Department of Finance Finance Down Under Building on the Best from the Cellars of Finance March 5-7, 2015 Department of Finance Finance Down Under

Building on the Best from the Cellars of Finance March 5-7, 2015

Organised by Department of Finance Faculty of Business and Economics The University of Melbourne Welcome to Finance Down Under (FDU) 2015

The Department of Finance in the Faculty of Business and Economics at the University of Melbourne welcomes everyone to its annual Finance Down Under conference.

Submissions again reached record levels in both quantity and quality this year, and we selected only 20 papers from among more than 250 submissions. These 20 papers from all areas in finance (Corporate Finance, Asset Pricing, Investments, and Market Microstructure) received high ratings from the 157-member program committee, and we have a nice group of academics who will provide discussions on the accepted papers.

Our unique format includes a special symposium built around ‘vintage’ work in finance that has withstood the test of time and continued to inspire current research. This year, FDU will celebrate the 25 years of research influenced by the 1990 publication of three classic papers by Andy Lo and A. Craig MacKinlay: “When are contrarian profits due to stock market overreaction?”; “Data-snooping biases in tests of financial asset pricing models”; and “An econometric analysis of nonsynchronous trading”. Weare honoured to have Professor A. Craig MacKinlay as a keynote speaker, as well as keynote presentations by Professors Maureen O’Hara, Lubos Pastor and Allan Timmermann. We have also selected two papers for Saturday’s special session in honour of Lo and MacKinlay’s classic papers.

Finance Down Under 2015 Building on the Best from the Cellars of Finance 1 FINANCE DOWN UNDER 2015: Building on the Best from the Cellars of Finance PROGRAM SUMMARY Thursday, March 5, 2015 (Melbourne Zoo) 5:00 pm – 7:00 pm Wine Reception (Rainforest Room) Welcome Speech: John Handley, University of Melbourne Keynote Speech: Maureen O’Hara, Cornell University

Friday, March 6, 2015 (Melbourne Cricket Ground) 9:30 am – 10:00 am Registration and Morning Coffee (Registration Desk) 10:00 am – 11:15 am Parallel Sessions I (Jack Ryder Rooms and Premiership Club Room) 11:15 am – 12:00 pm Keynote Speech: A. Craig MacKinlay, University of Pennsylvania 12:00 pm – 1:30 pm Lunch (Premiership Club Room) 1:30 pm – 2:45 pm Parallel Sessions II (Jack Ryder Rooms and Premiership Club Room) 2:45 pm – 3:15 pm Afternoon Tea 3:15 pm – 4:30 pm Parallel Sessions III (Jack Ryder Rooms and Premiership Club Room) 4:45 pm – 5:30 pm MCG Guided Tour 5:45 pm – 7:45 pm Wine Reception (Premiership Club Room) Keynote Speech: Allan Timmermann, University of California San Diego Saturday, March 7, 2015 (The Spot Building: Copland Theatre, Level B1) 9:00 am – 10:00 am Coffee and tea served 10:00 am – 11:15 am Special Session 11:15 am – 12:00 pm Keynote Speech: Lubos Pastor, University of Chicago 12:00 pm – 1:00 pm Lunch (Dean’s Boardroom, Level 12, The Spot Building) 1:00 pm – 10:00 pm Food and Wine Experience (Yarra Valley) Best Paper Award and Announcement

2 Finance Down Under 2015 Building on the Best from the Cellars of Finance Premiership Club Room Jack Ryder Room 1 Jack Ryder Room 2

Theoretical Asset Pricing in Overinvestment, Financial Decision Making: Parallel the Presence of Diverse, Underinvestment, Just Right Without Gambling, I Would Sessions I Disparate, Divergent Investment Not Exist – Hunter S. Decision Makers Thompson

Value or Growth? Pricing of Does Short Selling Discipline Fooled By Randomness? Idiosyncratic Cash-Flow Risk Overinvestment? March 6, Financial Decision-Making with Heterogeneous Beliefs 10:00 am – Under Model Uncertainty The Impact of Covenant 11:15 am Retail Traders and the Violations on Corporate When Saving is Gambling Competitive Allocation of Investment in R&D Attention Empirical Asset Pricing with Theoretical Corporate Parallel K Factors: 1

Growth Expectations, Counterparty Risk and the Establishment of the New Dividend Yields, and Future Is Market Timing Good for York Stock Exchange March 6, Stock Returns Shareholders? Clearinghouse 1:30 pm – 2:45 pm Corporate Policies with Tracing Out Capital Flows: Linking Cross-Sectional and Temporary and Permanent How Financially Integrated Aggregate Expected Returns Shocks Banks Respond to Natural Disasters Empirical Corporate Finance: Parallel Funds Finishing First The Long and the Short Run Market Microstructure Sessions III of It

Mutual Fund Competition, Managerial Myopia and Debt Managerial Skill, and Alpha High Frequency Trading and Maturity March 6, Persistence the 2008 Short Sale Ban 3:15 pm – Do Long-Term Investors 4:30 pm The Freedom of Information Shades of Darkness: A Improve Corporate Decision Act and the Race Towards Pecking Order of Trading Making? Information Acquisition Venues

Special Session: Overreacting to Nonsynchronous Data-snooping (The Spot, Basement Theatre)

March 7, 10:00 am – Is Aggregate Idiosyncratic Risk Priced? Follow the Bid-Ask Bounce 11:15 am Asset Pricing with Index Investing

Finance Down Under4 2015 Building on the Best from the Cellars of Finance 3 PROGRAM DETAILS

FRIDAY, March 6, 2015, 10:00 am – 11:15 am

Theoretical Asset Pricing in the Presence of Diverse, Disparate, Divergent Decision Makers – Premiership Club Room Session Chair: Andrea Lu, University of Melbourne

