Paris December 2018

This paper develops a model to investigate the impact of renegotiable debt on firms. The novel feature is that firms can renegotiate debt both in distress and outside distress, which allows us to rationalize empirical timing patterns of debt renegotiations. We show that this feature is crucial to explain the cross-section of observed credit spreads and the joint distribution of corporate events and the debt control premium. These debt pricing patterns are not captured by existing models. Incorporating both renegotiation events also generates novel testable implications for the impact of renegotiable debt on corporate policies.

We show that the number of common short sellers shorting two stocks can predict their four-factor excess return correlation one month ahead, controlling for many pair characteristics, including similarities in size, book-to-market, and momentum. We verify that this result holds out-of-sample and show that it can be used to establish a trading strategy that yields positive cumulative returns over 12 months. We explore the possible mechanisms that could give rise to this relationship. We find that neither the price-impact mechanism nor the liquidity-provision mechanism can explain the uncovered relationship. Rather, it seems that the relationship is due to informed short selling, which we identify using several indicators of value obtained from financial statement analyses.

Episodes of booming firm creation often coincide with intense speculation on financial markets. Disagreement among investors transforms the economics of optimal firm creation. We characterize the interaction between speculation and classic entry externalities from growth theory through a general entry tax formula for a non-paternalistic planner. The business-stealing effect is mitigated when investors believe they can identify the best firms. Speculation thus increases firm entry but reduces the optimal tax, potentially resulting in under-entry. The appropriability effect also vanishes, leaving only general equilibrium effects on input prices, aggregate demand, or knowledge. As a result, speculation reverses the role of many industry characteristics for efficiency. For instance, as the labor share increases, the optimal tax decreases under agreement but increases under disagreement. Further, economies with identical aggregate properties but a different market structure have the same efficiency with agreement, but call for different policies once financial market speculation is taken into account.

We document that Bitcoin returns, while unpredictable by macroeconomic variables, are predictable by 1- to 20-week moving averages (MAs) of daily prices, both in- and out-of-sample. Trading strategies based on MAs generate substantial alpha, utility and Sharpe ratios gains, and signicantly reduce the severity of drawdowns relative to a buyand-
hold position in Bitcoin, which already has a Sharpe ratio of 1.8. We explain these facts with a novel equilibrium model that demonstrates, with uncertainty about growth in fundamentals, rational learning by investors with different priors yields predictability of returns by MAs.

This paper studies the price discovery dynamics of cross-listed CAC40 stocks. Based on the Hasbrouck's (1995) methodology, we have used high-frequency order flow on individual stocks to study the monthly contribution of the Regulated Market (Euronext Paris) and Multilateral Trading Facilities (MTFs), such as BATS and Chi-X, to the price discovery. We study the impacts of spatial fragmentation on the price discovery process by using the quote midpoint on the best limits per second. Multilateral trading facilities (MTFs) contribute significantly to the price discovery. Nevertheless, Hautcoeur et al. (2010) have underlined that the Regulated Market (RM) has a role of centralising, consolidating and publishing pre- and post-trade information, which is considered a public good. An appropriate degree of transparency needs to exist in the markets in order to make the consolidation of transactions and the fragmentation of markets and players compatible. The latter encourages competition and market efficiency.

We use the staggered adoption of Wrongful Discharge Laws (WDLs) by different U.S. state courts as a quasi-natural experiment to examine the causal relation between employee firing costs and corporate payout policy. We find that greater employment protection and higher firing costs imposed by WDLs lead to higher stock repurchases. Further analysis indicates that since higher firing costs exacerbate the conflict of interests between shareholders and workers and potentially lead to rent extraction by the latter, firms increase share buybacks to reduce the risk of wealth transfer from shareholders to workers.

In a global-games framework, we show how a dealer-of-last-resort policy can promote financial stability while traditional lender-of-last-resort policies are informationally constrained: Central banks and private investors can be uncertain whether banks selling assets to fend off runs are insolvent or illiquid. Such uncertainty leads to asset price collapses and runs and restricts central banks' role as a lender of last resort. In the presence of aggregate uncertainty, contagion and price volatility emerge as a multiple-equilibria phenomenon despite the global-games refinement. A dealer-of-last-resort policy that requires no information on individual banks' solvency can contain contagion and stabilize prices at zero-expected costs.

We provide a new methodology to empirically investigate the respective roles of systematic and idiosyncratic skewness in explaining expected stock returns. Forming a risk factor that captures systematic skewness risk and forming idiosyncratic skewness sorted portfolios only require the ordering of stocks with respect to each skewness measure. Accordingly, we use a large number of predictors to forecast the cross-sectional ranks of systematic and idiosyncratic skewness which are considerably easier to predict than their actual values. Compared to other measures of ex ante systematic skewness, our forecasts create a significant spread in ex post systematic skewness. A predicted systematic skewness risk factor carries a significant risk premium that ranges from 7% to 12% per year and is robust to the inclusion of downside beta, size, value, momentum, profitability, and investment factors. In contrast to systematic skewness, the role of idiosyncratic skewness in pricing stocks is less robust. Finally, we document how the determinants of systematic skewness differ from those of idiosyncratic skewness.

