Research

Working Papers

6. The Corporate Supply of (Quasi) Safe Assets

Winner of

  • AQR Top Finance Graduate Award at Copenhagen Business School;

  • Best Paper Award at Copenhagen Macro Days Conference ;

  • Chazen Research Grant 2020 and Arora-Naldi Fellowship 2021.

Media coverage:

Presented at Finance Seminar at Anderson Business School UCLA, Berkeley Haas, BIS, Boston College, Chicago Booth, Columbia Business School, Macro Seminar at Columbia Business School, Harvard Business School, Darden Virginia University, Federal Reserve of New York, HEC Paris, Hong-Kong University, London Business School, London School of Economics, MIT Sloan, Princeton University, Rice, Said Business School Oxford University, Stanford Business School, Toronto University, University of British Columbia, University of Huston, Univerisity of Iowa, University of Washington, Utah University, Wharton Business School, Yale SOM, Macro Finance Research Program of the Becker Friedman Institute Summer Session, poster presentation at AFA 2020 and at the Diamond-Dybvig 36th Anniversary Conference.

Abstract: Investors value safety services in financial assets, such as the ability to serve as a store of value, to serve as collateral, or to meet mandatory capital and liquidity requirements. I present a model in which investors value safety services not only in traditional safe assets such as US Treasuries, but also in corporate debt. Shareholders thus maximize the value of the firm by complementing standard business operations with safe asset creation. Based on this theoretical framework, I use the CDS-bond basis to derive a measurement of the safety premium of corporate bonds. I document substantial cross-sectional variation in the safety premium of corporate bonds, which allows me to test the model's predictions. I show that a high safety premium leads to a marked increase in debt issuance by relatively safer firms. These debt proceeds have a small impact on real investment and are largely used instead for equity payouts. This mechanism can explain why, in the aftermath of the financial crisis, non-financial investment-grade companies significantly increased their debt issuance and equity payout while investment remained weak.

5. The Savings of Corporate Giants with Olivier Darmouni. Working Paper (revised April, 2022).

Media coverage:

Code and Data: www.fanfrepo.com

Abstract: We construct a novel panel dataset to provide new evidence on how the largest nonfinancial firms manage their financial assets. Our granular data shows that, over the past decade, bond portfolios have grown to be at least as large as cash-like instruments, driven by the meteoric rise of corporate bond holdings. To shed light on the drivers of this growth, we conduct a pair of event studies around the 2017 tax reform and the 2020 liquidity crisis. Our new data suggests that the financial portfolios of corporate giants are primarily driven by cross-border tax incentives rather than liquidity motives.


4. The Role of Inelastic Investors for Unconventional Monetary Policy with Melina Papoutsi. Available upon request (revised November, 2021).

Presentation at AEA 2021.

Abstract: In this paper, we study the impact of three unconventional monetary policy packages adopted by the European Central Bank (ECB) on the corporate bond market. These policies include participating in large scale purchase of government and corporate debt, direct lending facilities, and adopting negative interest rates. We use information on credit default swaps to decompose, in a model-free manner, corporate spreads into a default and a non-default component. While all ECB policies caused a decrease in corporate spreads, the largest impact comes from the monetary policy easing package in June 2014, when interest rates went into negative territory for the first time. We find that the default component is small across all packages and the impact on corporate spreads is almost fully explained by the effect on the non-default component. We show evidence that this result is driven by the increase in demand for safer bonds as these are more affected by the ECB interventions. The excess demand is not homogeneous across investors, rather each program triggers an excess demand from specific sectors.


3. Short-Selling Restrictions and Returns: A Natural Experiment with Fernando Barbosa, Marco Bonomo and João de Melo. Revise and Resubmit at Journal of Empirical Finance (revised February, 2020)

Winner of the Brazilian Econometric Society Best Paper Award 2015.

Presented at LAMES 2017, ESEM 2016, Luso-Brazilian Meeting 2015, SED 2015, Brazilian Finance Meeting 2015 and Brazilian Econometric Meeting 2015.

Abstract: We estimate the causal impact of short-selling restrictions on returns. We take advantage of a unique dataset and exploit a source of exogenous variation in loan fees provided by a tax-arbitrage opportunity that existed in Brazil from 1995 till 2015. The tax-arbitrage opportunity stems from the fact that domestic mutual funds were exempted from income taxes on dividends received by stocks they borrowed, whereas the original owners would be taxed if they did not lend out the stock. Because we observe investors' identity and all equity loan transactions, we can distinguish equity lending motivated by tax-arbitrage from speculative transactions according to the borrower-lender match. We show that the loan fee on tax-motivated transactions is a source of exogenous variation to estimate the causal impact of the loan fee on stock prices. We find that increases in stock loan fees have strong impact on stock prices.

Publications

2. Should Information be Sold Separately? Evidence from MiFID II with Yifeng Guo. Journal of Financial Economics 142(1), October 2021, 97-126.

Winner of the Chazen Research Grant 2019 and Deming Doctoral Fellowship

Media coverage:

Presented at Columbia Business School Seminar, NYU Stern Seminar, EFA 2019, and SFS Cavalcade 2019.

Abstract: Information production is key to the efficiency of financial markets. Does selling information separately improve its production? We investigate this question using MiFID II, a European regulation that unbundles research from transactions. We show that unbundling causes fewer research analysts to cover a firm. This decrease does not come from small- or mid-cap firms but is concentrated in large firms. Surprisingly, the reduction in analyst coverage is accompanied by a decrease in forecast error. Further analyses suggest that analyst competition enhancement could drive the results: inaccurate analysts drop out and analysts who stay produce more accurate research.


1. The Cross-Section of Risk and Returns with Kent Daniel, Simon Rottke, and Tano Santos . Review of Financial Studies, 33(5), May 2020, 1927-1979.

Data: CEPs and hedge portfolios

Presented at TCU, New Methods for the Cross Section of Returns Conference, EFA 2018, EEA 2018, AFA 2018, 12th Annual Hedge Fund Conference, AQR, Bloomberg, Barclays, and Kepos Capital.

Abstract: In the finance literature, a common practice is to create characteristic portfolios by sorting on characteristics associated with average returns. We show that the resulting portfolios are likely to capture not only the priced risk associated with the characteristic, but also unpriced risk. We develop a procedure to remove this unpriced risk using covariance information estimated from past returns. We apply our methodology to the five Fama and French (2015) characteristic portfolios. The squared Sharpe ratio of the optimal combination of the resulting characteristic efficient portfolios is 2.16, compared with 1.16 for the original characteristic portfolios.

Discussions

  1. Discussion of "Unbundling research and brokerage: implications on information acquisition and welfare" by Junli Zhao and Wei Zhao. The 3rd Annual Dauphine Finance Ph.D. Workshop. June 2020.