within a range of transparency, these two factors interactively amplify analysts' expectations of mispricing—analysts expect a larger positive deviation when a firm's disclosures more transparently reveal income‐increasing earnings management and the firm's most important investors are described as transient institutional investors with a shorter‐term horizon (low concentration in holdings, high portfolio turnover, and frequent momentum trading) rather than dedicated institutional investors with a longer‐term horizon (high concentration in holdings, low portfolio turnover, and little momentum trading). Results are consistent with analysts anticipating that transient institutional investors are more likely than dedicated institutional investors to adjust their trading strategies for near‐term factors affecting stock mispricings. Our theory and findings extend the accounting disclosure literature by identifying a boundary condition to the common supposition that disclosure transparency necessarily mitigates expected mispricing, and by providing evidence that analysts' pricing judgments are influenced by their anticipation of different investors' reactions to firm disclosures.     

The Fundamental Review of the Trading Book: Implications for Portfolio and Risk Management in the Banking Sector

The Fundamental Review of the Trading Book (FRTB) is the promised overhaul of bankmarket risk regulation. FRTB retains the authorized use of proprietary risk models, however, it introduces two additional criteria: (i) P&L attribution (PLA) tests and (ii) desk-level backtests. We examine empirically whether these additional criteria influence risk management and portfolio management practice, specifically portfolio construction and choice of risk model. We find that the PLA tests demand significant alignment with risk factors, however, the backtests do not incentivize use of superior risk models. This has important implications for the efficacy of the capital-based regulatory system.     

Liquidity Requirements,Free-Riding,and the Implications for Financial Stability Evidence from the Early 1900s

Maintaining sufficient liquidity in the financial system is vital for its stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent.