Are U.S. Multinational Corporations Becoming More Aggressive Income Shifters?

This paper examines income shifting of U.S. multinational companies over the past two decades. Domestic and foreign policy makers are increasingly concerned with the effect of income shifting on dwindling tax revenues, however, extant research on income shifting by U.S. multinational enterprises is mixed. We address the disconnect between the academic literature and the policy maker's perceptions by examining the extent of multijurisdictional income shifting by U.S. multinational companies. We directly address conflicting results in extant literature and show that using either multiperiod proxies or instrumental variables overcomes weaknesses of annual proxies in this setting. Our tests show that U.S. companies have become more active at shifting income out of the United States as the regulatory costs of shifting have changed. Holding tax rate differences between U.S. and foreign jurisdictions constant, our empirical estimates suggest that our sample of 380 corporations with low average foreign tax rates collectively shifts approximately $10 billion of additional income out of the United States annually during 2005–2009 relative to 1998–2002 due to varying regulatory costs of shifting.     

Are Stocks Really Less Volatile in the Long Run?

According to conventional wisdom, annualized volatility of stock returns is lower over long horizons than over short horizons, due to mean reversion induced by return predictability. In contrast, we find that stocks are substantially more volatile over long horizons from an investor's perspective. This perspective recognizes that parameters are uncertain, even with two centuries of data, and that observable predictors imperfectly deliver the conditional expected return. Mean reversion contributes strongly to reducing long‐horizon variance but is more than offset by various uncertainties faced by the investor. The same uncertainties reduce desired stock allocations of long‐horizon investors contemplating target‐date funds.     

Why Do U.S. Firms Hold So Much More Cash than They Used To?

The average cash-to-assets ratio for U.S. industrial firms more than doubles from 1980 to 2006. A measure of the economic importance of this increase is that at the end of the sample period, the average firm can retire all debt obligations with its cash holdings. Cash ratios increase because firms' cash flows become riskier. In addition, firms change: They hold fewer inventories and receivables and are increasingly R&D intensive. While the precautionary motive for cash holdings plays an important role in explaining the increase in cash ratios, we find no consistent evidence that agency conflicts contribute to the increase.     

Are U.S. firms using more short-term debt?

We show that, despite the sharp but temporary decline around the financial crisis of 2007–08, corporate debt maturity has risen significantly in the last two decades, erasing much of the secular decline from the 1980–90s documented in the literature. The reversal in debt maturity trend is driven by the rise in the use of intermediate-term debt among medium and large-sized firms. The low interest rates observed in the last two decades and the decline in the demand for long-term corporate bonds partly explains the rise in intermediate-term debt.     

Why Do Foreign Firms Leave U.S. Equity Markets?

Foreign firms terminate their Securities and Exchange Commission registration in the aftermath of the Sarbanes–Oxley Act (SOX) because they no longer require outside funds to finance growth opportunities. Deregistering firms’ insiders benefit from greater discretion to consume private benefits without having to raise higher cost funds. Foreign firms with more agency problems have worse stock‐price reactions to the adoption of Rule 12h‐6 in 2007, which made deregistration easier, than those firms more adversely affected by the compliance costs of SOX. Stock‐price reactions to deregistration announcements are negative, but less so under Rule 12h‐6, and more so for firms that raise fewer funds externally.     

Are U.S. Companies Really Holding That Much Cash—And If So,Why?

Non‐financial S&P 500 companies are now estimated to hold a total of $2.1 trillion of “cash,” a figure that is larger than the annual GDP of all but eight countries. In this report, J.P. Morgan's Corporate Finance Advisory team notes that while many observers have attributed the buildup to offshore cash growth alone, onshore cash levels are also up significantly. To be sure, the companies that have shown the greatest increases also tend to be highly successful, with strong cash flow and business performance. And the managers of such companies tend to prefer to retain much if not most of this cash to take advantage of investment opportunities and to maintain the flexibility to respond to the next economic downturn. Also adding to the cash build‐ups, the executives of large MNCs with significant overseas cash holdings typically try to avoid the higher tax bill triggered by repatriating funds to the U.S. Nevertheless, investors continue to expect growth and high returns on capital; and corporate distributions of capital in the form of dividends and stock buybacks can play an important role in encouraging companies to operate efficiently. While pursuing both of these goals—preservation of enough cash to weather downturns and invest in all positive‐NPV projects, and commitment to paying out excess capital—boards and senior decision makers should continuously reexamine their cash holdings and capital allocation policies to ensure they are appropriate not only for today's environment, but throughout the economic cycle.     

