Financial Frictions,Investment Delay,and Asset Market Interventions

We construct a dynamic macro model to incorporate financial frictions and investment delay. Investment is undertaken by entrepreneurs who face liquidity frictions in the equity market and a collateral constraint in the debt market. After calibrating the model to the U.S. data, we quantitatively examine how aggregate activity is affected by a shock to equity liquidity and a shock to entrepreneurs' borrowing capacity. We then analyze the effectiveness of government interventions in the asset market after such financial shocks. In particular, we compare the effects of government purchases of private equity and of private debt in the open market. In addition, we examine how these effects of government interventions depend on the option to delay investment.     

Stock liquidity,empire building,and valuation

We conjecture that high stock liquidity negatively affects firm valuation by inducing inefficient investment. Using takeovers of public targets to study the empire-building motive, we find that a liquid firm is more likely than an illiquid firm to acquire a public firm. Such a takeover by a bidder with higher stock liquidity destroys bidder value to a larger degree. These patterns occur in both stock and cash acquisitions and hold after we use decimalization of tick size as a quasi-exogenous shock to stock liquidity. Finally, we show that financial constraints and corporate governance play important roles in the effects of stock liquidity on empire building in mergers and acquisitions.     

杠杆率变动、固定资产投资与研发活动——兼论金融赋能高质量发展

本文通过构建一个包含企业固定资产投资与研发投资的理论模型,分析得出企业杠杆率变动与投资行为的非线性关系。实证结果表明,低杠杆下,杠杆率的增大会使企业增加固定资产和研发投资的规模。对于财务柔性更强、发展前景更好的企业,杠杆率的提升能够增大此类企业的研发投入占比,即企业开展更多能够提升技术水平的研发活动。进一步研究发现,短期杠杆与商业信用杠杆的提升有助于财务柔性较好的企业提高研发投资占比,而对于发展前景不佳的僵尸企业,长期杠杆和银行杠杆的提升反而会使其扩大固定资产投资,加剧产能过剩问题。本文的政策含义在于,要在保持宏观杠杆率基本稳定的前提下,引导金融资源更多投入到创新型经济上,给予优质及前景较好的企业一定杠杆率调整空间和自由度,使其能够更好地利用社会资金,激励其开展研发活动,促进金融更好地服务实体经济,赋能高质量发展。     

Stock liquidity and dividend policy: Evidence from an imputation tax environment

This paper investigates the impact of stock market liquidity on firms' dividend payout policy in the Australian market. The finding suggests that stock liquidity positively relates to firm dividend payouts. The result holds after controlling for different model estimations and different measures of stock liquidity/dividend. To address endogeneity issue, I use the removal of broker identities by the ASX in 2005 as an exogenous shock to stock liquidity. The result suggests that there is an increase in stock liquidity around this shock, leading to an increase in firm dividend, suggesting a causal effect of stock liquidity on firm dividend. I further document that stock liquidity enhances firm dividend through reducing cash-flow volatility and the effect of stock liquidity on firm dividend is weaker for firms reporting imputation tax credit.     

Can hedge funds time market liquidity?

We explore a new dimension of fund managers' timing ability by examining whether they can time market liquidity through adjusting their portfolios' market exposure as aggregate liquidity conditions change. Using a large sample of hedge funds, we find strong evidence of liquidity timing. A bootstrap analysis suggests that top-ranked liquidity timers cannot be attributed to pure luck. In out-of-sample tests, top liquidity timers outperform bottom timers by 4.0–5.5% annually on a risk-adjusted basis. We also find that it is important to distinguish liquidity timing from liquidity reaction, which primarily relies on public information. Our results are robust to alternative explanations, hedge fund data biases, and the use of alternative timing models, risk factors, and liquidity measures. The findings highlight the importance of understanding and incorporating market liquidity conditions in investment decision making.     

Liquidity,assets and business cycles

The objective here is to evaluate the quantitative importance of financial frictions in business cycles. The analysis shows that a negative financial shock can cause aggregate investment, employment and consumption to fall with output. Despite this realistic comovement among macro quantities, a negative financial shock generates an equity price boom as the shock tightens firms׳ financing constraint. This counterfactual response of the equity price is robust to a wide range of variations in how financial frictions are modeled and whether financial shocks affect asset liquidity or firms׳ collateral constraints. Some possible resolutions to this puzzle are discussed.     

COMMONALITY IN LIQUIDITY OF NEARBY FIRMS

In this article, we examine commonality in liquidity of firms headquartered in the same states and how the local liquidity commonality is influenced by firm‐ and state‐level characteristics. We document strong liquidity comovement of nearby firms. Moreover, firms that change headquarters location experience a decrease in their liquidity commonality with firms in the old states and an increase in their liquidity commonality with firms in the new states. Our findings show that both firm‐ and state‐level characteristics determine local liquidity comovement. Local liquidity commonality is stronger for firms with smaller size and lower level of institutional ownership. Our results also suggest that state‐level volatility, state personal income, state investment income, and state turnover commonality explain the local component of liquidity commonality. We further document that the four state‐level factors perform differently during volatile market periods.     

