This paper investigates how and to what extent do Chief Financial Officers (CFOs) affect earnings management. We introduce an index that captures CFOs' ability and incentives to influence firms' accounting practices. We find a negative association between the CFO index and discretionary accruals, which suggests that firms with strong CFOs (i.e. higher values of CFO index) are less likely to engage in accrual earnings management. This relation is robust to the inclusion of firm-, CEO- and governance-level controls, including fixed effects and to various approaches used to address potential endogeneity. The negative effect of strong CFOs on accruals seems to persist even in firms where CEOs have higher equity incentives and more power to engage in opportunistic earnings management. This suggests that CFOs may play an important monitoring role in the governance process. We also demonstrate that when firms are financially constrained, strong CFOs may (strategically) use discretionary accruals to facilitate its financing activities, but not when they are more likely to have personal financial gains from doing so.

We explore the effect of the sharp and sustained decline after June 2014 in the global price of crude oil (and hence in the U.S. price of gasoline) on U.S. real GDP growth. Our analysis suggests that this decline produced a cumulative stimulus of about 0.9 percent of real GDP by raising private real consumption and non-oil-related business investment, and an additional stimulus of 0.04 percent, reflecting a shrinking petroleum trade deficit. This simulative effect, however, has been largely offset by a large reduction in real investment by the oil sector. Hence, the net stimulus since June 2014 has been close to zero. We show that the U.S. economy’s response was not fundamentally different from that observed after the oil price decline of 1986. Then as now, the U.S. economy’s response is consistent with standard economic models of the transmission of oil price shocks. We find no evidence that frictions in reallocating capital and labor across sectors or increased uncertainty about the price of gasoline explain the sluggish response of U.S. real GDP growth. Nor do we find evidence of financial contagion, of spillovers from oil-related investment to non-oil-related investment, of an increase in household savings, or of households deleveraging

The rational portfolio allocation theories seem to be at odds with the mounting evidence of importance of behavioral factors for stock returns and market-wide measures of transactions. The factors can work through effects on sentiment, attention or both. We focus on effects of changes in attention driven by ever changing interest in sport, weather and finance, nationally and internationally. In most of the literature, investors' behavior is a black box between the news and their effects on the market. This paper opens the black box and looks at the investors' trading intensity directly. We find that institutional investors are not immune to attention factors. International investors are affected by both, sways in Norwegian and in domestic attention. We find attention to sport and weather, as measured by Google search volumes, to be important distractors, while attention to finance and the general interest in the country to be positively associated with trading activities. Rather than following the optimal portfolio rebalancing principles, the investors appear to be afflicted by several discernible behavioral biases.

We document that coordination among institutional investors affect how firms behave in the takeover market. We use geographic distance between the largest firms’ institutional investors as proxy for the ease of communication, cooperation and coordination among institutional investors. Consistent with the view that geographic proximity allows investors to facilitate more deals, firms with geographically close institutional shareholders are more likely to acquire other companies. We also show that M&As carried out firms for which institutional investors are geographically close, tend to generate higher abnormal returns around their announcement. Overall, these findings indicate that coordination among investors not only increases takeover activity, but also it improves its quality. We provide further support by showing that when corporate governance quality of the acquiring firm is low, or when its information cost is high, geographic closeness between main institutional owners plays a more important role

The aim of this paper is to propose a simple and unique measure of risk that subsumes the conflicting information contained in volatility and skewness indices and overcomes the limitations of these indices in accurately measuring future fear or greed in the market. To this end, we exploit the concept of upside and downside corridor implied volatility, which accounts for the asymmetry in the risk-neutral distribution, in the sense that investors like positive spikes while they dislike negative spikes in returns. The risk-asymmetry index is meant to capture the investors’ pricing asymmetry towards upside gains and downside losses. We show that the proposed risk-asymmetry index can play a crucial role in predicting future returns, at various forecast horizons, since it subsumes the information embedded in both the volatility and skewness indices. Furthermore, the risk-asymmetry index is the only index that, when it reaches very high values, it possesses the ability to signify a clearly risky situation for the aggregate stock market, detected neither by the volatility index nor by the skewness index. To our knowledge, this is the first paper proposing a synthetic risk index, based on model-free moments, which accounts both for the second and the third moments of the risk neutral distribution

A number of commentators and policy makers have argued that inflation targeting central banks are less aggressive in responding to shocks that push inflation below target than to shocks that push inflation above target (Thoma, 2012; Beckworth, 2016; Kashkar, 2017). Support for this claim is usually based on the observation that in a number of inflation targeting countries, recent inflation outcomes have been persistently below target, despite that fact that these countries have been experiencing growth rates below historical norms. For either a strict or flexible inflation targeting central bank, there is no trade‐off in terms of real activity to prevent it from doing what is necessary to increase the rate of inflation. In this paper we provide evidence of asymmetry in the time series process for inflation rates in five inflation targeting countries (Australia, New Zealand, Sweden, United States and the Euro‐Area). Of the countries we examine, only Canadian inflation shows no evidence of asymmetry. Since it is relatively standard to model inflation as an autoregressive process, we use a threshold autoregressive (TAR) model to test for asymmetry in inflation persistence; above and below some estimated threshold. We find the threshold estimates are reasonable in light of a central bank’s announced inflation target. 