This paper provides the first quantitative assessment of the contribution of global banks in intermediating tax evasion. Applying gravity equations on a unique regulatory dataset based on comprehensive individual country-by-country reporting from all the Systemically Important Institutions in the European Union, we find that: 1) Tax havens generate an 200% extra presence of foreign banks; 2) The favorite destinations of tax evasion intermediated by European banks are Luxembourg and Monaco 3) British and German banks display the most aggressive strategies in tax havens ; 4) New transparency requirements imposed in 2015 have not changed European banks commercial presence in tax havens; 5) Banks intermediate Eur 565.2 billion of off-shore assets, that is 5% of their origin countries' GDP; 6) Banks contribute to one third of global off-shore wealth intermediation.

We examine international equity allocations at the fund level and show how different returns on the foreign and domestic proportion of portfolios determine rebalancing behavior and trigger capital flows. We document the heterogeneity of rebalancing across fund types, its greater intensity under higher exchange rate volatility, and the exchange rate effect of such rebalancing. The observed dynamics of equity returns, exchange rates, and fund-level capital flows are compatible with a model of incomplete FX risk trading in which exchange rate risk partially segments international equity markets.

The Taylor rule (1993) states that Fed funds rates have an inflation beta equal to 1.5. If equity investors infer their long-term discount rate based upon guidance from the Federal Reserve using the Taylor rule, then earnings yields should display a positive beta to inflation. This provides a rational explanation to the empirically observed relationship between earnings yield and inflation, refuting the Money Illusion Hypothesis of Modigliani and Cohn (1979). Using an ARDL model, I find that Fed funds rates had an inflation beta between 1.55 and 1.85 over the 1978-2017 period, implying an inflation beta of earnings growth lying around one over the past 40 years. Equity investors therefore rationally discount nominal cash flows at nominal discount rate, accounting for the fact that Fed funds rates are described by the Taylor rule.

There is an ongoing debate about the benefits of active investing versus index investing. Instead of jumping to a black-or-white conclusion, we describe the different shades of alpha for active and index investing. We differentiate across institutional and retail funds, before and after fees. We also benchmark active funds against one-factor, multi-factor and investable models, different markets, and different investment categories. Our empirical analysis provides evidence that the hypothesis of a zero-sum game after costs cannot be rejected for a vast majority of investment categories especially when we filter out the worst-performing mutual funds of the past year.

Despite the availability of low-cost exchanges, over-the-counter (OTC) trading is pervasive for most assets. We explain the prevalence of OTC trading using a model of adverse selection, in which informed and uninformed investors choose to trade over-the-counter or on an exchange. OTC dealers' ability to price discriminate allows them to imperfectly cream-skim the uninformed investors from the exchange. Assets with a higher share of trades executed on exchanges are predicted to have wider bid-ask spreads on those exchanges, as supported by evidence from US stocks. Having an OTC market can reduce welfare while increasing total trade volume and decreasing average bid-ask spread. Specifically, for assets that are mostly traded over-the-counter (such as swaps and bonds), having the OTC market actually harms welfare. Our results justify recent policies that seek to end OTC trading in such assets.

The prices of dividends at alternative horizons contain critical information on the behavior of aggregate stock market. The ratio between prices of long- and short-term dividends, "price ratio" (pr), predicts annual market return with an out-of-sample R2 of 19%. pr subsumes the predictive power of traditional price-dividend ratio (pd). After orthogonalized to pr, the residuals of pd strongly predict dividend growth. Using an exponential-affine model, we show a one-to-one mapping between pr and the expected market return when the expectation of future cash flow is transient. Moreover, we find that return predictability is stronger after market downturns, and holds outside the U.S. As an economic test, shocks to pr are priced in the cross-section of stocks, consistent with ICAPM. Our measure of expected return declines during monetary expansions, and varies strongly with the conditions of macroeconomy, financial intermediaries, and sentiment.

We investigate whether taxation can be used to contain bank leverage, while leaving the supply of credit unaffected. We exploit the staggered introduction between 1996 and 2012 across Europe of tax reforms that increase the fiscal cost of leverage. Employing both bank- and loan-level data, we estimate the impact of the reforms on the leverage of banks and their supply of credit. We find that tax reforms that increase the cost of leverage lead banks to rely more on equity, to shift the composition of their assets towards loans, and to expand their lending to firms without incurring more risk.

We study how firms differ from their competitors in the labor market by constructing a time-varying labor market competitor network. Using a novel dataset covering the near-universe of online job postings, we measure the spatial distance of labor demand between every two firms. We show that firms' labor market competitors are distinct from their product market rivals: the overlap is less than 20%. Our network explains a substantial amount of cross-sectional variations in firms' labor characteristics and performances. We show that labor and industry shocks transmit along the network. Firstly, news about a firm's labor market, proxied by the returns of its labor-linked firms, has strong predictive power for the focal firm's subsequent returns - a long-short strategy generates monthly alpha of 92 basis points. Secondly, using the financial crisis as a shock to the financial industry, we show that it affected non-financial firms through the labor network.

