Standard setters contend that fair value accounting yields the most relevant measurement for financial instruments. We examine this claim by comparing the value relevance of banks' financial ...statements under fair value accounting with that under current GAAP, which is largely based on historical costs. We find that the combined value relevance of book value of equity and income under fair value is less than that under GAAP. We also find that fair value income is less value-relevant than GAAP income because of the inclusion of transitory unrealized gains and losses in fair value income. More surprisingly, we find that book value of equity under fair value is not more valuerelevant than under GAAP, due both to divergence between exit value and value-in-use and to measurement error in fair value estimates. Overall, our results suggest that financial statements under fair value accounting provide less relevant information for bank valuation than financial statements under current GAAP.
We introduce SRISK to measure the systemic risk contribution of a financial firm. SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, ...leverage and risk. We use the measure to study top financial institutions in the recent financial crisis. SRISK delivers useful rankings of systemic institutions at various stages of the crisis and identifies Fannie Mae, Freddie Mac, Morgan Stanley, Bear Stearns, and Lehman Brothers as top contributors as early as 2005-Q1. Moreover, aggregate SRISK provides early warning signals of distress in indicators of real activity.
We analyze how institutional investors entering commodity futures markets, referred to as the financialization of commodities, affect commodity prices. Institutional investors care about their ...performance relative to a commodity index. We find that all commodity futures prices, volatilities, and correlations go up with financialization, but more so for index futures than for nonindex futures. The equity-commodity correlations also increase. We demonstrate how financial markets transmit shocks not only to futures prices but also to commodity spot prices and inventories. Spot prices go up with financialization, and shocks to any index commodity spill over to all storable commodity prices.
This paper studies how hedge fund activism impacts corporate innovation. Firms targeted by activists improve their innovation efficiency over the five-year period following hedge fund intervention. ...Despite a tightening in research and development (R&D) expenditures, target firms increase innovation output, as measured by both patent counts and citations, with stronger effects among firms with more diversified innovation portfolios. Reallocation of innovative resources, redeployment of human capital, and change to board-level expertise all contribute to improve target firms’ innovation. Additional tests help isolate the effect of intervention from alternative explanations, including mean reversion, sample attrition, voluntary reforms, or activist stock-picking.
The Market in Financial Instruments Directive (MiFID) is nothing short of a revolution. Introduced on 1 November 2007, it will have a profound, long-term impact on Europe's securities markets. It ...will see banks operating as exchanges for certain activities, offering alternative execution services that more closely resemble the structure of over-the-counter markets, and will lead to the decentralisation of order execution in an array of venues previously governed by concentration rules. Crucially, MiFID will also have a profound impact on the organisation and business strategies of investment firms, exchanges, asset managers and other financial markets intermediaries. Until now, analysis has focused on the directive's short term implementation issues. This book focuses on the long term strategic implications associated with MiFID, and will be essential reading for anybody who recognises that their firm will need to make constant dynamic readjustments in order to remain competitive in this challenging new environment.
What economic forces limit mutual fund managers from generating consistent outperformance? We propose and test the hypothesis that buy-side competition from other funds matters. We make three ...contributions. First, we propose new style-based spatial methods to identify the customized rivals of each fund. Second, we construct dynamic, fundspecific measures of competition and generate measures of skill as a fund’s outperformance relative to its customized peers. Third, and finally, we show that funds outperforming their customized rivals generate future alpha when they face less competition. These results are economically significant and last for over four quarters.
Abstract
We document extreme disruption in debt markets during the COVID-19 crisis: a severe price crash accompanied by significant dislocations at the safer end of the credit spectrum. ...Investment-grade corporate bonds traded at a discount to credit default swaps; exchange-traded funds traded at a discount to net asset value, more so for safer bonds. The Federal Reserve’s announcement of corporate bond purchases caused these dislocations to disappear and prices to recover. These facts inform potential theories of the disruption. The best explanation is an acute liquidity need for specific bond investors, such as mutual funds, leading them to liquidate large positions.
•Following the financial crisis of 2008, corporate bond funds became prominent market players and generated concerns of financial fragility.•Using daily microdata, we document major outflows in these ...funds during the COVID-19 crisis, far greater than in past events.•Inspecting the sources of fragility, both the illiquidity of fund assets and the vulnerability to fire sales were important factors.•By providing a liquidity backstop for their bonds, the Fed bond purchase program helped to reverse outflows especially for the most fragile funds.•The evidence points to a new "bond fund fragility channel" whereby the Fed bond purchases transmit to the real economy via bond funds.
Using daily microdata, we document major outflows in corporate-bond funds during the COVID-19 crisis. Large outflows were sustained over weeks and most severe for funds with illiquid assets, vulnerable to fire sales, and exposed to sectors hurt by the crisis. By providing a liquidity backstop for their bond holdings, the Federal Reserve bond purchase program helped to reverse outflows especially for the most fragile funds. In turn, the program had spillover effects on primary market issuance and peer funds. The evidence points to a “bond-fund fragility channel” whereby the Fed liquidity backstop transmits to the real economy via funds.
We consider the generalized characteristics of smoothness of the functions omega.sup.w (f, t) and LAMBDA.sup.w (f, t), t > 0, in the space L.sub.2(R) and on the classes L.sup.alpha.sub.2(R) defined ...with the help of fractional-order derivatives alpha member of (0, infinity) and obtain the exact Jackson-type inequalities for omega.sub.w (f).
Recent developments in the national economy have shown the need to diversify and make more flexible the instruments used to finance current operating activities. The often negative dynamics of the ...labor market, the massive restrictions on the provision of financing resources, the emergence of deficits / urgent working capital needs in certain sectors / subsectors / activities cause companies to worry about the financial resources needed to cover overdue payments. Transactions using equity instruments can be a solution in this context. Share-based payments / financial instruments, relative to the fair value of equity instruments, may form a flexible set of instruments to meet the requirements of ensuring a flexible financial package to support the operating activities of the entities .
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