Understanding Post‐Euro Law‐of‐One‐Price Deviations

We put together a unique panel of thousands of good‐level prices before and after the euro to compare the determinants and understand the evolution of goods price dispersion across Europe over time. We find that tradeability and nontraded inputs play a significantly smaller role for cross‐country price dispersion after the adoption of the euro, and for Eurozone economies as compared to European Union ones. We then compare the distributions of law‐of‐one‐price (LOP) deviations over time to understand how the degree of integration across European economies changed after the euro. Our tests reveal that the distributions after the euro are typically significantly different from those before, consistent with a greater degree of integration. Utilizing our unique panel data set to trace the location of individual goods in the distribution of LOP deviations, we ask how the price advantage or disadvantage evident in these price distributions evolves over time, and whether goods characteristics play a role for the persistence of these LOP deviations. LOP deviations for these goods are highly correlated over 5‐ or 10‐ year horizons, and correlations remain significantly high over longer horizons. These correlations are greater for homogeneous as compared to differentiated goods and vary across countries. Finally, for most of these European economies and goods, price advantage is typically revealed to be more persistent than price disadvantage.     

On the Life Cycle Dynamics of Venture‐Capital‐ and Non‐Venture‐Capital‐Financed Firms

We use data over 25 years to understand the life cycle dynamics of VC‐ and non‐VC‐financed firms. We find successful and failed VC‐financed firms achieve larger scale but are not more profitable at exit than matched non‐VC‐financed firms. Cumulative failure rates of VC‐financed firms are lower, with the difference driven largely by lower failure rates in the initial years after receiving VC. Our results are not driven by VCs disguising failures as acquisitions or by certain types of VCs. The performance difference between VC‐ and non‐VC‐financed firms narrows in the post‐internet bubble years, but does not disappear.     

A neural‐network‐based decision‐making model in the peer‐to‐peer lending market

This study proposes an investment recommendation model for peer‐to‐peer (P2P) lending. P2P lenders usually are inexpert, so helping them to make the best decision for their investments is vital. In this study, while we aim to compare the performance of different artificial neural network (ANN) models, we evaluate loans from two perspectives: risk and return. The net present value (NPV) is considered as the return variable. To the best of our knowledge, NPV has been used in few studies in the P2P lending context. Considering the advantages of using NPV, we aim to improve decision‐making models in this market by the use of NPV and the integration of supervised learning and optimization algorithms that can be considered as one of our contributions. In order to predict NPV, three ANN models are compared concerning mean square error, mean absolute error, and root‐mean‐square error to find the optimal ANN model. Furthermore, for the risk evaluation, the probability of default of loans is computed using logistic regression. Investors in the P2P lending market can share their assets between different loans, so the procedure of P2P investment is similar to portfolio optimization. In this context, we minimize the risk of a portfolio for a minimum acceptable level of return. To analyse the effectiveness of our proposed model, we compare our decision‐making algorithm with the output of a traditional model. The experimental results on a real‐world data set show that our model leads to a better investment concerning both risk and return.     

Price Discovery in Near‐ and Away‐from‐the‐Money Option Markets

This paper examines the relative price discovery roles of near‐ and away‐from‐the‐money option markets. The evidence shows that, when considering multiple options with different strike prices jointly, option markets have an average information share of 17.6%. However, no individual option market dominates in the price discovery process, higher and lower trading activity options (i.e., near‐ and away‐from‐the‐money options, respectively) each contribute approximately equally to this process. The main implications of these results are that (1) collectively, option markets process a substantial amount of new stock price‐related information, and (2) looking across strike prices, option markets appear to be informationally nonredundant.     

Equity‐based incentives and shareholder say‐on‐pay

We study the relationship between CEO pay‐performance sensitivity, pay‐risk sensitivity, and shareholder voting outcomes as part of the “say‐on‐pay” provision of the 2010 US Dodd‐Frank Act. Consistent with our hypothesis, we provide evidence that shareholders tend to approve of compensation packages that are more sensitive to changes in stock price (pay‐performance sensitivity). Our findings are consistent with theoretical predictions that outside owners approve of equity incentives as a means of aligning managers' interests with those of shareholders. We also document that future changes to equity‐based incentives are related to voting outcomes and that shareholders incorporate CFO incentives into their votes. Collectively, these results provide evidence of the importance of equity‐based incentives from the perspective of those most concerned with firm value and of the effectiveness of say‐on‐pay as a governance mechanism.     

Risk‐based explanation for the book‐to‐market effect

This paper proposes a risk‐based explanation for the book‐to‐market (B/M) effect. I decompose B/M into net operating asset‐to‐market (NOA/M) and net financing asset‐to‐market (NFA/M) components. Portfolio analysis shows that (i) positive B/M, NOA/M and NFA/M are positively related to future returns and (ii) negative B/M, NOA/M and NFA/M are negatively related to future returns. To the extent that positive B/M, NOA/M and NFA/M act as measures of asset risk and negative B/M, NOA/M and NFA/M act as inverse measures of borrowing risk, the nonlinear relations between B/M, NOA/M and NFA/M and future returns provide some evidence to support the risk‐based explanation for the book‐to‐market effect in stock returns.     

Self‐Fulfilling Liquidity Dry‐Ups

I analyze a model in which holding cash imposes a negative externality: it worsens future adverse selection in markets for long‐term assets, which impairs their role for liquidity provision. Adverse selection worsens when potential sellers of long‐term assets hold more cash because then fewer sales reflect cash needs, and proportionally more sales reflect private information. Moreover, future market illiquidity makes current cash holding more appealing. This feedback effect may result in hoarding behavior and a market breakdown, which I interpret as a self‐fulfilling liquidity dry‐up. This mechanism suggests that imposing liquidity requirements on financial institutions may backfire.     