Value or Growth? Pricing of Idiosyncratic Cash-Flow Risk with Heterogeneous Beliefs Michael F. Gallmeyer, University of Virginia Hogyu Jhang, Georgia Institute of Technology Hwagyun Kim, Texas A&M University

Retail Traders and the Competitive Allocation of Attention Shaun W. Davies, University of Colorado, Boulder

Discussants: Qi Zeng, University of Melbourne Filippo Massari, University of New South Wales

Overinvestment, Underinvestment, Just Right Investment – Jack Ryder Room 1 Session Chair: Sturla Fjesme, University of Melbourne

Does Short Selling Discipline Overinvestment? Eric C. Chang, University of Hong Kong Tse-Chun Lin, University of Hong Kong Xiaorong Ma, University of Hong Kong

The Impact of Covenant Violations on Corporate Investment in R&D Sudheer Chava, Georgia Institute of Technology Vikram K. Nanda, Rutgers Business School Steven Chong Xiao, Rutgers Business School

Discussants: Garry Twite, University of Melbourne Jordan Neyland, University of Melbourne

Financial Decision Making: Without Gambling, I Would Not Exist – Hunter S. Thompson – Jack Ryder Room 2 Session Chair: André Gygax, University of Melbourne

Fooled By Randomness? Financial Decision-Making Under Model Uncertainty Elise Payzan-LeNestour, University of New South Wales

When Saving is Gambling J. Anthony Cookson, University of Colorado, Boulder

Discussants: Joshua Shemesh, University of Melbourne Carsten Murawski, University of Melbourne 5 4 Finance Down Under 2015 Building on the Best from the Cellars of Finance FRIDAY, March 6, 2015, 1:30 pm – 2:45 pm

Empirical Asset Pricing with K Factors: 1

Growth Expectations, Dividend Yields, and Future Stock Returns Zhi Da, University of Notre Dame Ravi Jagannathan, Northwestern University Jianfeng Shen, University of New South Wales

Linking Cross-Sectional and Aggregate Expected Returns Serhiy Kozak, University of Michigan Shrihari Santosh, University of Maryland

Discussants: Federico Nardari, University of Melbourne Antonio Gargano, University of Melbourne

Theoretical Corporate Finance: The Short and the Long Run of It – Jack Ryder Room 1 Session Chair: Ali Akyol, University of Melbourne

Is Market Timing Good for Shareholders? Ilona Babenko, Arizona State University Yuri Tserlukevich, Arizona State University Pengcheng Wan, Arizona State University

Corporate Policies with Temporary and Permanent Shocks Jean-Paul Decamps, Toulouse School of Economics Sebastian Gryglewicz, Erasmus University Erwan Morellec, Swiss Finance Institute Stephane Villeneuve, Toulouse School of Economics

Discussants: Neal Galpin, University of Melbourne Hae Won (Henny) Jung, University of Melbourne

Containing Contagion – Jack Ryder Room 2 Session Chair: Vidhan Goyal, HKUST

Counterparty Risk and the Establishment of the New York Stock Exchange Clearinghouse Asaf Bernstein, Massachusetts Institute of Technology Eric N. Hughson, Claremont McKenna College Marc D. Weidenmier, Claremont McKenna College

Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters Kristle R. Cortés, Federal Reserve Bank of Cleveland Philip E. Strahan, Boston College

Discussants: Spencer Martin, University of Melbourne Lei Zhang, Nanyang Technological University 6 Finance Down Under 2015 Building on the Best from the Cellars of Finance 5 FRIDAY, March 6, 2015, 3:15 pm – 4:30 pm

Funds Finishing First – Premiership Club Room Session Chair: Allaudeen Hameed, National University of Singapore

Mutual Fund Competition, Managerial Skill, and Alpha Persistence Gerard Hoberg, University of Maryland Nitin Kumar, Indian School of Business Nagpurnanand R. Prabhala, University of Maryland

The Freedom of Information Act and the Race Towards Information Acquisition Antonio Gargano, University of Melbourne Alberto G. Rossi, University of Maryland Russ R. Wermers, University of Maryland

Discussants: Juan Sotes-Paladino, University of Melbourne Oliver Boguth, Arizona State University

Empirical Corporate Finance: The Long and the Short Run of It – Jack Ryder Room 1 Session Chair: Ning Gong, University of Melbourne

Managerial Myopia and Debt Maturity Indraneel Chakraborty, Southern Methodist University Andrew MacKinlay, Southern Methodist University William F. Maxwell, Southern Methodist University

Do Long-Term Investors Improve Corporate Decision Making? Jarrad Harford, University of Washington Ambrus Kecskes, York University Sattar Mansi, Virginia Tech

Discussants: Stefan Petry, University of Melbourne Jeffrey Harris, American University

Market Microstructure – Jack Ryder Room 2 Session Chair: Carole Comerton-Forde, University of Melbourne

High Frequency Trading and the 2008 Short Sale Ban Johnathan Brogaard, University of Washington Terrence Hendershott, University of California - Berkeley Ryan Riordan, Queen’s University

Shades of Darkness: A Pecking Order of Trading Venues Albert J. Menkveld, VU University Amsterdam Bart Z. Yueshen, INSEAD Haoxiang Zhu, Massachusetts Institute of Technology

Discussants: Bryan Lim, University of Melbourne Zhuo Zhong, University of Melbourne 7 6 Finance Down Under 2015 Building on the Best from the Cellars of Finance SATURDAY, March 7, 2015, 10:00 am – 11:15 am

Special Session: Overreacting to Nonsynchronous Data-snooping – The Spot, Copland Theatre Session Chair: Burton Hollifield, Carnegie Mellon University

Is Aggregate Idiosyncratic Risk Priced? Follow the Bid-Ask Bounce David A. Lesmond, Tulane University Yihua Zhao, Tulane University

Asset Pricing with Index Investing Georgy Chabakauri, London School of Economics and Political Science Oleg Rytchkov, Temple University

Discussants: Thijs van der Heijden, University of Melbourne Vincent Grégoire, University of Melbourne

8 Finance Down Under 2015 Building on the Best from the Cellars of Finance 7 BIOGRAPHY OF KEYNOTE SPEAKERS A. Craig MacKinlay Joseph P. Wargrove Professor of Finance, Wharton Business School, University of Pennsylvania.