Equity crowdfunding has recently become available and is quickly expanding. Concerns have been raised that investors ('backers') may be following the crowd 'too much' and making investments ('pledges') based on past investments rather than private information. We construct a model of equilibrium rational herding where uninformed investors follow signals generated by in formed investors with private information and a public belief generated by all past pledges. We show that large investments provide positive public information about the project's quality, whereas periods of absence of investment provide negative information. An information cascade is shown to occur only if not enough positive signals are generated. We then empirically analyse a large number of pledges from a leading European equity crowdfunding platform. We show that a pledge is strongly affected by both the size of the most recent pledge, and the time elapsed since the most recent pledge. For pledges that are not adjacent in the order of arrivals, the correlation between their sizes is still positive, but after being separated by two or more intervening pledges the correlation is no longer statistically significant. The effects are strongest for less-informed investors, and in some specifications the effects are strongest at the early stage of a campaign. We find similar results in IV analysis. Results are consistent with our model and inconsistent with some alternative models.

We examine the market reactions to earnings announcements within a parent-subsidiary ownership structure. We find that the parents' investors react to all announcements within the group either immediately or with delay, whereas subsidiaries' investors only react to their own firm's announcements, ignoring predictive information released by the parent. Multiple announcements within a group lead to enhanced transparency for parents' investors, who benefit from detailed information on the origin of their firm's earnings. In contrast, subsidiaries' investors appear unaware of ownership links, and behave as inattentive investors. Inattention is worsened by geographical diversification of affiliated firms and by indirect ownership, but cannot be explained by strategic timing of the disclosure of earnings surprises, day-of-the-week effect or seasonality, internal capital markets, or synergy-related explanations across industries. Institutional investors do not seem to be smarter at understanding group structures, with the exception of active investors owning shares in both parent and subsidiary companies.

Complex risks differ from simple risks in that agents facing them only possess imperfect information about the underlying objective probabilities. This paper studies how complex risks are priced by and shared among heterogeneous investors in a Walrasian market. I apply decision theory under ambiguity to derive robust predictions regarding the trading of complex risks in the absence of aggregate uncertainty. I test these predictions in the laboratory. The experimental data provides strong evidence for theory's predicted reduction in subjects' price sensitivity under complex risks. While complexity induces more noise in individual trading decisions, market outcomes remain theory-consistent. This striking feature can be reconciled with a random choice model, where the bounds on rationality are reinforced by complexity. When moving from simple to complex risks, equilibrium prices become more sensitive whereas risk allocations turn less sensitive to noise introduced by imperfectly rational subjects. Markets' effectiveness in aggregating beliefs about complex risks is determined by the trade-off between reduced price sensitivity and reinforced bounded rationality. Moreover, my results imply that complexity has similar but more pronounced effects on market outcomes than ambiguity induced by conventional Ellsberg urns.

We study how third-party rating information influences firms' access to bank financing and real outcomes. We exploit a refinement in the rating scale that occurred in France in 2004. The new rules made some firms within each rating class receive a rating surprise, without affecting their risk weight in banks' required capital calculation. We find that such firms enjoy greater and cheaper access to bank credit. Specifically, they obtain more credit from previously less informed lenders, and start new bank relationships more easily. Consequently, they rely on equity to a lower extent and invest more. These findings suggest that credit ratings may help reducing the hold-up problem and increase competition among banks.

Loss aversion and overconfidence are arguably the two most studied behavioral biases in finance, and yet often considered having contradictory effects on risk taking. Overconfident investors are generally more prone to take-on risk, whereas loss averse investors tend to be more cautious. We study their marginal impacts on trading. We propose a model in which rational investors and investors who are jointly loss averse and overconfident, disagree over public signals. The proposed theory succeeds to rationalize asymmetries in returns: It generates a positive correlation between volume and aggregate information, a high-volume return premium, positive unconditional skewness and explains cross-sectional variation in skewness at the firm level.

Revisiting the two-factor valuation of financial futures contracts and their derivatives, we propose a new approach in which the covariance process between the underlying asset price and the money market interest rate is set endogenously according to investors' arbitrage operations. The asset-rate covariance turns out to be stochastic, thereby explicitly capturing futures contracts' marking-to-market feature. Our numerical simulations show significant deviations from the traditional cost-of-carry model of futures prices, in line with Cox, Ingersoll and Ross's (1981) theory and a large corpus of past empirical research. Our empirical tests show an impact of several index points magnitude from the recent US Federal Reserve interest rate hikes on the S&P 500 daily spot-futures basis, highlighting the effect of monetary policy at low frequencies on the backwardation vs. contango regime, and shedding new light on Keynes's (1930) theory of normal backwardation.