Individual Investors and Volatility FOUCAULT, THIERRY; SRAER, DAVID; THESMAR, DAVID J.
The Journal of finance (New York),
August 2011, Volume:
66, Issue:
4
Journal Article
Peer reviewed
We show that retail trading activity has a positive effect on the volatility of stock returns, which suggests that retail investors behave as noise traders. To identify this effect, we use a reform ...of the French stock market that raises the relative cost of speculative trading for retail investors. The daily return volatility of the stocks affected by the reform falls by 20 basis points (a quarter of the sample standard deviation of the return volatility) relative to other stocks. For affected stocks, we also find a significant decrease in the magnitude of return reversals and the price impact of trades.
What is the impact of real estate prices on corporate investment? In the presence of financing frictions, firms use pledgeable assets as collateral to finance new projects. Through this collateral ...channel, shocks to the value of real estate can have a large impact on aggregate investment. To compute the sensitivity of investment to collateral value, we use local variations in real estate prices as shocks to the collateral value of firms that own real estate. Over the 1993-2007 period, the representative US corporation invests $0.06 out of each $1 of collateral.
Housing Collateral and Entrepreneurship SCHMALZ, MARTIN C.; SRAER, DAVID A.; THESMAR, DAVID
The Journal of finance (New York),
February 2017, Volume:
72, Issue:
1
Journal Article
Peer reviewed
Open access
We show that collateral constraints restrict firm entry and postentry growth, using French administrative data and cross-sectional variation in local house-price appreciation as shocks to collateral ...values. We control for local demand shocks by comparing treated homeowners to controls in the same region that do not experience collateral shocks: renters and homeowners with an outstanding mortgage, who (in France) cannot take out a second mortgage. In both comparisons, an increase in collateral value leads to a higher probability of becoming an entrepreneur. Conditional on entry, treated entrepreneurs use more debt, start larger firms, and remain larger in the long run.
In this paper, we test whether firms properly adjust for risk in their capital budgeting decisions. If managers use a single discount rate within firms, we expect that conglomerates underinvest ...(overinvest) in relatively safe (risky) divisions. We measure division relative risk as the difference between the division's asset beta and a firm-wide beta. We establish a robust and significant positive relationship between division-level investment and division relative risk. Next, we measure the value loss due to this behavior in the context of acquisitions. When the bidder's beta is lower than that of the target, announcement returns are significantly lower.
This paper empirically documents the performance and behavior of family firms listed on the French stock exchange between 1994 and 2000. On the French stock market, approximately one third of the ...firms are widely held, whereas the remaining two thirds are family firms. We find that, in the cross-section, family firms largely outperform widely held corporations. This result holds for founder-controlled firms, professionally managed family firms, but more surprisingly also for firms run by descendants of the founder. We offer explanations for the good performance of family firms. First, we present evidence of a more efficient use of labor in heir-managed firms. These firms pay lower wages, even allowing for skill and age structure. We also find that descendants smooth out industry shocks and manage to honor implicit labor contracts. Second, we present evidence consistent with outside CEOs in family firms making a more parsimonious use of capital. They employ more unskilled, cheap labor, use less capital, pay lower interest rates on debt and initiate more profitable acquisitions.
We investigate how the deregulation of the French banking industry in the 1980s affected the real behavior of firms and the structure and dynamics of product markets. Following deregulation, banks ...are less willing to bail out poorly performing firms and firms in the more bank-dependent sectors are more likely to undertake restructuring activities. At the industry level, we observe an increase in asset and job reallocation, an improvement in allocative efficiency across firms, and a decline in concentration. Overall, these findings support the view that a more efficient banking sector helps foster a Schumpeterian process of "creative destruction."
Abstract
We analyze the dynamics of earnings forecasts and discount rates implicit in valuations during the COVID-19 crisis. Forecasts over 2020 earnings have been progressively reduced by 16%. ...Longer-run forecasts have reacted much less. We estimate an implicit discount rate going from 8.5% in mid-February to 11% at the end of March and reverting to its initial level in mid-May. Over the period, the unlevered asset risk premium increases by 50bp, the leverage effect also increases by 50bp, while the risk free rate decreases by 100bp. Hence, analysts’ forecast revisions explain all of the decrease in equity values between January 2020 and mid-May 2020.
Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
Vulnerable banks Greenwood, Robin; Landier, Augustin; Thesmar, David
Journal of financial economics,
03/2015, Volume:
115, Issue:
3
Journal Article
Peer reviewed
We present a model in which fire sales propagate shocks across bank balance sheets. When a bank experiences a negative shock to its equity, a natural way to return to target leverage is to sell ...assets. If potential buyers are limited, then asset sales depress prices, in which case one bank׳s sales impact other banks with common exposures. We show how this contagion effect adds up across the banking sector, and how it can be estimated empirically using balance sheet data. We compute bank exposures to system-wide deleveraging, as well as the spillovers induced by individual banks. Applying the model to European banks, we evaluate a variety of interventions to reduce their vulnerability to fire sales during the sovereign debt crisis.
SOCIAL NETWORKS IN THE BOARDROOM Kramarz, Francis; Thesmar, David
Journal of the European Economic Association,
August 2013, Volume:
11, Issue:
4
Journal Article
Peer reviewed
Open access
This paper provides evidence that social networks strongly affect board composition and are detrimental to corporate governance. Our empirical investigation relies on a large data set of executives ...and outside directors of French public firms. This data source is a matched employer–employee data set that provides detailed information on directors/CEOs as well as information about the firm employing them. We find a strong and robust correlation between the CEO's network and that of his directors. Networks of former high-ranking civil servants are the most active in shaping board composition. Our identification strategy takes into account not only firm and directors' fixed effects but also the matching of firms and director in terms of one observable and one unobservable characteristic. Turning to the direct effects of such network activity, we find that firms in which these networks are most active pay their CEOs more, are less likely to replace a CEO who underperforms, and engage in less value-creating acquisitions. These findings suggest that social networks are active in the boardroom and have detrimental effects on firms' governance.
Optimistic beliefs are a source of nonpecuniary benefits for entrepreneurs that can explain the "Private Equity Puzzle." This paper looks at the effects of entrepreneurial optimism on financial ...contracting. When the contract space is restricted to debt, we show the existence of a separating equilibrium in which optimists self-select into short-term debt and realists into long-term debt. Long-term debt is optimal for a realist entrepreneur as it smooths payoffs across states of nature. Short-term debt is optimal for optimists for two reasons: (i) "bridging the gap in beliefs" by letting the entrepreneur take a bet on his project's success, and (ii) letting the investor impose adaptation decisions in bad states. We test our theory on a large data set of French entrepreneurs. First, in agreement with the psychology literature, we find that biases in beliefs may be (partly) explained by individual characteristics and tend to persist over time. Second, as predicted by our model, we find that short-term debt is robustly correlated with "optimistic" expectation errors, even controlling for firm risk and other potential determinants of short-term leverage.
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