A former member of the Board of Directors of the American Finance Association and the NASD Economic Advisory Board, Craig's research interests include empirical implementation and validation of asset pricing models, measuring investment performance, pricing of futures contracts, microstructure of financial markets, assessment of credit risk, and statistical methods in finance.

In addition to teaching, he is also a Research Associate of the National Bureau of Economic Research. Craig is the co-author of two books, the Econometrics of Financial Markets and A Non-Random Walk Down Wall Street. https://fnce.wharton.upenn.edu/profile/955/

Maureen O’Hara Robert W. Purcell Professor of Finance, Johnson Graduate School of Management, Cornell University

Maureen O’Hara is the Robert W. Purcell Professor of Finance at the Johnson Graduate School of Management, Cornell University. She holds degrees from the University of Illinois (B.S. Economics), and Northwestern University (M.S. Economics and Ph.D. Finance), and Honorary Doctorates from Facultés Universitaires Catholiques à Mons (FUCAM), Belgium and Universität Bern, Switzerland.

Professor O'Hara's research focuses on issues in market microstructure, and she is the author of numerous journal articles as well as the book Market Microstructure Theory (Blackwell: 1995). Her most recent research looks at the role of toxicity in affecting liquidity in high frequency markets. Dr. O'Hara also publishes widely on a broad range of topics including banking and financial intermediaries, law and finance, and experimental economics. Professor O’Hara has served as President of the American Finance Association, the Western Finance Association, the Financial Management Association, the Society for Financial Studies and the International Atlantic Economic Society. She was formerly the Executive Editor of the Review of Financial Studies. Professor O’Hara is Chairman of the Board of Directors of Investment Technology Group, Inc (ITG), a global agency brokerage firm, and she serves on the Board of Directors of NewStar Financial, a commercial finance company, where she is on the audit and governance committees. She also serves on the Board of Trustees of Teachers Insurance and Annuity Association (TIAA-CREF). She is a member of the CFTC-SEC Emerging Regulatory Issues Task Force (the “flash crash” committee), the Global Advisory Board of the Securities Exchange Board of India (SEBI), and the Advisory Board of the Office of Financial Research, U.S. Treasury. She has consulted for a number of companies and organizations, including Microsoft, Merrill Lynch, Credit Suisse, the New York Stock Exchange, Bristol-Meyers Squibb, and the World Federation of Exchanges. https://www.johnson.cornell.edu/Faculty-And-Research/Profile/id/mo19

9 8 Finance Down Under 2015 Building on the Best from the Cellars of Finance Lubos Pastor

Lubos Pastor is Charles is Charles P. McQuaid Professor of Finance at the University of Chicago Booth School of Business. He is also co-director of the Fama- Miller Center for Research in Finance, Vice President of the Western Finance Association, member of the CRSP Indexes Advisory Council, Research Associate at the National Bureau of Economic Research, and Research Fellow at the Centre for Economic Policy and Research. In addition, he is an Associate Editor of the Journal of Finance and Journal of Financial Economics, and a former Associate Editor of the Review of Financial Studies. Professor Pastor’s research focuses mostly on financial markets and asset management. He has written on a broad range of topics such as liquidity risk, political uncertainty, stock price bubbles, stock volatility, return predictability, technological revolutions, portfolio choice, performance evaluation, returns to scale in active management, indexing, and IPOs. He has analyzed various effects of parameter uncertainty and learning in finance. His articles have appeared in the American Economic Review, Journal of Finance, Journal of Financial Economics, Journal of Political Economy, Review of Financial Studies, as well as nonacademic outlets such as Bloomberg and the Financial Times. His research has been awarded numerous prizes, such as two Smith Breeden Prizes, two Fama/DFA Prizes, Whitebox Advisors Selected Research Prize, Goldman Sachs Asset Management Prize, Barclays Global Investors Prize, Rothschild Caesarea Center Best Paper Award, two Geewax, Terker & Co. Prizes, Marshall Blume Prize, the NASDAQ Award, and the Q Group Award.

Professor Pastor has been teaching at Chicago Booth since 1999 when he obtained a Ph.D. in finance from the Wharton School at the University of Pennsylvania. He has received the McKinsey Award for Excellence in Teaching as well as two Faculty Excellence Awards at Chicago Booth. In his student years, Professor Pastor won awards in chess and mathematics, mainly in his native Slovakia. In his spare time, he enjoys sports, reading, and spending time with his family. http://www.chicagobooth.edu/faculty/directory/p/lubos-pastor

Allan Timmermann Atkinson/Epstein Endowed Chair, Professor of Finance, Rady School of Management, University of California San Diego

Timmermann uses a mix of theory, data and econometric techniques to understand the behavior of prices and expectations in financial markets. His objective is to understand what determines the movement of security prices and to use this in managing risk, forming portfolios and forecasting future price movements. He has also studied mutual fund and pension fund performance. Timmermann has developed new methods in areas such as forecasting under structural breaks, forecast combinations and evaluation of predictive skills. He serves as an associate editor on leading journals in financial economics and econometrics. Timmermann earned his Ph.D. from the University of Cambridge. http://rady.ucsd.edu/faculty/directory/timmermann/

