Trade credit is an important source of firm financing, yet its rich informational content pertaining to payment timeliness is under-explored in asset pricing. Using an extensive data set from a leading private information exchange on business payment performance, we study the effects of trade credit payment timeliness on stock returns. We document two distinct channels through which trade credit payment behavior impacts future stock returns - slow diffusion of information and risk stemming from a customer firm's vertical bargaining power position in the supply chain. Consistent with our first channel, a sudden delay in a firm's payment to its suppliers predicts significantly lower future returns for its stock. Consistent with our second channel, firms that pay their bills moderately late on a consistent basis relative to terms earn significantly higher stock returns.

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Using a novel dataset that combines information on customer-supplier trade relationships with information on firm-bank lending relationships, we show that common banks that lend to firms at both ends of a trade link grow and strengthen such trade relationships. To establish causality, we use bank mergers, which generate exogenous variations in the presence of common banks, and show that common bank relationships between customers and suppliers increase trade relationships by 49.6%. We find that the role of a common bank is greater when it is more informed and when supply chains suffer from larger information and holdup problems. We also document that suppliers with common banks face lower spillover risks from a distressed customer. Overall, our findings show the unique role of banks in driving inter-firm growth and investment by mitigating information and holdup problems, which arguably leads to greater economic growth.

As governments around the world steadily assume greater financial risk, there is concern about the growing sovereign risk that overhangs the private sector. Using a sample of 2,430 firms in 52 countries, we find that firms’ equity and credit returns exhibit higher R2s and are more tightly integrated in environments with greater sovereign risk. As such, emerging economies often exhibit strong equity-credit integration despite severe impediments to arbitrage. We find that sovereign risk contributes to economic policy uncertainty, and sovereign-to-corporate spillover is weakened by strong legal institutions. Our results indicate that elevated sovereign risk drives information to be revealed through credit markets and dampens reactions to firm-level information events. Overall, this study finds that sovereign risk is an important common driving force in firms’ equity and credit returns.

We study the role of financial product complexity in retail investor trading. We find retail trading in complex options surged with the introduction of zero-commissions, and these traders prefer strategies with high volatility, embedded leverage, and lottery-like features. Model-free subjective expectations of volatility extracted from their trades show significant optimism bias. Importantly, their trades on average yield negative returns of -16.4% over three days, with losses increasing with complexity. Our findings suggest that retail investors do not fully grasp the risk/returns trade-offs in complex strategies, and they are lured by their inherent leverage and promise of lottery-like payoffs.

We examine the association between product endorser quality, performance expectations, and abnormal stock returns of corporate sponsors and identify a pronounced underdog effect — marginal excess returns to sponsors of the biggest underdogs are roughly double those of the biggest favorites. Results indicate that consumers are more excited about and more motivated to support brands having an underdog narrative.

We provide a new explanation for distortions in fund returns, showing private equity (PE) fund managers report boosted and smoothed returns to cater to investors’ demand for favorable headline returns. Fund investors’ sensitivity to reported returns and exogenous shocks to pension trustees’ career concerns from staggered gubernatorial elections explain if and when returns are boosted or smoothed. Our tests show substantial catering responses in PE real estate, where political pressures shape pensions’ allocations. Reported market-adjusted annual returns rise five percentage points per standard deviation increase in the instrumented likelihood a political pension trustee invested in the fund faces re-election.

Fast data access and flows are crucial to the competitive success of many firms as they navigate the real effects of latency in the digital economy. Using an extensive, hand-collected dataset of U.S. internet exchange points (IXPs), office property transaction data, and tenant lease information, we examine real asset pricing and tenant agglomeration effects arising from the geographic location of internet infrastructure. Estimating hedonic and spatial regression models, we document significant price premiums for office property transactions located within one-half mile of an IXP. A one standard deviation decrease in linear distance from an IXP is associated with a 13 percent decrease in sale price. Using difference-in-difference analysis and numerous spatial characteristics, we also provide a battery of robustness checks to confirm and sharply identify our findings. As an important demand-driven channel for our findings, we document a significant increase in demand for office space surrounding IXPs by tenants in knowledge and technology intensive (KTI) industries following IXP establishment. This collocation effect is associated with higher effective rents in properties surrounding IXPs and the magnitude of the effect is greater among KTI tenants.

We introduce a novel approach to ascertain firms’ unobserved asset return distribution implied by the joint pricing of equity and credit securities within a structural framework. Motivated by Q-theory, we propose a two-factor model that captures asset growth and risk-shifting effects on stock returns. We show that strong asset returns representing systematic growth options predict higher stock returns, whereas shifting risk from equity to credit forecasts lower stock returns. We also find that the performance of many popular stock market factors (that overlook the optionality of equity) are significantly improved after controlling for asset-level risk-shifting exposure.

We provide robust evidence showing local information plays a significant role in local asset concentrations and return outperformance. Using a unique setting with significant cross-market information asymmetries and large sample of individual commercial property holdings, we find property portfolio managers concentrate an economically significant portion of their portfolios in their headquarter location. We further document a significant positive relation between local concentration and portfolio returns in markets where information asymmetry is most severe. Through numerous robustness and loan-level identification tests, we further confirm an information-based channel of asset concentration and return effects that is distinct from risk-based or behavioral explanations.