Conditional portfolio allocation: Does aggregate market liquidity matter?

This paper investigates how aggregate liquidity influences optimal portfolio allocations across various US characteristic portfolios. We consider short-term allocation problems, with single and multiple risky assets, and use the nonparametric approach of Brandt (1999) to directly express optimal portfolio weights as functions of aggregate liquidity shocks. We find, first, that the effect of aggregate liquidity is positive and decreasing with the investment horizon. Second, at daily and weekly horizons, this effect is weaker on allocations in large stocks and gets stronger as we move toward small stocks, regardless of the other stock characteristics, suggesting that liquidity is the main concern of very short-term investors. Third, conditional allocations in risky assets decrease and exhibit shifts toward more liquid assets as aggregate liquidity worsens. Overall, conditioning on aggregate liquidity yields empirical results that are consistent with the so-called flight-to-safety and flight-to-liquidity episodes. Finally, we propose a simple tactical investment strategy and show how aggregate liquidity information can be exploited to enhance the out-of-sample performance of long-term strategies.     

Time-to-build, time-to-plan, habit-persistence, and the liquidity effect

The inability of sticky-price monetary business cycle models to generate liquidity effects has been extensively documented by a number of authors. This paper develops a sticky-price monetary business cycle model with investment gestation lags and habit-persistence in consumption that is capable of generating an empirically plausible liquidity effect.     

Stock Liquidity and Investment Opportunities: Evidence from Index Additions

We examine the relation between stock liquidity and investment opportunities in a sample of firms experiencing an exogenous liquidity shock. We find a positive relation between changes in capital expenditures and changes in stock liquidity, indicating that stock liquidity influences corporate investment decisions. This relation is robust to alternative measures of growth opportunities, and is consistent with a liquidity premium in equity returns. That is, an increase in liquidity effectively expands the set of positive NPV projects because it reduces the cost of capital. The results suggest that liquidity-enhancing events benefit shareholders by increasing the pool of viable growth opportunities.     

Relationship Banking, Liquidity, and Investment in the German Industrialization

Close bank relationships are thought to ameliorate firms' liquidity constraints—a phenomenon frequently measured by liquidity sensitivity of investment. Using German firms during the formative years of universal banking (1903–1913), this paper shows that, even controlling for selection bias, investment is more sensitive to internal liquidity for bank-networked firms than unattached firms. The firm exhibiting the greatest liquidity sensitivity, however, faced no apparent liquidity constraint. The findings yield two implications: they support recent research rejecting a linear relationship between liquidity sensitivity and financing constraints, and they suggest that relationship banking provides no consistent lessening of firms' liquidity sensitivity.     

A global approach to mutual funds market timing ability

In this paper, we globally investigate market timing abilities of mutual fund managers from the three perspectives: market return, market-wide volatility and aggregate liquidity. We propose a new specification to study market timing. Instead of considering an average market exposure for mutual funds, we allow mutual fund market betas to follow a random walk in the absence of market timing ability. As a consequence, we capture market exposure dynamics which is really due to manager market timing skills while allowing dynamics to come from other sources than market timing. We find that on average 6% of mutual funds display return market timing abilities while this percentage amounts to respectively 13% and 14% for volatility and liquidity market timing. We also analyze market timing by investment strategies and for surviving and dead funds. Dead funds exhibit lower volatility and liquidity timing skills than live funds.     

Liquidity and firm investment: Evidence for Latin America

This paper explores the relationship between firms' investment and stock market liquidity. Using a panel of Latin American firms, I find evidence that a higher trading volume and a higher industry-adjusted trading volume are associated with higher firm investment (PPE, Total Assets, and Inventory). This relationship is higher in episodes where the firm decides to issue shares, and it is also greater for firms with tighter financial constraints and better investment opportunities. This evidence is consistent with a mispricing channel, where firms issue and invest the proceeds to take advantage of low cost of capital, or with a cost channel, where liquidity is associated with lower issuance costs. Also, it is less related with an informational channel, where a liquid market helps a manager to take more efficient decisions, since this channel does not necessarily predict an increase in investment, but only more efficient investment.     

Stock liquidity and investment opportunities: New evidence from FTSE 100 index deletions

This paper examines the relationship between stock liquidity and investment opportunities in a sample of firms experiencing a negative exogenous liquidity shock, captured by deletion from the FTSE 100 stock index. We find no statistical association between stock liquidity and investment opportunities. These findings are in sharp contrast to the positive relation between liquidity and investment opportunities reported in US equity markets. This unique result in the London Stock Exchange suggests that deletion from a major stock index does not influence corporate investment decisions because there is no significant change in the cost of capital.     