10 Finance Down Under 2015 Building on the Best from the Cellars of Finance 9 ABSTRACTS

Theoretical Asset Pricing in the Presence of Diverse, Disparate, Divergent Decision Makers

Value or Growth? Pricing of Idiosyncratic Cash-Flow Risk with Heterogeneous Beliefs Michael F. Gallmeyer, Hogyu Jhang and Hwagyun Kim

We study a continuous-time pure exchange economy where idiosyncratic cash flow risks are priced via investors' heterogeneous beliefs. Investors perceive idiosyncratic cash flow risks differently through heterogeneous subjective mean growth rates on a firm's cash flow. This impacts equilibrium quantities. Our model shows that idiosyncratic cash flow shocks priced through belief differences can explain cross- sectional variations in stock returns and cash flows. Quantitative results show that a value premium arises, as value stocks have higher idiosyncratic cash-flow volatilities, lower average cash flows, and higher belief differences, which is empirically supported. A growth premium prevails without belief differences.

Retail Traders and the Competitive Allocation of Attention Shaun W. Davies

I consider a rational expectations framework in which attention constrained individuals compete against each other and institutions. The model reconciles a set of empirical facts that cannot be simultaneously explained by standard theories: retail trader portfolios are highly correlated, retail traders tend to follow some stocks and ignore others, and aggregate trades from retail traders are profitable over short horizons and predict future returns (even controlling for past returns or past volume). Additionally, the equilibrium herding behavior of individuals suggests that their actions are not subsumed by institutions. Instead the herd competes directly against institutions. The analysis also yields novel predictions regarding portfolio composition and turnover.

Overinvestment, Underinvestment, Just Right Investment

Does Short Selling Discipline Overinvestment? Eric C. Chang, Tse-Chun Lin and Xiaorong Ma

We explore the disciplining effect of short selling on overinvestment. Firms with more stock lending supply have higher abnormal announcement stock returns of acquiring firms, lower subsequent abnormal capital investments, and longer spells between large investments, and higher subsequent Tobin’s Q and ROA. Alleviating the endogeneity concern, our multivariate difference-in-difference analysis shows that this disciplinary force of lending supply is more effective for firms in the Regulation SHO-PILOT Program. We identify two mechanisms through which short selling disciplines managers: managers’ wealth-performance sensitivity and likelihood of hostile takeovers. Additionally, the disciplinary force only exists for non- financial-constrained firms and non all-cash M&A deals.

The Impact of Covenant Violations on Corporate Investment in R&D Sudheer Chava, Vikram K. Nanda and Steven Chong Xiao

Using regression discontinuity design, we show that corporate investment in R&D declines sharply following a financial covenant violation, wherein creditors can use the threat of accelerating the loan to influence changes in firm policies. The reduction in R&D is more severe in firms with low R&D efficiency i.e., when firm R&D is less productive in terms of ROA and results in fewer patents and citations. Consequently, despite a decrease in R&D, covenant-violating firms do not suffer a drop in innovative output (patents and citations-to-patents). These results highlight that lenders are judicious in exercising their control rights after covenant violations and suggest that bank financing can be a viable source of financing for innovative firms. 11 10 Finance Down Under 2015 Building on the Best from the Cellars of Finance Financial Decision Making: Without Gambling, I Would Not Exist

Fooled By Randomness? Financial Decision-Making Under Model Uncertainty Elise Payzan-LeNestour

Tail risk is pervasive in financial markets. Overlooking it often leads to blow-ups. Here I consider assets that yield steady streams of good payoffs but eventually inflict a major loss, leading the investor to blow up. Learning about those assets’ risk/reward profiles is crucial yet challenging. When asked to perform a stylized version of the task, participants managed to learn in a Bayesian way. However, many still chose to invest in these assets, apparently owing to an overwhelming desire to pick pennies. These findings may help flesh out key psychological forces at stake during financial manias.

When Saving is Gambling J. Anthony Cookson

This paper investigates whether financial gambles substitute for casino gambling using the introduction of lottery-linked savings accounts in Nebraska as a natural experiment. Using proprietary data on casino cash withdrawals, the introduction of savings lotteries induces consumers in affected regions to reduce casino gambling by half relative to unaffected regions. The estimated effect is stronger if savings lotteries and casino gambling have similar attributes, consistent with the interpretation that the effect reflects substitution across gambling products. Examining the substitution pattern more deeply, I find savings lotteries appeal most to high dollar-value gamblers with better financial habits. These findings suggests that savings lotteries can be an effective tool to improve savings rates by appealing to gambling preferences, but the introduction of savings lotteries is not merely a substitute for financial education. Indeed, the impact of savings lotteries on casino gambling would be greater if consumers have better ex ante financial habits.

Empirical Asset Pricing with K Factors: 1

Growth Expectations, Dividend Yields, and Future Stock Returns Zhi Da, Ravi Jagannathan and Jianfeng Shen

According to the dynamic version of the Gordon growth model, the long-run expected return on stocks, stock yield, is the sum of the dividend yield on stocks plus some weighted average of expected future growth rates in dividends. We construct a measure of stock yield as a model-imposed affine combination of dividend yield and an expected dividend growth proxy measured from sell-side analysts' near-term earnings forecasts. Stock yield predicts US stock index returns well, with an out-of-sample R-squared that is consistently above 2% at monthly frequency over our sample period. When both dividend yield and expected dividend growth are used as explanatory variables in a multivariate regression without any coefficient restriction to predict future stock returns, the in-sample R-squared is almost the same as that for stock yield, but the out-of-sample R-squared is only about half of that for stock yield, which suggests that dividend yield, expected dividend growth and expected future returns are tied together through the present-value relation. Stock yield also predicts future stock index returns in other G7 countries and returns of US stock portfolios formed by sorting stocks based on firm characteristics, at various horizons. The findings are consistent with a single dominant factor driving expected returns on stocks over different holding periods. That single factor extracted from the cross section of stock yields using the Kelly and Pruitt (2013) partial regressions method predicts stock index returns better. The performance of the Binsbergen and Koijen (2010) latent factor model for forecasting stock returns improves significantly when stock yield is included as an imperfect observation of expected return on stocks. Consistent with folk wisdom, stock returns are more predictable coming out of a recession. Our measure performs as well in predicting stock returns as the implied cost of capital, another common stock yield measure that uses additional information.

