This paper presents a framework to study how investors' social concerns affect technology choices. Consequentialist preferences (disutility from aggregate harm) influence outcomes only if investors coordinate, unless internalized harm is independent of an investor's mass. Non-consequentialist preferences (disutility from stockholdings) affect outcomes regardless of coordination. Both preferences have stronger impact when risk-sharing consequences of technology supply are small (e.g., highly correlated returns), and their effects cannot be inferred from cost-of-capital differences. When harm is stochastic, polluting firms may appear less risky to social investors. Depending on type and strength of social preferences, this can support or hinder the green transition.

The MiFID II regulation led to the unbundling of research and execution costs in Europe starting in 2018. We exploit the early adoption of an unbundling rule in Sweden in 2016 to provide evidence on the implications of unbundling for fund investors. Using a difference-in-differences framework and hand-collected data on bundled and unbundled commissions, we find no economically meaningful effect of unbundling on commissions. When we split the sample into more active and less active funds, we find that fund costs of more active funds increased in relative terms. Finally, we do not find evidence that the increased transparency of observing execution and research costs led to improved fund performance or information gains for investors’ fund selection process. Overall, our results suggest that investors did not significantly benefit from the unbundling of commissions.

Investment funds operate in a highly regulated sector and are thus required to act within strict constraints. Currently, compliance of fund activities is only checked through periodic inspections of the reports issued by the funds. This checking process is mostly performed manually and does not fully capture the data produced by the fund. Therefore, there is a need for providing automated solutions to support compliance monitoring of fund activities. We propose fulfilling this need using a model-driven approach. As a starting point, we create a conceptual model that formalizes the information types pertinent to compliance of fund activities. Building such a conceptual model requires analyzing multiple sources of compliance requirements, including both the applicable regulations and fund documents containing self-imposed requirements by the fund on itself. It also requires analyzing business data to understand the practice. This activity comes with various challenges mainly due to the discrepancies between the legal and business terminology. In this paper, we present our conceptual model and we further discuss the challenges we encountered during its creation. This model serves as an enabler for developing an automated support for monitoring fund activities.

Fund activities such as subscriptions or redemption of shares to issuers, fee management, and acquisition or sale of holdings may affect the fund's compliance to requirements of different sources (legal, regulatory but also self-imposed requirements) with potentially huge impact such as hefty fines. One pressing challenge for fund managers and regulators is to target live monitoring of such activities in order to evaluate compliance as soon as possible and in a continuous way. Setting the rules for automatic monitoring and checking the compliance of fund activities is difficult due to the complexity and heterogeneity of the applicable requirements and the observability of data. In this position paper, we introduce our vision toward runtime monitoring of fund activities. Specifically, we aim at extracting monitoring rules from legislation and fund documentation and at providing automated support for enabling the runtime verification of fund activities.

We estimate firm-specific exposures to climate risk from public news covering a period of 20 years by applying a novel topic modeling algorithm. We differentiate between regulatory (or transition) and physical climate risks and document that financial markets price both risks. Our study is the first to find a positive and statistically significant risk premium for physical climate risk. For regulatory climate risk we find a regime shift occurring around the year 2012 reconciling the conflicting evidence in the literature. While the risk premium is positive in the earlier period, it becomes significantly negative in the later one. A long-short portfolio that is long “green” firms and short “brown” firms, as identified by their topic exposures in public news, constitutes a priced risk factor and shows a surprisingly strong correlation with an ESG-sorted benchmark portfolio.

We develop a dynamic general equilibrium model with stochastic social preferences and endogenous corporate investment in the green transition. Firms’ responses to changing investor tastes mitigate valuation effects of preference shocks occurring when investment is fixed. Thus, small changes in social preferences can have negligible cost-of-capital consequences, but large impact on corporate decisions. Our analysis shows that stochastic social preferences delay the transition, especially when preference shocks correlate positively with aggregate cash flows, and that they generate time-varying correlations between green and brown firms’ returns. While risk aversion initially accelerates the transition it impedes it later due to risk-sharing considerations.

Previous work shows large differences in fees for S&P 500 index funds and other funds and suggests that investors suffer wealth losses investing in high-fee funds when similar low-fee funds are available. In contrast, the neoclassical model of mutual funds (Berk and van Binsbergen, 2015, J. Financ. Econ., 118, 1-20) argues that percentage fees are irrelevant, as fund size will adjust in equilibrium such that net alphas are equal to zero. We show that fees matter from an investor perspective. We document (i) a strong negative association between net-of-fee fund performance and fees in a sample of all US and international equity funds, (ii) economically large, robust, persistent, and pervasive fee dispersion in the mutual fund industry, and (iii) important economic effects for investors. During the sample period, the mutual fund industry has generated a total value lost (i.e., a negative net value added) of 125 billion USD, coming predominantly fromhigh-fee funds.

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We find that bond issues have substantially increased since the onset of the COVID-19 crisis in calendar week 12 (March 16-20) for bonds rated A or higher, but surprisingly also for bonds rated BBB or lower. In contrast to existing evidence on bond maturities in economic downturns, we document that maturities exceed those of bonds issued before by the same firms as well as the average maturities during normal times. Determinants of corporate bond spreads substantially differ between COVID-19 and normal times. Most prominently, asset tangibility has a highly significant negative effect on spreads during normal times. During COVID-19, this is reversed, especially in industries heavily affected by lockdown measures, reflecting the inflexibility associated with fixed assets. A different picture emerges for equity issues, which slowed considerably during the first 4 weeks of the pandemic, before accelerating again. Capital raised during COVID-19 via equity issues is approximately 5% of capital raised via bond issues.

