White paper: A New Anomaly: The Cross-Sectional Profitability of Technical Analysis
Guofu Zhou, Frederick Bierman & James E. Spears Professor of Finance with Yufeng Han & Ke Yang

Abstract: The paper applies a moving average strategy of technical analysis to portfolios sorted by volatility. It finds that the investment timing portfolios based on the moving average strategy outperform the buy-and-hold strategy substantially. For high volatility portfolios, the abnormal returns, relative to the CAPM and the Fama-French three-factor models, are high, and higher than those from the well-known momentum strategy. The abnormal returns remain high even after accounting for transaction costs. Although both the moving average and the momentum strategies are trend-following methods, their performances are surprisingly uncorrelated and behave different over the business cycles, and has different exposures over default and liquidity risk.

White paper: The Optimal Duration of Executive Compensation: Theory & Evidence
Radhakrishnan Gopalan, Assistant Professor of Finance with Todd Milbourn, Fenghua Song & Anjan V. Thakor

Abstract: While much is made of the ills of “short-termism" in executive compensation, in reality very little is known empirically about the extent of short-termism in CEO compensation. This paper develops a new measure of CEO pay duration that reflects the vesting periods of different components of compensation, thereby quantifying the extent to which compensation is short-term and the extent to which it is long-term. It also develops a theoretical model that generates three predictions for which we find strong empirical support using our measure of pay duration. First, optimal pay duration is decreasing in the extent of mispricing of the firm's stock. Second, optimal pay duration is longer in firms with poorer corporate governance. Third, CEOs with shorter pay durations are more likely to engage in myopic investment behavior, and this relationship is stronger when the extent of stock mispricing is larger.

White paper: Panacea, Pandora’s Box, or Placebo: Feedback in Bank Holdings of Mortgage‐Backed Securities & Fair Value Accounting
Richard M. Frankel, Beverly & James Hance Professor of Accounting with Gauri Bhat & Xiumin Martin

Abstract: We examine the relation between bank holdings of mortgage-backed securities (MBS) and MBS prices. Theory suggests feedback between MBS holdings and underlying asset markets can be aggravated by mark-to-market accounting. We measure feedback by the relation between asset returns and the changes in bank MBS holdings. Consistent with the existence of feedback effects related to mark-to-market, we find that for banks with high MBS, more nonperforming loans, and lower total capital ratio, changes in bank MBS positions are positively associated with changes in MBS prices and that this relation is reduced after the easing of mark-to-market rules. To assess the effect of feedback on shareholder value, we test whether the stock-price response of banks to the announcement of the easing of mark-to-market accounting is associated with the intensity of feedback behavior. We find that the market reaction to the easing of market-to-market is more positive for banks with more MBS, higher nonperforming loans and higher pre-rule-change feedback. Overall, our results suggest feedback related to mark-to-market accounting had measurable effects on shareholder value.

White paper: Managerial Decisions, Control Influences & Corporate Finance: Survey Evidence
Anjan Thakor, John E. Simon Professor of Finance and Director of the PhD Program

Abstract: We surveyed senior (C-level) executives in a variety of privately-owned and publicly-traded organizations to examine their corporate goals, the factors that affect the ability of their managers to make decisions to achieve these goals, the control influences on managerial decisions exerted by various stakeholders, the factors that affect firms’ capital-raising, M&A and dividend policy decisions, and how firms make their capital structure decisions. The main findings are as follows. While managers seek to maximize shareholder value, achieving long-term growth and stability for all stakeholders and increasing market share growth are also important, even for public firms. A key impediment perceived by managers in the attainment of their goals is lack of endorsement of their decisions by key stakeholders, caused by fundamental disagreement. Managers thus attempt to make decisions that they believe their key employees, boards of directors and major investors will endorse. The choice of which security to issue to raise external capital is driven most significantly by the firm’s overall corporate strategy and whether the chosen security will facilitate management’s flexibility (increase decision endorsement) to execute that strategy. Agency and asymmetric information matter in some corporate decisions, but agency costs have no impact on financial policy. Tests of specific hypotheses reveal that firms that value managerial decision-making autonomy (which is adversely affected by fundamental disagreement) more choose lower dividend-payout ratios and lower leverage ratios, whereas firms that face larger asymmetric information have lower leverage ratios.

White paper: Do Bank-affiliated Analysts Benefit from Lending Relationships?
Xiumin Martin, Assistant Professor of Accounting

Abstract: This paper investigates whether private information from lending activities improves the forecast accuracy of bank-affiliated analysts. Using a matched sample design, matching by affiliated bank or borrower, we demonstrate that the forecast accuracy of bank-affiliated analysts increases after the followed firm borrows from the affiliated bank. We also find that the increase in forecast accuracy is more pronounced for borrowers with greater information asymmetry and bad news, and for deals with financial covenants. Last, we find that the informational advantage of bank-affiliated analysts exists only when the affiliated banks serve as lead arrangers, not merely as participating lenders. Overall our evidence suggests that information flows from commercial banking to equity research divisions within financial conglomerates.