12 Finance Down Under 2015 Building on the Best from the Cellars of Finance 11 Linking Cross-Sectional and Aggregate Expected Returns Serhiy Kozak, Shrihari Santosh

We propose a one state variable ICAPM that rationalizes the size, value, and momentum “anomalies” observed in stock returns. Our main insight is that differential covariance with news about future market discount rates drives the observed crosssectional variation in expected returns. We find that in response to an increase in expected future market discount rates, large, growth, and recent losers company stocks outperform small, value, and recent winner stocks, respectively. Our interpretation is that such an increase in discount rates represents “bad” news for the representative investor, increasing his marginal utility of wealth. We further show that ignoring this state variable leads to drastic underestimation of the equilibrium price of “level risk” measured using bond returns. An augmented model which adds a “level” factor jointly prices both stock and bond returns.

Theoretical Corporate Finance: The Short and the Long Run of It

Is Market Timing Good for Shareholders? Ilona Babenko, Yuri Tserlukevich and Pengcheng Wan

We challenge the view that equity market timing always benefits shareholders. By distinguishing the effect of a firm’s equity decisions from the effect of mispricing itself, we show that market timing can decrease shareholder value. Additionally, the timing of equity sales has a more negative effect on existing shareholders than the timing of share repurchases. Our theory can be used to infer firms’ maximization objectives from their observed market timing strategies. We argue that the popularity of stock buybacks, the low frequency of seasoned equity offerings, and the observed post-event stock returns are consistent with managers maximizing current shareholder value.

Corporate Policies with Temporary and Permanent Shocks Jean-Paul Decamps, Sebastian Gryglewicz, Erwan Morellec and Stephane Villeneuve

We develop a dynamic model of investment, cash holdings, financing, and risk management policies in which firms face financing frictions and are subject to permanent and temporary cash flow shocks. In this model, target cash holdings depend on the long-term prospects of the firm, implying that the payout policy of the firm, its financing policy, and its cash-flow sensitivity of cash display a more realistic behaviour than in prior models with financing frictions. In addition, risk management policies are richer and depend on the nature of cash flow shocks and potential collateral constraints. Lastly, the timing of investment and the firms initial asset mix both reflect financing frictions and the joint effects of permanent and temporary shocks.

Containing Contagion

Counterparty Risk and the Establishment of the New York Stock Exchange Clearinghouse Asaf Bernstein, Eric N. Hughson and Marc D. Weidenmier

Heightened counterparty risk during the recent financial crisis has raised questions about the role clearinghouses play in global financial stability. Empirical identification of the effect of centralized clearing on counterparty risk is challenging because of the co-incidence of macro-economic turbulence and the introduction of clearinghouses. We overcome these concerns by examining a novel historical experiment, the establishment of a clearinghouse on the New York Stock Exchange (NYSE) in 1892. During this period the largest NYSE stocks were also listed on the Consolidated Stock Exchange (CSE), which already had a clearinghouse. Using identical securities on the CSE as a control, we find that the introduction of clearing reduced annualized volatility of NYSE returns by 90-173bps and increased asset values. Prior to clearing,

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12 Finance Down Under 2015 Building on the Best from the Cellars of Finance shocks to overnight lending rates reduced the value of stocks on the NYSE, relative to identical stocks on the CSE, but this was no longer true after the establishment of clearing. We also show that at least ½ of the average reduction in counterparty risk on the NYSE is driven by a reduction in contagion risk –the risk of a cascade of broker defaults. Our results indicate that clearing can cause a significant improvement in market stability and value through a reduction in network contagion and counterparty risk.

Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters Kristle R. Cortés and Philip E. Strahan

Multi-market banks reallocate capital when local credit demand increases after natural disasters. Following such events, credit in unaffected but connected markets declines by about 50 cents per dollar of additional lending in shocked areas, but most of the decline comes from loans in areas where banks do not own branches. Moreover, banks increase sales of more-liquid loans in order to lessen the impact of the demand shock on credit supply. Larger, multi-market banks appear better able than smaller ones to shield credit supplied to their core markets (those with branches) by aggressively cutting back lending outside those markets.

Funds Finishing First

Mutual Fund Competition, Managerial Skill, and Alpha Persistence Gerard Hoberg, Nitin Kumar and Nagpurnanand R. Prabhala

Whether fund managers can generate positive alpha and do so persistently are key questions in the mutual fund literature. We propose a new economic force that limits persistence in alpha: competition from other funds that cater to similar segments of investor demand. We make three contributions. First, we use new spatial methods to identify the dynamic competition faced by funds. Second, we develop a new measure of fund manager skill, viz., the ability of a fund to beat its spatially close rivals. The skill measure predicts alphas for at least four quarters ahead. Finally, we show that alpha is persistent only when a fund has few rivals. This new persistence is not driven by diseconomies of scale, is economically large, and lasts up to four quarters. Thus, besides the scale diseconomies emphasized by Berk and Green (2004), competition between funds is a potent force that limits the persistence of alpha.

