Investing Public

Kevin Lewis

May 24, 2022

Public Firm Presence, Financial Reporting, and the Decline of U.S. Manufacturing
Stephen Glaeser & James Omartian
Journal of Accounting Research, June 2022, Pages 1083-1128

We examine the relation between public firm presence and import competition. The information created by public firm presence may provide importers with insights they can use for competing with domestic firms. Consistent with this possibility, we document a positive relation between public firm presence and import competition. We find similar results when using differences in the expected costs of the Sarbanes-Oxley Act as a source of plausibly exogenous variation in public firm presence after the act. We use differences in the proportion of German firms reporting publicly around a major enforcement reform as a natural mechanism experiment, and find evidence that financial reporting is a channel through which public firm presence relates to import competition. Additional mechanism tests and a falsification test estimated in the United Kingdom, where public and most private firms report publicly, further support this inference. In total, our evidence is consistent with foreign competitors using the information created by public firm presence, including what public firms disclose in financial reports, to compete with domestic firms. Consequently, our results provide evidence of competitors using the proprietary information disclosed in financial reports to compete with the disclosing firms and of information frictions affecting trade. 

The Secular Decline in Private Firm Leverage
Christine Dobridge, Erik Gilje & Andrew Whitten
NBER Working Paper, May 2022

Using firm-level administrative tax data on the 43% of business liabilities in the United States tied to privately held firms, we document dramatic reductions in leverage since the Great Recession. Leverage for the average private firm fell fifteen percent between 2004 and 2018. In contrast, leverage among public firms rose during this period. The decline in leverage among private firms is inconsistent with theories that suggest firm leverage tracks pro-cyclical credit market conditions. Younger and smaller private firms see especially large declines in leverage, and we find that reduced leverage among private firms is correlated with lower investment. Our findings have important implications for theories on how firm leverage and investment relate to economic fluctuations. 

Memory Moves Markets
Constantin Charles
University of Southern California Working Paper, May 2022

I show that the constraints of human memory can distort prices in financial markets. To estimate which firms are associated in aggregate investor memory, I exploit firms' rigid earnings announcement schedules. If two firms happened to announce earnings on the same day in the past, they share an aggregate memory association because they were experienced in the same context by many investors. Months later, when only one of the two firms announces earnings, this context is cued, and triggers the recall of the other, associated firm. On such days, I find that trading volume of the associated firm's stock increases sharply. This increase is so strong that it leads to temporary price pressure in the associated firm's stock. I then conduct novel tests of the memory mechanism. I find strong support, and consistent with theory, the effects weaken when there were more distracting earnings announcements by other firms during the encoding of a memory association between two firms. These distracting events lead to interference in recall on the day of the cue. I also find that two firms that historically announced with a timing gap between their earnings announcements share a weaker memory association. Overall, my results suggest that economic models of human memory can be applied at the market level. 

Analyzing the Analysts: Evidence from their Bloomberg Usage
Azi Ben-Rephael et al.
Rutgers Working Paper, February 2022

We use minute-by-minute Bloomberg online status data to characterize two important dimensions of sell-side equity analysts' work habits: we estimate the average workday length (AWL) to proxy for analysts' general effort provision and we use the percentage away day (PAD) to proxy for their soft information production. Both AWL and PAD vary much more across analysts than across time. Controlling for coverage, AWL is positively related to the quantity and the timeliness of analyst forecasts, while PAD is negatively related to quantity. Both are positively related to forecast accuracy, even after controlling for analyst fixed effects. COVID lockdown provides further causal evidence. Traveling analysts (with high pre-COVID PAD) experience a significant reduction in forecast accuracy during the lockdown. Using pre-COVID analyst commute time to instrument increased AWL during the lockdown, we find a higher AWL to significantly increase output and improve the accuracy of the forecasts. 