Why Don't U.S. Issuers Demand European Fees for IPOs?

We compare fees charged by investment banks for conducting IPOs in the United States and Europe. In recent years, the “7% solution,” as documented by Chen and Ritter (2000) , has become even more prevalent in the United States, and is now the norm for IPOs raising up to $250 million. The same banks dominate both markets, but European IPO fees are roughly three percentage points lower, are much more variable, and have been falling. We review explanations for the gap in spreads and find the evidence consistent with strategic pricing. U.S. issuers could have saved over $1 billion a year by paying European fees.     

Are family and friends the wrong investors? Evidence from U.S. start-ups

This paper investigates the effects of funding from family and friends (i.e., informal funding) on subsequent access to venture capital for start-up firms. We retrieve information on financing activity of young U.S. firms from a novel dataset based on private placements filings (Form Ds). To address potential endogeneity issues, we use an instrument that hinges on the family size of founders as an exogenous constraint on the supply of informal funds. Our results show that informal finance significantly reduces the probability of future financing events. We provide suggestive evidence that this is due to conflicts of interests between informal stakeholders and professional investors.     

Greenspan:More Than 50 Percent Chance of U.S.Recession

There is more than a 50 percent chance the UnitedStates could go into recession,former Federal Reservechairman Alan Greenspan told El Pais newspaper in an     

Are Risk Management Disclosures Informative or Tautological? Evidence from the U.S. Banking Sector

Banks experienced increasing risk levels during the latest financial crisis. Investors’ confidence was shaken by the effectiveness of bank risk management practices, which has opened new challenges for bank management in approaching its risk. Understanding and communicating adopted risk management mechanisms is likely to provide insights and enable diagnosis on firm risk exposure. Conveying data that reduces information asymmetry might be reflected on stock performance. Investigating the impact of risk management disclosures content on stock price change and return volatility, using a sample of U.S. national commercial banks during 2009–2010, shows that informative risk management disclosures seems to be valued by investors. This is reflected on current‐year stock prices and reduces the subsequent‐year return variances.     

Climate transition risk in U.S. loan portfolios: Are all banks the same?

We examine banks' exposure to climate transition risk using a bottom-up, loan-level methodology incorporating climate stress test based on the Merton probability of default model and transition pathways from the Intergovernmental Panel on Climate Change (IPCC). Specifically, we match machine learning predictions of corporate carbon footprints to syndicated loans initiated in 2010–2018 and aggregate these to loan portfolios of the twenty largest banks in the United States. Banks vary in their climate transition risk not only due to their exposure to the energy sectors but also due to borrowers' carbon emission profiles from other sectors. Banks generally lend a minimal amount to coal (0.4%) but hold a considerable exposure in oil and gas (8.6%) and electricity firms (4.6%) and thus have a large exposure to the energy sectors (13.5%). We observe that climate transition risk profile was stable over time, save for a temporary (in some cases) and permanent (in others), reduction in their fossil-fuel exposure after the Paris Agreement. From the stress testing, the median loss is 0.5% of US syndicated loans, representing a decrease in CET1 capital of 4.1% when extrapolated to the whole balance sheet. The loss is twice as large in the 1.5°C scenarios (1.4%–2.1% of loan value, 12%–16% of CET1 capital) compared to the 2°C target (0.6%–1.1% of loan value, 5%–9% of CET1 capital) with significant tail-end risk (7.7% of loan value, 62% of CET1 capital). Banks' vulnerabilities are also driven by the ex-ante financial risk of their borrowers more generally, highlighting that climate risk is not independent from conventional risks.     

The U.S. left behind? Financial globalization and the rise of IPOs outside the U.S.

From 1990 to 2011, the share of world IPO activity by non-U.S. firms increased because of financial globalization and because of a decrease in U.S. IPO activity. Financial globalization reduces the impact of national institutions on domestic IPO activity and enables more non-U.S. firms from countries with weak institutions to go public with a global IPO. U.S. IPO activity does not benefit from financial globalization. Compared to other countries, the rate of small-firm IPO activity in the U.S. is abnormally low in the 2000s. This abnormally low rate cannot be explained by the regulatory changes of the early 2000s.     

How asymmetric is U.S. stock market volatility?