The Freedom of Information Act and the Race Towards Information Acquisition Antonio Gargano, Alberto G. Rossi and Russ R. Wermers

We document a previously unknown source of information exploited by sophisticated institutional investors: the Freedom of Information Act, a law that allows for the full or partial disclosure of previously unreleased information and documents controlled by the United States government. Through our own FOIA requests we uncover the identities of several large institutional investors, chiefly hedge funds, that routinely request value-relevant information to the Food and Drug Administration. We first provide a detailed analysis of how FOIA requests are generated, the kind of information commonly requested by institutional investors and its costs. We then document that the target of FOIA requests are large firms that experience periods of low profitability and high stock price volatility. Finally, we show that FOIA requests allow institutional investors to generate abnormal portfolio returns and provide evidence suggesting that the FOIA information is not systematically known to other investors in the marketplace.

Empirical Corporate Finance: The Long and the Short Run of It

Managerial Myopia and Debt Maturity Indraneel Chakraborty, Andrew MacKinlay and William F. Maxwell

We argue that firms with relatively shorter term debt face higher managerial myopia. Because shorter term debt is less sensitive to the firm's long-term performance, short-term debtholders have less incentive to 14 Finance Down Under 2015 Building on the Best from the Cellars of Finance 13 monitor the firm management regarding myopic investments. Myopic versus long-term investments affect the value of the firm differently at different horizons, and ultimately the firm's short-term and long-term equity returns. We use a generated instrumental variables approach to distinguish the fraction of debt maturity reduction due to investor preference and not firm preference. Ceteris paribus, at the mean issuance debt maturity of almost 10 years, we find that for a one year reduction in debt maturity due to investor preference, five-year equity returns fall by about 2:1% per annum. The benefits of monitoring by debtholders can be quite significant for equityholders.

Do Long-Term Investors Improve Corporate Decision Making? Jarrad Harford, Ambrus Kecskes and Sattar Mansi

We study the effect of investor horizons on a comprehensive set of corporate decisions. Long-term investors have the means and motive to monitor corporate managers, which generates corporate decisions that are consistent with shareholder value maximization. We find that long-term investors restrain numerous corporate misbehaviors such as earnings management and financial fraud and strengthen internal governance. They discourage a range of investment and financing activities but encourage payouts. Shareholders benefit through higher stock returns, greater profitability, and lower risk. Firms diversify their operations. We use a popular identification strategy to establish causality of our results.

Market Microstructure

High Frequency Trading and the 2008 Short Sale Ban Johnathan Brogaard, Terrence Hendershott and Ryan Riordan

We examine the effects of high frequency traders (HFTs) on liquidity and price efficiency using the September 2008 short sale ban. To disentangle the separate impacts of short selling by HFTs and non-HFTs (nHFTs) we use an instrumental variables approach exploiting differences in the ban's cross-sectional impact on HFTs and nHFTs. nHFTs’ short selling improves liquidity and price efficiency, as measured by bid- ask spreads and pricing errors. HFTs’ short selling has the opposite effect by decreasing liquidity and price efficiency. HFTs’ negative impact is driven by liquidity demanding trades. HFTs’ liquidity supply improves liquidity and price efficiency, but not enough to outweigh the negative HFT liquidity demand effect.

Shades of Darkness: A Pecking Order of Trading Venues Albert J. Menkveld, Bart Z. Yueshen and Haoxiang Zhu

Investors trade in various types of venues. When demanding immediacy they face a basic tradeoff between price impact and execution uncertainty. Venues can be sorted accordingly along a “pecking order,” with mid-point dark pools and lit markets at the top and bottom, and non-midpoint pools in the middle. A simple model formalizes this pecking order hypothesis. We test it using a unique dataset that disaggregates U.S. dark trading into various categories. A higher VIX or larger earnings surprise tilts trading volumes from the top of the pecking order to the bottom, confirming the hypothesis.

Special Session: Overreacting to Nonsynchronous Data-snooping

Is Aggregate Idiosyncratic Risk Priced? Follow the Bid-Ask Bounce David A. Lesmond and Yihua Zhao

This paper models a market microstructure bias, driven by the bid-ask spread, that is evident in the pricing of aggregate firm-level risk embodied by the stock return variance estimates of Goyal and Santa-Clara (2003). Controlling for this bias, we find no pricing ability for aggregate firm-level variance for the period 1927 to 2012 or for any sub-period tested. Market microstructure also explains the time-trend of aggregate firm-level volatility observed from 1962 to 1997 (Campbell, Lettau, Malkiel, and Xu, 2001), and subsumes any relation between retail trading and future idiosyncratic volatility from 1983 to 1999 (Brandt, Brav, 15 14 Finance Down Under 2015 Building on the Best from the Cellars of Finance Graham, and Kumar, 2010). We conclude that the aggregate firm-level bid-ask spread is priced with future market returns rather than any of the aggregate firm-level risk measures.

Asset Pricing with Index Investing Georgy Chabakauri and Oleg Rytchkov

We provide a novel theoretical analysis of how index investing affects capital market equilibrium. We consider a dynamic exchange economy with heterogeneous investors and two Lucas trees and find that indexing can either increase or decrease the correlation between stock returns and in general increases (decreases) volatilities and betas of stocks with larger (smaller) market capitalizations. Indexing also decreases market volatility and interest rates, although those effects are weak. The impact of index investing is particularly strong when stocks have heterogeneous fundamentals. Our results highlight that indexing changes not only how investors can trade but also their incentives to trade.

16 Finance Down Under 2015 Building on the Best from the Cellars of Finance 15 MAP & TRANSPORTATION

From the Melbourne airport to the hotels in the city, it takes 20-30 minutes, which might vary depending on the traffic. You can either take a taxi (fare: $50-60) or SkyBus (fare: $18 for one way/$30 for return). On arrival at Southern Cross Station in the city, SkyBus provides a complimentary hotel transfer service, subject to availability (visit www.skybus.com.au for details).

