Do Corporations Retain Too Much Cash? Evidence from a Natural Experiment
(with Hwanki Brian Kim and Woojin Kim)
Review of Financial Studies, forthcoming
Corporations have accumulated record amounts of cash. We study whether firms' cash retention has been excessive by examining a Korean reform that introduced a new tax on earnings retained as cash. Difference-in-differences tests show that treated firms reduce cash retention and instead increase payouts and investments. Market participants react favorably to the reform, consistent with excessive cash retention. The valuation effects and the alternative uses of the cash are associated with behavioral and agency frictions. Firms that are more subject to behavioral biases increase payouts and experience higher valuations, while poorly governed firms allocate more to investment and experience relatively lower valuations.
Sitting Bucks: Stale Pricing in Fixed Income Funds
(with Jaewon Choi and Ji Yeol Jimmy Oh)
Journal of Financial Economics, 2022
– Awards: AIM Investment Conference Distinguished Paper Award (2019); FMA Best paper on Investments semifinalist (2019)
– SSRN working paper version
We document evidence of widespread stale pricing in bond mutual funds and the resulting risks of dilution and fragility. A principal driver of this phenomenon is the high illiquidity of funds’ holdings, which makes accurate pricing difficult and provides funds with greater discretion over valuation. Consequently, net asset values (NAVs) are extremely stale and fund returns are predictable over several days and weeks, particularly during market crises. Opportunistic traders withdraw capital from overvalued funds, exacerbating the risk of fund runs, while buy-and-hold investors face annual dilution of around $1.2 billion. Our results highlight adverse consequences of insufficient fair-valuation practices that remain pervasive even after corrective regulations that followed the 2003 market-timing scandal.
Out of Sight No More? The Effect of Fee Disclosures on 401(k) Investment Allocations
(with Veronika K. Pool, Clemens Sialm, and Irina Stefanescu)
Journal of Financial Economics, 2021
– NBER Working Paper No. w27573
– Awards: FMA Best paper on Investments (2019)
– SSRN working paper version
We examine the effects of a 2012 regulatory reform that mandated fee and performance disclosures for the investment options in 401(k) plans. We show that participants became significantly more attentive to expense ratios and short-term performance after the reform. The disclosure effects are stronger among plans with large average contributions per participant and weaker for plans with many investment options. Additionally, these results are not driven by secular changes in investor behavior or sponsor-initiated changes to the investment menus. Our findings suggest that providing salient fee and performance information can mitigate participants’ inertia in retirement plans.
Do Bond Issuers Shop for Favorable Credit Ratings?
Management Science, 2020
– SSRN working paper version
This paper provides evidence of ratings shopping in the corporate bond market. By estimating systematic differences in agencies' biases about any given firm's bonds, I show that new bonds are more likely to be rated by agencies that are positively biased towards the firm---a pattern that is strongest among bonds that have only one rating. The paper also shows that issuers often delay less favorable ratings until after a bond is sold. Consistent with theoretical models of ratings shopping, these effects are strongest among more complex bonds that are more difficult to rate. Bonds with upward-biased ratings are more likely to be downgraded and default, but investors account for this bias and demand higher yields when buying these bonds.
Reaching for Yield by Corporate Bond Mutual Funds
(with Jaewon Choi)
Review of Financial Studies, 2018
– SSRN working paper version
We examine "reaching for yield" in U.S. corporate bond mutual funds. We define reaching for yield as tilting portfolios toward bonds with yields higher than the benchmarks. We find that funds generate higher returns and attract more inflows when they reach for yield, especially in periods of low interest rates. Returns for high reaching-for-yield funds nevertheless tend to be negative on a risk-adjusted basis. Funds engage in rank-chasing behavior by reaching for yield, although these incentives are moderated by the illiquid nature of corporate bonds. High reaching-for-yield funds hold less cash and less liquid bonds, exacerbating redemption risks.
The Real Effects of Share Repurchases
(with Heitor Almeida and Vyacheslav Fos)
Journal of Financial Economics, 2016
– SSRN working paper version
We employ a regression discontinuity design to identify the real effects of share repurchases on other firm outcomes. The probability of share repurchases that increase earnings per share (EPS) is sharply higher for firms that would have just missed the EPS forecast in the absence of the repurchase, when compared with firms that “just beat” the EPS forecast. We use this discontinuity to show that EPS-motivated repurchases are associated with reductions in employment and investment, and a decrease in cash holdings. Our evidence suggests that managers are willing to trade off investments and employment for stock repurchases that allow them to meet analyst EPS forecasts.