This paper explores differences in the impact of equally large positive and negative surprise return shocks in the aggregate U.S. stock market on: (1) the volatility predictions of asymmetric time-series models, (2) implied volatility, and (3) realized volatility. Following large negative surprise return shocks, both asymmetric time-series models (such as the EGARCH and GJR models) and implied volatility predict an increase in volatility and, consistent with this, ex post realized volatility normally rises as predicted. Following large positive return shocks, asymmetric time-series models predict an increase in volatility (albeit a much smaller increase than following a negative shock of the same magnitude), but both implied and realized volatilities generally fall sharply. While asymmetric time-series models predict a decline in volatility following near-zero returns, both implied and realized volatility are normally little changed from levels observed prior to the stable market. The reasons for the differences are explored.     

Does Global Liquidity Help to Forecast U.S. Inflation?

We construct a measure of global liquidity using the growth rates of broad money for the G7 economies. Global liquidity produces forecasts of U.S. inflation that are significantly more accurate than the forecasts based on U.S. money growth, Phillips curve, and autoregressive and moving average models. The marginal predictive power of global liquidity is strong at 3-year horizons. Results are robust to alternative measures of inflation.     

Why Don't We Know More About Housing Supply?

This paper reviews the main themes in the empirical literature on housing supply and outlines suggestions for future research. Much of the literature has focused on the determinants of new housing supply, particularly the supply of single family detached homes, and the renovation and repair decisions of homeowners. We have learned a great deal from the work that has been done but many important puzzles remain. Much of the literature has focused on aggregate data because there is so little information where the unit of observation is the builder, investor, or landlord. We need to focus on bringing new data to bear on the decision-making processes of these important actors to build our understanding of the micro foundations of housing supply.     

Why haven’t U.S. GAAP and IFRS on insurance contracts converged? Evidence from an unsuccessful joint project

This study examines the FASB’s and IASB’s unsuccessful joint project on accounting for insurance contracts. It highlights the divergent views the Boards may hold on certain fundamental accounting issues. Further, this study examines how the costs and benefits of accounting standard convergence can vary within an industry, conditional on factors such as prior accounting standards and firms’ global operations. Empirically, U.S. insurers’ negative market reactions to the joint insurance project suggest U.S. investors perceived net costs would outweigh net benefits. This study also finds that market reactions of U.S. insurers were more negative than those of European insurers. The results of cross-sectional analyses indicate that U.S. life insurers perceived higher net costs associated with the joint project, while European insurers with more global revenue perceived higher net benefits. This work illuminates some of the challenges facing standard setters when attempting to develop a globally acceptable set of financial reporting standards.     

What drives delistings of foreign firms from U.S. Exchanges?

We examine time dependency in the factors motivating delistings of foreign firms from major U.S. Exchanges over the period 1962–2006. For firms listing before Sarbanes-Oxley (SOX), we find that governance has no significant effect on delisting but after SOX, it becomes one of the main forces driving delisting. For firms whose delisting decision is most likely attributable to SOX, we find they realize low benefits from listing – they originate from countries with strong home market governance, and from listing onward realize low trading volume, analyst coverage, and make little use of capital raising. Our results suggest that SOX has had a large influence on the benefits seek from a U.S. listing, leading firms from well governed countries and low capital raising needs to delist.     

Does risk management matter? Evidence from the U.S. agricultural industry

This article constructs triple-difference tests around shifts in the supply of risk management instruments available to agricultural producers to reveal a positive relation between risk management and productivity. This relation is more robust when producers adopt instruments with payoffs linked to group performance and weaker when payoffs are linked to individual performance. Additionally, productivity is particularly high among risk-managing producers in counties containing high levels of bank deposits, a proxy for access to finance. Overall, this article illuminates the relation between hedging and real firm outcomes as well as the interaction between access to finance and firms' risk management choices.     

Will the U.S. bank recapitalization succeed? Eight lessons from Japan

During the financial crisis that started in 2007, the U.S. government has used a variety of tools to try to rehabilitate the U.S. banking industry. Many of those strategies were also used in Japan to combat its banking problems in the 1990s. There are also a surprising number of other similarities between the current U.S. crisis and the recent Japanese crisis. The Japanese policies were only partially successful in recapitalizing the banks until the economy finally started to recover in 2003. From these unsuccessful attempts, we derive eight lessons. In light of these eight lessons, we assess the policies the U.S. has pursued. The U.S. has ignored three of the lessons and it is too early to evaluate the U.S. policies with respect to four of the others. So far, the U.S. has avoided Japan's problem of having impaired banks prop up zombie firms.