For your transportation needs within the city area, we highly recommend the public transit system in Melbourne. There is a free tram zone in the Melbourne CBD – refer map below. For travel outside this zone you must purchase a "Myki" pass which allows travel on trams, busses, and trains. The Public transit is effective and as safe as can be reasonably expected. ↑ To Melb Zoo - 2.8kms

Welcome Reception, Thursday 5th March 5:00pm – 7:00pm Melbourne Zoo, Rainforest Room Elliott Avenue, Parkville, Tram 55 to Melbourne Zoo

Conference Sessions, Friday 6th March 9:30am – 7:45pm Melbourne Cricket Ground, Premiership Club & Jack Ryder Rooms Gate 6A, Brunton Ave, Melbourne, Tram 70 to MCG

Conference Special Session, Saturday 7th March 9:00am – 1:00pm The University of Melbourne Copland Theatre (Basement), The Spot Building 198 Berkeley St, Parkville, Tram 19 or 59 to Haymarket

17 16 Finance Down Under 2015 Building on the Best from the Cellars of Finance FRIDAY MELBOURNE CRICKET GROUND GUIDED TOUR

The Melbourne Cricket Ground http://www.mcg.org.au/ was built in 1853 and, since then, has established a marvellous history that compares favourably with any other in the world. Known colloquially as the ‘G, Australia’s favourite stadium is the birthplace of Test cricket and the home of Australian football, holding more than 80 events annually and boasting a capacity of 100,024.

The MCG guided tour gives the opportunity to relive great sporting memories through a comprehensive tour of this marvellous stadium.

MCG TOUR FEATURES

 The Ponsford Stand  MCC Members Reserve  MCG Tapestry  Players' change rooms  Long Room  MCC Library  Media facilities  A walk on the arena

SATURDAY YARRA VALLEY WINE TOUR & DINNER

The Yarra Valley has the enviable reputation as one of the world's great food and wine regions. From architectural statements to rustic tin sheds hidden among the vines, the Yarra Valley has a wonderful range of cellar doors, all reflecting the diversity of styles and approaches in this beautiful, cool-climate region. Sample the grapes and marvel at the harmony of diverse soils, temperate weather, and the dedication of generations of vignerons in the pioneering region that kick-started Victoria's wine industry in 1838. http://www.wineyarravalley.com/

Groups of up to 10 people will tour the Yarra Valley in small coaches, departing 1:00pm Saturday 7th March and returning 9:00pm. Each group will visit two wineries from the selection below and indulge their sweet side at the Chocolaterie & Ice Creamery. The day will conclude with the official FDU conference dinner and award presentations at De Bortoli Estate.

Balgownie http://www.balgownieestate.com.au/ Balgownie Estate is set amongst the undulating green landscape on 30 hectares surrounded by vineyards and breathtakingly beautiful views which are accentuated by the striking geometry of corridors of grape vines. The extensive wine tasting range includes some of our award winning wines as well as our flagship Estate Cabernet Sauvignon and Estate Shiraz from our original 40 year old vines in Bendigo.

Domaine Chandon http://www.domainechandon.com.au/ Domaine Chandon was established by French champagne house Moët & Chandon in 1986 and is dedicated to the production of méthode traditionnelle sparkling wine and premium quality, cool- climate still wines.

18 Finance Down Under 2015 Building on the Best from the Cellars of Finance 17 Rochford Wines http://www.rochfordwines.com.au/ Winemaker Marc Lunt produces high quality wines with fruit sourced from our vineyards, located in two of Victoria’s premium cool climate wine regions. Marc works to ensure that the vineyards in the Macedon Ranges and the Yarra Valley produce only the finest of grapes to be used in the making of our wines.

Tarrawarra Estate http://www.tarrawarra.com.au/ Under the watchful eye of winemaker Clare Halloran, all of TarraWarra’s wines are meticulously grown, hand picked, vinified and aged on the estate. TarraWarra Estate is best known as a producer of exceptional Pinot Noir and Chardonnay and we also make several other single block heritage varietals and estate blends.

Yering Station http://www.yering.com/ Yering Station was originally established in 1838 as Victoria's first vineyard and today, this family owned Winery Tourism Complex is reaching new heights. Beyond the manicured gardens lies the contemporary stone edifice where you can taste the full range of the estate's award-winning wines, Barak's Bridge, Yering Station and Yarra Edge, along with the critically acclaimed traditional method, Yarrabank.

Yarra Valley Chocolaterie & Ice Creamery http://www.yvci.com.au/ Delight in the experience of tasting, seeing and indulging in quality products in our spectacular showroom and café nestled amongst sweeping valley vistas. Ice creams and decadent sweet treats await in our café while our expansive lawns, orchard and sculptures are the perfect place to explore.

Conference Dinner

De Bortoli Yarra Valley Estate http://debortoliyarra.com.au/ De Bortoli Wines Yarra Valley Estate was established in 1989 by the De Bortoli family. The estate is managed by third generation Leanne De Bortoli and her husband, De Bortoli Chief Winemaker Steve Webber. Together they have built a successful estate based on the family traditions of warm hospitality and a passion for creating interesting and delicious wine and food. At the Estate they have some of the oldest plantings in the Yarra Valley region. These carefully cultivated vines are handled with care and each year continue to produce exceptional quality fruit and a range of wines to suit every palate and every pocket.