Neuro‐fuzzy time‐series analysis of large‐volume data

This paper describes a framework that utilizes an adaptive‐network‐based fuzzy inference system to perform user‐constrained pattern recognition on time‐series data. Using a customizable fuzzy logic grammar, the architecture allows an analyst to capture domain expertise in a context‐relevant manner. Fuzzy logic rules constructed by the analyst are used to perform feature extraction and influence the training of a neural network to perform pattern recognition. We demonstrate that the architecture is capable of performing noise‐tolerant searches across multiple features on large volumes of time‐series data. The experiments presented here are from the domain of stock analysis. We are able to create simple rule sets automatically to search a data warehouse of stocks to select stocks that exhibit desirable behaviours. Copyright © 2011 John Wiley & Sons, Ltd.     

On‐the‐Job Learning and News‐Driven Business Cycles

This paper proposes a new channel of on‐the‐job learning to explain the positive comovement between consumption and employment following good news about future productivity. The new recruits can generate an additional stream of output production in all future periods, and the firm's labor demand is thus characterized by the forward‐looking property. Therefore, the firm is motivated to hire more new recruits in advance in response to good news about future productivity. Once the increase in labor demand is greater than the decrease in labor supply caused by the income effect, the coincident rise in consumption and employment can be driven by the news shock. When such a channel is paired with investment adjustment costs and the endogenous capacity utilization rate, this paper provides a plausible explanation for simultaneous booms in current consumption, investment, output, and employment to match the empirical evidence under the news shock.     

“Too‐Small‐To‐Survive” versus “Too‐Big‐To‐Fail” banks: The two sides of the same coin

In the recent crisis, the U.S. authorities bailed out numerous banks through TARP, whilst let many others to fail as going concern entities. Even though both interventions fully protect depositors, a bail out represents an implied subsidy to shareholders, which is not yet the case with closures where creditors are not subsidised. We investigate this non‐uniform policy, demonstrating that size and not performance is the decision variable that endogenously determines one threshold below which banks are treated as TSTS by regulators and another one above which are considered to be TBTF. We, hence, provide a pair of economic rather than regulatory cut‐offs for TBTF and TSTS banks. The shareholders and the other uninsured creditors of a distressed bank are not bailed out if the bank is considered to be TSTS. We further document that the less complex a bank is, the less likely is to be bailed out and, hence, to have all of its creditors protected.     

Large‐Sample Evidence on Firms’ Year‐over‐Year MD&A Modifications

The Securities and Exchange Commission (SEC) has expressed concern about the informativeness of firms’ Management Discussion and Analysis (MD&A) disclosures. A firm's MD&A is potentially uninformative if it does not change appreciably from the previous year after significant economic changes at the firm. We introduce a measure for narrative disclosure—the degree to which the MD&A differs from the previous disclosure—and provide three findings on the usefulness of MD&A disclosure. First, firms with larger economic changes modify the MD&A more than those with smaller economic changes. Second, the magnitude of stock price responses to 10‐K filings is positively associated with the MD&A modification score, but analyst earnings forecast revisions are unassociated with the score, suggesting that investors—but not analysts—use MD&A information. Finally, MD&A modification scores have declined in the past decade even as MD&A disclosures have become longer; the price reaction to MD&A modification scores has also weakened, suggesting a decline in MD&A usefulness.     

Nasdaq ex‐day behavior: An out‐of‐sample test

We test various explanations of the ex‐dividend day price anomaly using Nasdaq‐listed firms. Similar to NYSE‐listed firms, on average the prices of Nasdaq‐listed firms drop by less than the dividend amount. However, the average Nasdaq price‐drop is substantially smaller than what existing theories would predict and translates to an imputed dividend tax rate that is double the maximum tax rate. We thus find little support for the tax hypothesis. We also find little support for the short‐term trading hypothesis and various other explanations. The significant disconnect we document between Nasdaq dividends and price changes seems to support the “free dividends fallacy.”     

The flight‐to‐quality effect: a copula‐based analysis

We derive and estimate a copula combining the features of the Frank and Gumbel copulas to analyse the relationship between equity and long‐term bond returns. Our analysis of quarterly returns from 1952 to 2003 finds that, in general, there is a positive relationship between equity returns and bond returns. In extreme situations, however, there is approximately a one‐in‐seven chance of a flight‐to‐quality effect where large negative equity returns are associated with large positive bond returns.     

Nonlinearity and Flight‐to‐Safety in the Risk‐Return Trade‐Off for Stocks and Bonds

We document a highly significant, strongly nonlinear dependence of stock and bond returns on past equity market volatility as measured by the VIX. We propose a new estimator for the shape of the nonlinear forecasting relationship that exploits variation in the cross‐section of returns. The nonlinearities are mirror images for stocks and bonds, revealing flight‐to‐safety: expected returns increase for stocks when volatility increases from moderate to high levels while they decline for Treasuries. These findings provide support for dynamic asset pricing theories in which the price of risk is a nonlinear function of market volatility.     

Risk‐Adjusted Long‐Term Contrarian Profits: Evidence from Non‐S&P 500 High‐Volume Stocks

Can trading volume help unravel the long‐term overreaction puzzle? With portfolios of non‐S&P 500 NYSE stocks, we show that (1) both the high‐ and low‐volume (abnormal volume) contrarian portfolios earn a much higher market‐adjusted excess return than the normal‐volume contrarian portfolio, (2) however, when leverage‐induced risk is factored in, excess returns from contrarian portfolios with normal‐ and low‐volume stocks are insignificant, (3) only excess returns from high‐volume contrarian stocks are significant and cannot be explained by the time‐varying risk and return framework, and (4) such high‐volume, risk‐adjusted excess returns arise mainly from winner (glamour) stocks.