We investigate whether a firm’s social capital, and the trust that it engenders, are viewed favorably by bondholders. Using the financial crisis as an exogenous shock to trust, and firms’ corporate social responsibility (CSR) activities as a proxy for social capital, we show that high-CSR firms benefited from lower bond spreads in the secondary market during the financial crisis compared to low-CSR firms. These findings are more pronounced for firms that have more of an opportunity to engage in asset substitution. High-CSR firms were also able to raise more debt capital on the primary market during this period, and those high-CSR firms that raised more debt were able to do so at lower at-issue bond spreads, better initial credit ratings, and for longer maturities. Our results suggest that debt investors believe that high-CSR firms are less likely to engage in asset substitution that would be detrimental to stakeholders other than shareholders. These findings also indicate that the reciprocity benefits of CSR that accrued to shareholders during the financial crisis carry across to another important asset class, debt capital

We develop non-parametric tests for prospect stochastic dominance Efficiency (PSDE) and Markowitz stochastic dominance efficiency (MSDE) using block bootstrap resampling. Under the appropriate conditions we show that they are asymptotically conservative and consistent. We employ Monte Carlo experiments to assess the finite sample size and power of the tests. We use the tests to empirically establish whether the value-weighted market portfolio is the best choice of every individual with preferences exhibiting certain patterns of local attitudes towards risk. Our results indicate that we cannot reject the hypothesis of prospect stochastic dominance efficiency for the market portfolio. This is supportive of the claim that the particular portfolio can be rationalized as the optimal choice for any S-shaped utility function. Instead, we reject the hypothesis for Markowitz stochastic dominance, which could imply that there exist reverse S-shaped utility functions that do not rationalize the market portfolio.

We investigate the determinants of institutional investors' holdings in IPO firms and the post-issue relation between these holdings and operating performance. We find that institutions' initial holdings strongly depend on IPO characteristics, in particular, the public float. After controlling for public float, initial institutional holdings are unrelated to pre-IPO operating performance. During the first year after the IPO, average institutional holdings increase from 24% to 36% of shares outstanding and stabilize at about 42% by the end of the second year. Furthermore, post-IPO operating performance is positively related to institutional holdings. This relation holds also in lags, but diminishes towards the third year after the IPO. Overall, our findings indicate that institutional ownership is a valid indicator of the firm's operating performance in its initial years as a public company.

We investigate the determinants of institutional investors' holdings in IPO firms and the post-issue relation between these holdings and operating performance. We find that institutions' initial holdings strongly depend on IPO characteristics, in particular, the public float. After controlling for public float, initial institutional holdings are unrelated to pre-IPO operating performance. During the first year after the IPO, average institutional holdings increase from 24% to 36% of shares outstanding and stabilize at about 42% by the end of the second year. Furthermore, post-IPO operating performance is positively related to institutional holdings. This relation holds also in lags, but diminishes towards the third year after the IPO. Overall, our findings indicate that institutional ownership is a valid indicator of the firm's operating performance in its initial years as a public company.

We analyze the benefits accruing to a risk averse investor of adding commodity futures to her portfolio of traditional assets using an out-of-sample framework that efficiently incorporates the information contained in commodity characteristics. We identify the futures carry as a key characteristic for tactical allocation among commodities. Adding futures to the traditional portfolio by conditioning on the carry leads to a significant increase in the Sharpe ratio of 427%, without an adverse impact on the distribution of portfolio returns. Indeed, a stochastic dominance methodology, which explicitly takes into account the investor's aversion towards negative skewness, indicates that the investor would strictly prefer the commodity futures carry augmented portfolio over the benchmark (stocks and bonds only) portfolio. 

We examine the effects of learning by experience on portfolio decisions of U.S. investors. Our evidence suggests that knowledgeable investors benefit the most from learning. That is, as knowledgeable investors gain experience, they improve portfolio construction and performance. However, there might be limits to learning since investors are heavily influenced by prior choices made near the time when the investor starts trading (primacy effect) and in the most recent period (recency effect). Overall, our evidence suggests that investment knowledge can enhance learning, which may be impeded by the impact of prior choices

Alliances come in many shapes and forms. We show in a simple formal model that alliances can resemble two broad types, depending on the degree of product market competition: Low competition alliances will resemble a stag hunt game in which contributing to the alliance is in the partners’ interests. High competition alliances are akin to a prisoner’s dilemma in which alliance partners have an interest in withholding effort, at least if the alliance game is played only once. We match these two alliance environments with different alliance configurations and vary the number of alliance partners and the level of commitment. We find that alliance configuration matters most in high competition alliances, while performance of low competition alliances is relatively unaffected by different alliance configurations. This points towards important contingencies for the choice of alliance configuration.