19 18 Finance Down Under 2015 Building on the Best from the Cellars of Finance PROGRAM COMMITTEE

Tim Adam Ron Giammarino Phong Ngo Humboldt University University of British Colombia Australian National University Renée B. Adams Stefano Giglio Oyvind Norli University of New South Wales University of Chicago BI Norwegian Business School Sumit Agarwal Luis Filipe Goncalves-Pinto Kjell G. Nyborg National University of Singapore National University of Singapore University of Zürich Vikas Agarwal Todd A. Gormley Maureen O’Hara Georgia State University University of Pennsylvania Cornell University Reena Aggarwal Vidhan K. Goyal Micah S. Officer Georgetwon University HKUST Loyola Marymount University Anup Agrawal Roberto C. Gutierrez Emilio Osambela University of Alabama University of Oregon Carnegie Mellon University Heitor Almeida Allaudeen Hameed Marco Pagano University of Illinois Urbana-Champaign National University of Singapore University of Napoli Federico II George O. Aragon Kathleen Hanley Dimitris Papanikolaou Arizona State University University of Maryland Northwestern University Illona Babenko Andrew Hertzberg Andrew Patton Arizona State University Columbia University Duke University Kerry Back Christian Heyerdahl-Larsen Bradley S. Paye Rice University London Business School University of Georgia Neil Pearson Gurdip Bakshi Nicholas Hirschey University of Illinois Urbana- University of Maryland London Business School Champaign Pierluigi Balduzzi Burton Hollifield Kim Peijnenberg Boston College Carnegie Mellon University Bocconi University Thomas W. Bates Edith S. Hotchkiss Francisco Perez-Gonzalez Arizona State University Boston College Stanford University Robert Battalio David A. Hsieh Ludovic Phalippou University of Notre Dame Duke University Oxford University Gregory Bauer Eric Hughson Gordon M. Phillips Bank of Canada Claremont McKenna College University of Southern California Simon Benninga Zoran Ivković Christopher Polk Tel Aviv University Michigan State University London School of Economics Antje Berndt Kris Jacobs Jeffrey E. Pontiff North Carolina State University University of Houston Boston College Gennaro Bernile Shane A. Johnson Uday Rajan Singapore Management University Texas A&M University University of Michigan Utpal Bhattacharya Jennifer L. Juergens David Reeb Indiana University Drexel University National University of Singapore Audra L. Boone Brandon Julio Jay Ritter Texas A&M University London Business School University of Florida Jörg Rocholl Peter L. Bossaerts Marcin T. Kacperczyk European School of Management California Institute of Technology New York University and Technology Jonathan Brogaard Charles Kahn Harley E. (Chip) Ryan Jr. University of Washington University of Illinois Urbana-Champaign Georgia State University Stephen J. Brown Patrick Kelly Stefano Sacchetto New York University New Economic School Moscow Carnegie Mellon University Max Bruche Ralph Koijen Ravindra Sastry City University London London Business School Southern Mothodist University

20 Finance Down Under 2015 Building on the Best from the Cellars of Finance 19 Sabrina Buti Robert A. Korajczyk Astrid Schornick University of Toronto Northwestern University INSEAD Murillo Campello Arthur Korteweg Norman Schürhoff Cornell University University of Southern California Université de Lausanne Jerry Cao David Lando Ivan Shaliastovich Singapore Management University Copenhagen Business School University of Pennsylvania Indraneel Chakraborty Anh Le Kelly Shue Southern Methodist University University of North Carolina University of Chicago Susan Christoffersen Laura Lindsey Clemens Sialm University of Toronto Arizona State University The University of Texas at Austin Lauren H. Cohen Juhani Linnainmaa Stephan Siegel Harvard Business School University of Chicago University of Washington Carole Comerton-Forde Hong Liu Tom M. Smith University of Melbourne Washington University St Louis University of Queensland Jennifer Conrad Laura Xiaolei Liu Denis Sosyura UNC Chapel Hill HKUST University of Michigan Martin Cremers Richard Lowery Heather Tookes University of Notre Dame The University of Texas at Austin Yale University Sudipto Dasgupta Michelle B. Lowry Yuri Tserlukevich HKUST The Pennsylvania State University Arizona State University Stephen G. Dimmock Christian T. Lundblad Garry J. Twite Nanyang Technological University UNC Chapel Hill University of Melbourne Amy Dittmar Peter Mackay Patrick Verwijmeren University of Michigan HKUST VU University Amsterdam Ran Duchin Andrew MacKinlay Mitch Warachka University of Washington Southern Methodist University Claremont McKenna College B. Espen Eckbo Craig MacKinlay Scott J. Weisbenner Dartmouth College University of Pennsylvania University of Illinois Roger Edelen Igor Makarov Russ Wermers University of California Davis London School of Economics University of Maryland Andrew Ellul Max Maksimovic Bill Wilhelm Indiana University Maryland University University of Virginia Daniel Ferreira Spencer Martin Youchang Wu London School of Economics University of Melbourne University of Wisconsin Eliezer M. Fich Christoph Merkle David Yermack Drexel University University of Mannheim New York University Fangjian Fu Alexander Michaelides Fernando Zapatero Singapore Management University Imperial College University of Southern California Joe Zhang Paolo Fulghieri Roni Michaely Singapore Management UNC Chapel Hill Cornell University University Michael F. Gallmeyer Todd T. Milbourn Guofu Zhou University of Virginia Washington University St Louis Washington University St Louis Haoxiang Zhu Simon Gervais Erwan Morellec Massachusettes Institute of Duke University Swiss Finance Institute Technoligy Vikram Nanda

Georgia Institute of Technology

21 20 Finance Down Under 2015 Building on the Best from the Cellars of Finance Notes

Finance Down Under 2015 Building on the Best from the Cellars of Finance 21 CONTACT

Conference Administrators AnnMaree Murray and Silvia Barberoglou Department of Finance Faculty of Business and Economics The University of Melbourne Parkville, VIC 3010, AUSTRALIA T: +61 3 8344 3538 | F: +61 3 8344 6914 [email protected] http://fbe.unimelb.edu.au/finance/fdu

Organizing Committee: Neal Galpin, Vincent Grégoire, Bruce D.Grundy and Hae Won (Henny) Jung