Cross-sectional heterogeneity and the persistence of aggregate fluctuations

The microevidence indicates that small firms grow faster than big firms. I argue that this relationship between the expected growth rate of a firm and its size may provide a microfoundation for the well-known high degree of persistence of shocks to aggregate output. The logic goes as follows. Almost any shock tends to temporarily alter firms' incentive to invest in growth thereby leading to a reallocation of firms across size categories. If small firms grow faster than big ones, the impact effect of the shock on aggregate output is gradually absorbed. But, as fast growing small firms become big and start to grow at the lower rate of big firms, the rate at which the shock is absorbed decreases over the adjustment path. As a result, shocks are absorbed, yet at a very low decreasing rate which induces long memory in aggregate output. I argue that this transmission mechanism may reconcile the microevidence with the observed degree of aggregate persistence. It requires changes in neither the number of firms in the market nor the rate of technological progress. It is merely the result of the cross-sectional heterogeneity that we observe in real economies.     

隐性杠杆约束、流动性风险和投资者情绪

本文以2003—2019年间开放式主动管理型的股票型和偏股型基金为样本,以持仓占比为权重估算基金投组中A股的总市场风险暴露,检验结果表明,该序列上升反映了基金面临的隐性杠杆约束收紧,刻画了市场的弱流动性。内在逻辑在于,流动性收紧时,投资者难以通过融资直接增加杠杆,更倾向于重仓持有高市场风险头寸的股票而间接实现杠杆。本文发现隐性杠杆约束所刻画的风险在股票或基金收益截面上的无条件定价基本失效,而条件定价则依赖于低市场情绪与弱流动性。分解基金持股的敞口,进一步发现,因中小盘基金在流动性收紧时具有更强的流动性偏好,其持股的市场风险头寸能够更敏锐地捕捉到弱流动性风险。     

Bubbles and capital flow volatility: Causes and risk management

Emerging market economies are fertile ground for the development of real estate and other financial bubbles. Despite these economies’ significant growth potential, their corporate and government sectors do not generate the financial instruments to provide residents with adequate stores of value. Capital often flows out of these economies seeking these stores of value in the developed world. Bubbles are beneficial because they provide domestic stores of value and thereby reduce capital outflows while increasing investment. But they come at a cost, as they expose the country to bubble-crashes and capital flow reversals. We show that domestic financial underdevelopment not only facilitates the emergence of bubbles, but also leads agents to undervalue the aggregate risk embodied in financial bubbles. In this context, even rational bubbles can be welfare reducing. We study a set of aggregate risk management policies to alleviate the bubble-risk. We show that liquidity requirements, sterilization of capital inflows and structural policies aimed at developing public debt markets ‘collateralized’ by future revenues, all have a high payoff in this environment.     

Does the investment horizon of institutional investors matter for stock liquidity?

This paper examines the role of the investment horizon of institutional investors on stock liquidity of firms. We show that an increase in long-term institutional ownership is negatively associated with firm liquidity, while an increase in short-term ownership is positively related to a firm's stock liquidity. We identify the ownership-liquidity relationship by examining two major channels: the trading activity channel and the informational friction channel. Long-term investors reduce stock liquidity through low frequency trading and access to value-enhancing and private information, which induces adverse selection bias. In contrast, short-term investors improve liquidity through trading activity and competition with other investors, which lowers transaction costs. Our findings further suggest that the effects of an increase in long-term (short-term) institutional investors on liquidity weaken (strengthen) when a firm has more publicly available information. Finally, we show that the positive impact of an increase in long-term ownership on valuation is more pronounced for firms with higher liquidity and the valuation effect is persistent.     

Contagion of a liquidity crisis between two firms

This paper presents a model in which the contagion of a liquidity crisis between two nonfinancial institutions occurs because of learning activity within a common creditor pool. After creditors observe what occurs in a rollover game for a firm, they conjecture one another's “type” or attitude toward the risk associated with the firm's investment project. Creditors' inference about one another's type then influences their decision to lend to the next firm. By providing an analysis of the “incidence of failure” (the threshold for a liquidity crisis) for each firm, this paper demonstrates that the risk of contagion increases sharply if it originates ex ante from a firm facing a low probability of failure. In addition, the paper proposes some policy measures for mitigating the severity of contagion during a liquidity crisis.     

What Drives the Owner‐Occupied and Rental Housing Markets? Evidence from an Estimated DSGE Model

Most dynamic stochastic general equilibrium (DSGE) models with a housing market do not explicitly include a rental market and assume a tight mapping between house prices and rents over the business cycle. However, rents are much smoother than house prices in the data. We match this feature of the data by adding both an owner‐occupied housing market and a rental market in a standard DSGE model. The intertemporal preference shock accounts for more than half of the variation in house prices and contributes to residential investment fluctuations through the liquidity constraint, and nominal rigidity in rental contracts captures the variation in the price‐rent ratio.