Responsible Hedge Funds
Hao Liang, Lin Sun & Melvyn Teo
Review of Finance, forthcoming

Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low environmental, social, and governance (ESG) exposures and is greater for hedge funds with poor incentive alignment. To address endogeneity, we exploit regulatory reforms that enhance stewardship and show that the ESG exposure and relative performance of signatory funds improve post reforms. Our findings suggest that some hedge funds endorse responsible investment to pander to investor preferences. 

Pandemic-Era Uncertainty
Brent Meyer et al.
NBER Working Paper, April 2022

We examine several measures of uncertainty to make five points. First, equity market traders and executives at nonfinancial firms have shared similar assessments about one-year-ahead uncertainty since the pandemic struck. Both the one-year VIX and our survey-based measure of firm-level uncertainty at a one-year forecast horizon doubled at the onset of the pandemic and then fell about half-way back to pre-pandemic levels by mid 2021. Second, and in contrast, the 1-month VIX, a Twitter-based Economic Uncertainty Index, and macro forecaster disagreement all rose sharply in reaction to the pandemic but retrenched almost completely by mid 2021. Third, Categorical Policy Uncertainty Indexes highlight the changing sources of uncertainty - from healthcare and fiscal policy uncertainty in spring 2020 to elevated uncertainty around monetary policy and national security as of March 2022. Fourth, firm-level risk perceptions skewed heavily to the downside in spring 2020 but shifted rapidly to the upside from fall 2020 onwards. Perceived upside uncertainty remains highly elevated as of early 2022. Fifth, our survey evidence suggests that elevated uncertainty is exerting only mild restraint on capital investment plans for 2022 and 2023, perhaps because perceived risks are so skewed to the upside. 

Short sellers and insider trading profitability: A natural experiment
Xia Chen et al.
Journal of Accounting and Public Policy, May-June 2022 

We examine the impact of short sellers on insider trading profitability using a natural experiment of a pilot program which relaxed short-selling constraints for randomly selected pilot stocks. We find that pilot firms experienced a significant decrease in insider trading profitability during the pilot program. The results are more pronounced for the pilot firms with poor information quality, and for the pilot firms without corporate restrictions on insider trading. Our evidence suggests that short sellers serve an important market disciplinary role by reducing insider trading profitability. 

It's a Small World: The Importance of Social Connections with Auditors to Mutual Fund Managers' Portfolio Decisions
Yangyang Chen et al.
Journal of Accounting Research, June 2022, Pages 901-963

We find that mutual funds whose managers are socially connected with firm auditors hold more shares of these firms and generate superior portfolio returns. Cross-sectional results reveal that the relation between social connections and mutual fund stockholdings is more pronounced: when the social connections are stronger, when the auditor is in a better position or has stronger incentives to acquire private information, when the fund manager exercises more power, for small audit firms, for auditors in areas with poor investor protection, and for public firms with greater business opacity or private information. Other results are consistent with fund managers electing to schedule their corporate site visits to coincide with the fieldwork of their connected auditors, as would be expected if fund managers time their visits to meet with these auditors to facilitate information transfer. Additionally, we observe associations between fund trading prior to earnings surprises and audit opinions, and the presence of social connections between fund managers and firm auditors. Finally, we show that mutual funds and firms in which they invest tend to appoint connected auditors and pay them higher fees. Collectively, we document empirical patterns that would arise if socially connected auditors and mutual fund managers share information. 

Fund names versus family names: Implications for mutual fund flows
Aymen Karoui & Sadok El Ghoul
Financial Review, forthcoming 

An emerging literature shows that investors are sensitive to mutual fund names. Using a sample of US equity funds over the period 1993-2017, we provide evidence that funds with names that are closer to those of their families attract more flows and display a stronger performance-flow relationship. This name bias is more persistent among old and large fund families and in retail funds. Our results are in line with the literature on social biases and costly searches and show that seemingly innocuous differences in fund attributes, such as fund names, can translate into significant differences in investor decisions.


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