We show that endogenous information signaling in the CDS market, together with sluggish updates on corporate credit ratings assigned by major rating agencies, creates anomalies such as return momentum within the CDS market and across CDS-to-stock return momentum. Using 5-year credit default swap (CDS) contracts on 1,247 U.S. firms from 2003 to 2011, a three-month formation and one-month holding period CDS momentum strategy yields 52 bps per month with a Sharpe ratio of 0.423. The performance is better for entities with lower credit ratings (83 bps per month), high CDS depth (80 bps per month), and during the financial crisis (97 bps per month). Furthermore, our cross-market tests show that by incorporating past CDS returns into the stock momentum portfolio formation process, traditional stock momentum strategies avoid abrupt losses during the crisis period and improve their performance by a net of 104 bps per month. This joint-market momentum strategy is particularly profitable for entities with high CDS depth. Importantly, we show that both within the CDS market and CDS-to-stock joint-market, momentum profits exist because CDS returns correctly anticipate future credit rating changes. This mechanism completely differentiates CDS momentum from bond return momentum.

We provide a comprehensive examination of the return performance of closed-end, private equity real estate (PERE) funds relative to the performance of listed real estate stocks (real estate investment trusts [REITs]) and the NCREIF ODCE fund index. We first match each PERE fund in our sample and its realized internal rate of return and equity multiple with the return that would have been earned by an LP investor on an investment in the designated benchmark over each fund’s investment horizon. Overall, we find that closed-end PERE funds have underperformed listed REITs. In contrast, we find similar overall performance between PERE and the NCREIF ODCE fund index. We also examine the determinants of the relative performance spread between the PERE funds and the equity REIT index and find that the spread widens with interest rate environment variables (Treasury yields and default spreads) and narrows with broad macroeconomic performance indicators (growth rate of GDP). Key Findings ▪ Closed-end PERE funds underperform listed REITs—both on average and by the percentages of individual funds. ▪ The performance spread widens with interest rate environment variables (Treasury yields and default spreads) and narrows with broad macroeconomic performance indicators (growth rate of GDP). ▪ The overall performance between PERE and the NCREIF ODCE fund index is similar.

This study examines the relationship between corporate internationalization and the cost of equity capital. We find that international diversification reduces the cost of equity. The diversification benefits are particularly strong during the 2008 financial crisis and for financially constrained firms. We also find that market-specific factors serve as important channels through which the corporate internationalization effects amplify or attenuate. Overall, our study provides support for theories that multinational companies perform valuable diversification functions to investors in a world with segmented and imperfect financial markets.

Using performance data through the fourth quarter of 2017 on 467 funds that came to market between 2000 and 2013, the authors of this article first examine the unconditional performance of closed-end, private equity real estate (PERE) funds over time and across various fund characteristics. The performance metrics they use are the internal rate of return, the multiple on invested capital, and a proxy for the public market equivalent. Using conditional sorts, as well as regression procedures with asset pricing specifications, the authors estimate the exposure of PERE performance to fund-level characteristics and macroeconomic environment risk factors and find that both significantly affect PERE performance. More specifically, they find that PERE performance is positively related to fund size, gross domestic product growth changes, private market real estate returns, interest rate changes, and default spread changes and is negatively related to vintage volume. International funds dramatically underperformed relative to domestic funds during the sample period. The authors also find that fund performance is positively associated with the performance of prior funds raised by the same PERE firm.

This study examines the sensitivity of equity REIT returns to time-varying MSA allocations of REIT property portfolios. Using a large sample of individual commercial property holdings, we find significant cross-sectional and time variation in REIT geographic exposures and the ability of these exposures to explain the cross-section of REIT returns. Importantly, the pattern of MSA exposure effects changes quickly as local market information is incorporated into property values both across MSAs and over time. We further find evidence consistent with REIT managers being able, on average, to both identify MSAs that will outperform in the following year and overcome the costs and delays associated with increasing allocations to these MSAs. This ability to time allocation decisions is most prevalent in non-Gateway markets and varies significantly across MSAs and over time. Furthermore, financially flexible firms with a larger platform and experience owning and operating properties in multiple markets are better positioned to quickly act on investment opportunities they identify in major MSAs. In contrast, the ability to time market exit is more highly correlated with a firm’s perceived growth options and investment opportunities.

In many markets, buyers, sellers, and their agents have differential information about the quality of heterogeneous assets. We study negotiated transaction prices in the commercial real estate market, which is characterized by heterogeneous assets, illiquidity, and highly segmented local markets, all of which increase the importance of asymmetric information in negotiated pricing outcomes. Using 114,588 industrial, multi-family and office sale transactions that occurred during 1997–2011, we document that distant commercial real estate buyers pay, on average, premiums of 4 % to 15 % relative to local buyers, controlling for individual property characteristics as well as time fixed-effects. We also examine the extent to which the sources of these observed premiums are a product of higher search costs/information asymmetry problems associated with distance (search cost channel) or a result of reference-dependence preference/anchoring based on the price levels in the investors’ local market (behavioral biases channel). Our results suggest the observed price premiums are explained by distant investors who face higher search costs and are at an information disadvantage compared to investors located in closer proximity to the property. In contrast, anchoring plays a more muted role in explaining observed premiums. The use of an intermediary (broker) increases, on average, the acquisition prices of buyers and decreases the disposition prices of sellers by 3 % to 8 %. This result is consistent with the incentive real estate agents have to convince sellers to dispose of their properties too quickly and to convince buyers to search less and therefore pay higher prices.