We find that bond issues increased substantially since the onset of the COVID-19 crisis in calendar week 12 (March 16-20) for bonds rated A or higher, but surprisingly also for bonds rated BBB or lower. In contrast to existing evidence on bond maturities in economic downturns, we document that maturities exceed those of bonds issued before by the same firms as well as the average maturities during normal times. Determinants of corporate bond spreads differ substantially between COVID-19 and normal periods. Most prominently, asset tangibility has a highly significant negative effect on spreads during normal times. In the COVID-19 period this is reversed, especially in industries heavily affected by lock-down measures, reflecting the inflexibility associated with fixed assets. A different picture emerges for equity issues, which slowed considerably during the first four weeks of the pandemic before accelerating again. Capital raised during COVID-19 via equity issues is approximately 5% of capital raised via bond issues.

We find that US public firms spread out their debt more across different sources in recession quarters, making measures of debt concentration move pro-cyclically. There is substantial cross-sectional variation in these dynamics. Firms with less leverage and higher debt concentration further decrease leverage and increase debt concentration in recessions. The opposite is true for firms with higher leverage and lower debt concentration. The latter (former) group consists of firms that are larger (smaller), less risky (riskier), have fewer (more) growth options and lower (higher) cash levels. While the fraction of total assets funded by bank debt increases in the recession by approximately 18% of its average non-recession level, the equivalent measure for market debt drops by approximately 7%. Bank debt, in particular, term loans, appears to become more attractive during recession quarters, especially for borrowers characterized by high profitability while firm size, in contrast, has a positive effect on the use of market debt in recessions. A cluster analysis shows that a substantial fraction of firms changes its debt policy over the business cycle. For example, 12% of the firms that exclusively use bond-financing pre-recession switch to bank-financing during recessions.

Firm fundamentals, in particular firm size, help explain variation in factor loadings (betas) for the market, size and value factor. Surprisingly, however, they are dominated in terms of explanatory power by an unobserved time-invariant component. This leads to surprisingly stable factor loadings: stocks with high (low) factor loadings tend to remain as such for over a decade. Our models work best in explaining market betas (r-squares up to 64%) and worst in explaining value betas (r-squares up to 35%). These results are robust to different estimation techniques of factor betas and also hold up when we limit the sample to firms with statistically significant betas.

While a large literature on return predictability has shown a link between valuation levels and expected rates of aggregate returns in-sample, we document a link between valuation levels and the shape of the distribution of cumulative (for example, over 12 and 24 months) total returns. Return distributions become more asymmetric and negatively skewed when valuation levels are high. In contrast, they are roughly symmetric when valuation levels are low. These results turn out to be very robust to alternative (a) measures of valuation levels, (b) model specifications and (c) equity markets (international and industry-level). Importantly, these findings shed light on how equity prices regress back to their means conditional on valuation levels, have important practical implications for risk measurement and asset management, and refine the well-known finding of negative skewness in aggregate returns. The model with conditional skewness also outperforms benchmark models assuming a symmetric or constant-skewness distribution in an out-of-sample setup. Our empirical results support theoretical asset pricing models that have asymmetric responses to shocks, such as stochastic bubbles, liquidity spirals or models with time-varying risk aversion.

Surprisingly little is known about the business cycle dynamics of leverage. The existing evidence documents that target leverage evolves pro-cyclically either for all firms or financially constrained ones. In contrast, we show that, on average, target leverage ratios evolve counter-cyclically once cyclicality is measured comprehensively, accounting for variation in explanatory variables and model parameters. These counter-cyclical dynamics are robust to different subsamples of firms, data samples, empirical models of leverage, and definitions of leverage. There is a fraction of 10–25% of firms with pro-cyclical dynamics whose characteristics are consistent with counter-cyclical dynamics for loss-given-default and probability of default.

We analyze the profitability of government-owned banks' lending to their owners, using a unique data set of relatively homogeneous government-owned banks; the banks are all owned by similarly structured local governments in a single country. Making use of a natural experiment that altered the regulatory and competitive environment, we find evidence that such lending was used to transfer revenues from the banks to the governments. Some of the evidence is particularly pronounced in localities where the incumbent politicians face significant competition for reelection.

Previous work shows large differences in fees for S&P500 index funds. We expand this work to compare fees across all US equity funds using two methods, regression-based pricing models and holdings-based fund matching, to control for fund heterogeneity. We find economically large, robust, persistent and pervasive fee dispersion in the mutual fund industry. Importantly, fee dispersion exists among the largest funds (top TNA quintile) as well as among institutional funds. Most surprisingly, fee dispersion has noticeably increased over the last twenty years, even as the industry has experienced enormous growth in capital invested and the number of funds.

This paper shows that the corporate life-cycle is an important dimension for the dynamics and valuations of cash holdings. Our results indicate that firms’ cash policies are markedly interacted with their strategy choices. While firms in early stages and post-maturity stages hold large amounts of cash, cash ratios decrease when firms move towards maturity. Much of this variation in cash holdings is attributable to a changing demand function for cash over the different life-cycle stages. Trade-off and pecking order motives are of different importance for cash policies dependent on a firm’s life-cycle stage. An additional dollar in cash is highly valuable for introduction and growth firms, while a dollar in cash adds, on average, less than a dollar in market value for firms in later life-cycle stages, most likely due to increasing agency problems. Most of the dynamics in cash holdings are observed at life-cycle transition points rather than during the different life-cycle stages. Finally, the secular trend in cash holdings seems strongly attributable to increases in cash in the introduction and the decline stage.